“Free banking” is not a threat

plus: rates, macro, markets and war

“Intellectuals cannot tolerate the chance event, the unintelligible: they have a nostalgia for the absolute, for a universally comprehensive scheme.” – Raymond Aron ||

Hello everyone, I hope you’re all doing well! So, it looks like a few things happened in the day I was away from my desk…

The recording of a chat I had recently with Copper’s Head of Research Fadi Aboualfa is out! You can listen to that here.

IN THIS NEWSLETTER:

• “Free banking” is not a threat

• Macro-Crypto Bits: FOMC, macro, war, markets

If you’re not a premium subscriber, I hope you’ll consider becoming one! You get ~daily commentary on markets, tokenization, regulation and other signs that crypto IS impacting the macro landscape. As well as relevant links and music recommendations ‘cos why not.

WHAT I’M WATCHING:

“Free banking” is not a threat

The “wildcat banking” critique of stablecoins just won’t slink away in defeat.

Back in 2021, it was working overtime, with then-Fed Governor Lael Brainard, Senator Elizabeth Warren and others with high-profile curricula arguing that stablecoins recreated the destabilizing private money risks of the 19th century “Free Banking Era”. This connection was thoroughly refuted at the time by not only crypto venture investor Nic Carter but also reputable economists such as George Selgin and Larry White, all of whom have written and spoken extensively on the subject.

But on Tuesday, in an op-ed for the New York Times, economist Barry Eichengreen trotted out the dusty central banker talking points. It seems that yet again we have to revisit US history.

After the pseudo-central Second Bank of the United States closed its doors in 1836, several states passed laws allowing anyone meeting minimum capital requirements to open a bank and issue bank notes backed by a narrow range of permitted assets. The result was a patchwork of different paper representations of value, not all with the same quality of backing and not all accepted at the same price. Indeed, several of the issuing banks ended up collapsing, leaving note holders high and dry.

There’s no reason, Eichengreen argues, to think that the destruction of the “singleness” of money won’t happen again.

The trigger for this renewed concern is the GENIUS Act, which sets out requirements for stablecoin issuers. Eichengreen’s main objection is that this would give hundreds and perhaps thousands of companies the right to issue their own stablecoins. There are strict requirements as to reserve ratios and assets, but he doesn’t think the regulators can be trusted to enforce the law – after all, if they couldn’t prevent the collapse of Silicon Valley Bank, how do we expect them to monitor a much more complex landscape?

And if producers and consumers can’t trust the integrity of the stablecoins in their wallets, they won’t be able to transact and “activity will grind to a halt”.

Where to start…

I’m not an expert on financial history, but even to my relatively unversed eye there are obvious errors of logic here: