It is rare that we talk about digital assets in The Risk Report, and that is a bit myopic because there is an overwhelming likelihood that digital assets, and especially the technology to store and transfer them, will encapsulate and be our global financial infrastructure in the not-too-distant future.
As with any substantial technological advancement, there can be, shall we say, resistance to the new. Not surprisingly, part of that resistance is voiced by those who make their living in the old school, the status quo, AKA the banks.
This week, there was another round of discussions on how to draft a US digital asset bill, and specifically, the sticking point of whether crypto companies should be able to pay interest to stablecoin holders on their platforms.
For those of us who tune out the second our nephew/niece says “blockchain”, let’s just recap:
A crypto company is, in this case, a company that issues a digital asset (stablecoin) and pegs its value 1-to-1 to (a fraction of) another asset they hold, such as EUR, USD, or treasury notes.
Because the other asset is good at holding its value so is the stablecoin, hence the name.
Examples of stablecoins are Tether (USDT) and USD Coin (USDC).
In many cases, the asset that backs the coin has appeal because it pays interest, and if the crypto company paid some or all of that interest to those who bought their stablecoins, maybe they could attract even more buyers.
But wait a minute,” said the banks, “do you mean that people can then take the extra money they have lying around, like their savings, and then deposit it with crypto companies instead of banks, receive stablecoins, and then earn interest on those stablecoins? Oh no, you don’t want to do that.”
According to the banks, the main reason why this won’t work is that it would siphon deposits from the current financial system and over to the crypto companies, and then there wouldn’t be enough money left for the banks (to lend out). And, over at the cryptos, the deposits wouldn’t be insured because cryptos are not banks. And, also, what if everybody who bought stablecoins wanted to sell them at the same time?
Then some people, who were possibly trying to be helpful, said that the banks are always free to offer competitive interest rates on deposits, and with good deposit rates at banks, it is unlikely that everyone wants to buy stablecoins instead.
Even more helpful people pointed out that the stable assets backing the stablecoins are, in fact, really stable, and thus the risk of them losing value really fast, which has traditionally caused deposit flights, is really small.
And the most helpful people said that maybe the crypto companies could get access to borrowing at the Fed for emergencies, just like the banks have.
At this point, it was easy to hear the banks grumble under their breath.
We do not mean to imply that their concerns are not valid. Fewer deposits can mean less liquidity and credit availability and, in the extreme, less stable banks and more bank runs. That is all true, albeit seen through a narrow lens.
And the banks are smarter than that. Many banks are themselves dabbling in cryptocurrencies and blockchain technology. Some have even issued their own stablecoins, and peers are about to join them. This is all part of adopting the new.
Source: Financial Times and Bloomberg
FRG and The Risk Report find digital assets interesting because they affect the financial infrastructure we work within.
Regitze Ladekarl, FRM, is FRG’s Director of Company Intelligence. She has 25-plus years of experience where finance meets technology.
This article is part of the FRG Risk Report, published weekly on the FRG blog. To read other entries of the Risk Report, visit frgrisk.com/category/risk-report/.