Asking for trouble

A New York Times background piece on "stablecoins" is well worth reading.

Sounds like a whole lot of trouble brewing, if you ask me:

Stablecoins work like a digital i.o.u. Their value is pegged to the U.S. dollar, unlike cryptocurrencies like Bitcoin, which have no such constraint and thus can swing wildly in price.

Here’s how they would work at scale: A bank customer places his or her cash with the bank and gets a stash of stablecoins in return. The consumer can then use these coins, for instance, to send money overseas or make international payments less expensively than wiring money.

The funds that a customer exchanges in return for stablecoins is, to the bank, the equivalent of a guaranteed profit.

That’s because a federal law passed this summer with bipartisan support requires banks to take the money they receive for stablecoins and invest it in government bonds and other virtually risk-free assets. Those bonds generate interest, which the bank keeps. Unlike traditional bank accounts, these savings don’t earn even nominal interest for depositors.

Another big change: Stablecoins eschew the century-old practice of automatic federal deposit insurance. If they fail, there is no guarantee of a government backstop.

Bankers say stablecoins, if widely adopted, could bring a radical change to the nuts and bolts of their industry, and they have the potential to upend a century of accepted banking practices.

One reason is that the money that a customer places with a bank in exchange for a stablecoin cannot be lent out in the same way that money placed in a traditional checking and savings account can be.

Any dollar that goes into a stablecoin and not a consumer’s traditional bank account essentially shrinks the size of a bank’s lending book and the bank’s deposit base overall. This means banks could have fewer deposits to make home or business loans with, which the Federal Reserve Bank of Kansas City last week warned could carry unintended consequences for the economy.

“The genie is out of the bottle,” said Mike Cagney, a former chief executive of SoFi and now the head of the digital lender Figure. He predicted that the rise of stablecoins would come at the expense of bank deposits. “You don’t need a lot of deposit flight to really buckle the banks,” Mr. Cagney said. 

Trump, of course, would understand none of this.  He just seems crypto bros throwing him money, and he's all in.