Another good post from JP Koning on stablecoin regulation. His key point, that regulation should follow the function of the activity rather than its form, is not a new contribution to the stablecoin regulation debate. There are lots of issues, ambiguities and areas for reasonable people to take different views on the question of what role stablecoins can or should play in the future of finance but this still seems to me like a sound organising principle.
What this means in practice is yet to be decided but here are a few preliminary thoughts:
- I doubt that being regulated like a depositary institution (aka “bank”), as proposed by the recent President’s Working Group report, is the right answer – stablecoin issuers have adopted a variety of business models which tend to be quite different to the fractional reserve banking model adopted by most contemporary depositary institutions.
- The issues Koning raises with the US Money Transmitter framework seem valid to me so that does not look like the right model either.
- I am sceptical that the Free Banking model proposed by some stablecoin advocates will work as well as claimed but I recognise there is probably a bias at work here so I need to do some more work to properly understand how the Free Banking model works.
- Part of the answer (I think) lies in establishing the right taxonomy that not only defines the different types of stablecoin business models but places them in a broader context that includes money transmitter businesses, depositary institutions (both the narrow bank kind and fractional reserve based models) and also the various forms of money market funds – this taxonomy would also distinguish systemically important business models from those which can be allowed to fail in an (ideally) orderly fashion
I included a link to JP Koning’s post above but if you are time poor then this extract captures the key point
“… the key point is that while there are times when stablecoins function like PayPal and Western Union, in other circumstances they are performing a role that PayPal and Western Union never do, which is to serve as the substructure for a set of financial utilities. Which suggests that stablecoins merit a different regulatory framework, one better fit for that function.
I don’t know what framework that should be. Banking, securities law, a special stablecoin license? But the old school money transmitter framework — which has very lenient requirements governing things like the safety of the transmitters underlying assets — is probably the wrong framework. If you serve as financial bedrock, you merit more robust regulation than Western Union.
Let me know what I am missing …
Tony – From the Outside
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