A dangerous monetary transformation is underway, prompted by the steady rise of stablecoins – privately issued currencies that are supposed to be backed by US dollar reserves. But a public stablecoin system, using the same blockchain technology, would avoid the risk of a financial crisis and make possible a trust fund for all.
Margaret Thatcher famously quipped that the problem with socialists is that, eventually, they run out of other people’s money. But what happens when bankers run out of other people’s money, as seems likely to happen soon? Either we end up with another calamitous financial meltdown or we innovate to serve the public interest in a manner Thatcher would have dismissed as socialist.
Before I propose one such innovative response to the looming financial quagmire, one must understand the monetary transformation currently underway, owing to the steady rise of stablecoins. Unlike Bitcoin and other cryptocurrencies which are tethered to nothing and fluctuate like a yo-yo, stablecoins are issued by private corporations that promise that their tokens will faithfully track the value of the US dollar.
There are good reasons why common people, not just criminals, want to use stablecoins: they offer a way to send money, especially abroad, that is cheaper, faster, immune to US sanctions, and more reliable than rickety inter-bank messaging systems such as SWIFT.
There are even more reasons why financiers are keen to offer us their brand of stablecoin: by shifting the trading of shares, bonds, derivatives, and other securities onto their own blockchain, they can make trading much faster and more reliable. Moreover, if their stablecoin becomes dominant, they will own not only the market but also the currency in which trades are made, creating scope for gargantuan financial gains.
But stablecoins are setting the stage for the next financial meltdown. For starters, their issuers have an incentive to issue more tokens than the dollars they keep in reserve to back them. And, because stablecoin issuers keep a significant portion of their dollar reserves in banks, a bank run will cause a stablecoin run (a rush of requests to convert them into real dollars) which then triggers a cascade of bank runs.
Moreover, a doom loop ties together stablecoins, shares, and bonds: once financial trading has shifted to blockchains “lubricated” by a stablecoin, a run on that stablecoin will threaten the stock market and the $29 trillion Treasuries market. And then there is the global fragility introduced by dollar-backed stablecoins issued outside the United States by companies that US authorities are unlikely to rescue if the need arises.
How significant is the shift from the conventional monetary system to this jungle of private stablecoins? On June 17, the US Senate passed the so-called GENIUS Act. Its chief aim is to legitimize and boost stablecoin adoption. In essence, President Donald Trump’s administration is privatizing the dollar system for geopolitical, self-serving, and ideological reasons. The US Treasury predicts that US “commercial-bank transactional deposits (non-interest-bearing accounts)” totaling $6.6 trillion (the equivalent of 660% of the annual US defense budget) will migrate to stablecoins on the GENIUS Act’s coattails. This is nothing short of an enormous time bomb planted at the foundations of our economies.
So, what is the alternative? Suppose that US residents could download a Federal Reserve digital wallet from any app store. Imagine that they could then ask employers to deposit their pay into that wallet and even transfer money from their commercial bank accounts to take advantage of the Fed’s overnight interest rates as well as free transactions.
Using the same blockchain technology of stablecoin issuers, the Fed could guarantee that every payment or transfer is utterly private, while enabling everyone to see how much money sloshes around the system in aggregate, thereby preventing the authorities from creating new money without everyone knowing.
This would be the mother of all stablecoins, without any of the drawbacks. Speed, efficiency, and privacy would be combined with a higher interest rate on deposits (compared to commercial banks) and the copper-plated security that your digital tokens are 100% Fed-backed US dollars with none of the moral hazards or doom loops afflicting private stablecoins. Moreover, this public system comes with an additional advantage: it makes possible a trust fund for everyone.
Recall that, under the current system of fractional reserve banking, commercial banks create a lot more dollars from every dollar of deposits they receive (the so-called money market multiplier). Conversely, if the US Treasury is correct that $6.6 trillion of deposits are about to migrate from US banks to stablecoins, the overall supply of dollars is about to shrink dramatically. That will cause the Fed to raise interest rates substantially in order to allow banks to do likewise to stem the migration and the fall in the money supply – a disastrous outcome for the real economy.
By contrast, following a mass migration of bank deposits to Fed wallets, the Fed does not need to increase interest rates. All it needs to do is calculate by how much the money supply is falling and credit each resident’s wallet with whatever sum is necessary to keep the money supply steady. In essence, without the state having to raise new taxes or borrow a single cent, the Fed would be offering a substantial trust fund to everyone within this new public crypto network that functions like a truly novel monetary commons.
Bankers will undoubtedly hate the idea. Deprived of their monopoly over payments and savings, Fed wallets would force them to function, as they ought to, like financial intermediaries, turning Jill’s savings into loans for Jack.
Financial markets, too, will need to use the Fed’s new tokenized dollar for transactions, but without the exorbitant rents they would have received had they been allowed to privatize the tokenized dollar. Bankers and financiers will, for once, need to offer us services under circumstances that allow us to say no.
This new monetary commons, including the sizeable trust fund for everyone, would grant us unprecedented freedom from bankers and financiers. And that’s why you will not be hearing about it from any of the mainstream political parties whose campaign financing depends on bankers and financiers.
