By Thomas Richards
As a banker with an economics degree, I generally favor private-sector solutions. But as a student of history, we’ve learned the hard way that private currency doesn’t meet all the needs of our economy. The proliferation of payment stablecoins and cryptocurrencies feels eerily similar to the free banking, or “wildcat” bank, era of the early 19th century — a disaster waiting to happen. Consider four articles that, taken together, highlight the risks of our current crypto landscape and point toward a solution, tokenized deposits:
- John Steele Gordon’s recent “From the Vault” column in the ABA Banking Journal discusses the free banking era and the problems caused by poorly regulated private currencies. Sound familiar?
- Thomas Vartanian’s op-ed in the Wall Street Journal draws historical parallels between today’s environment — where the Genius Act envisions nonbanks issuing private currencies — and the pre-savings and loan crisis era, when Congress allowed money-market funds to siphon deposits from traditional banks. Spoiler alert: It didn’t end well.
- Again in the ABA Banking Journal, Jeff Huther and Yikai Wang apply quantitative analysis showing stablecoins ballooning from $250 billion today to $1-2 trillion (amounting to 5 to 10% of all U.S. bank deposits) within the next decade. This means fewer deposits in community banks and fewer loans to customers.
- Lastly, in American Banker, Claire Williams explores how stablecoin failures are supposed to be handled, and she quotes experts who highlight flaws in the current system. Super-priority status for stablecoin holders is meant to instill confidence, but it also incentivizes keeping money in stablecoins rather than bank deposits (disintermediation). Requiring issuers to hold some reserves in cash brings deposits back into the banking system — but in the form of concentrated wholesale funds, which carry their own risks.
In my opinion, the mass adoption of cryptocurrencies, and in particular payment stablecoins, has several major risks which are interrelated:
- Siphoning deposits from the banking system, reducing credit availability, especially from community banks that are least likely to have stablecoin reserves on their balance sheet.
- Further migration of financial activity outside the prudentially regulated banking system, allowing risks to grow unnoticed until it’s too late.
- At some point, a stablecoin failure, which could trigger a crisis of confidence in the wider financial system.
Congress tried to mitigate some of these risks in the Genius Act, but tech companies are already finding ways around legislated safeguards. For example, while interest payments on stablecoins are supposedly prohibited, Venmo offers “rewards” of 4% for maintaining a balance in PYUSD (a stablecoin issued by PayPal, Venmo’s parent company). Stablecoins are also supposed to be fully reserved, but we’ve seen issues like the USDC de-peg and Tether’s instability.
Everything works fine — until it doesn’t. Human error is inevitable, and at some point, a payment stablecoin will fail.
So why are we building a system that seems unnecessary? We already have a perfectly good currency: the U.S. dollar. We already have instant or near-instant payment systems like FedNow and RTP. Blockchain-based tokenized deposits are the next logical step to capture some of the benefits stablecoins claim to offer — while keeping the activity within the regulated banking sector and on community bank balance sheets where they can be put to productive local use.
America has lived through the painful lessons of insufficiently regulated private currencies. It would be a shame if we had to learn those lessons again — when we can get the technological benefits of tokenization without the financial stability risks and local economic costs.
Thomas Richards is a sixth-generation community banker from Kentucky, where he is CEO of Owingsville Banking Company. with 15 years of industry experience. A member of the ABA Government Relations Council and a graduate of the ABA Stonier Graduate School of Banking, Richards has testified in front of the House Financial Services Committee and participated in industry panels. The views expressed in this article are his own.
