The Kansas banking commission dissolved a state bank in Almena, a railroad hamlet near the Nebraska border, in October 2020.
The Federal Deposit Insurance Corporation, which insures deposits in American banks, paid $18 million to each depositor.
It was a standard intervention. The banking commission intervened on a Friday, ensuring that deposits were not disrupted over the weekend.
This was the last time a bank in the United States went bankrupt.
When Nellie Liang, the US Treasury’s undersecretary for domestic finance, testified in Congress this week, the collapse of the Almena State Bank and the rescue of its depositors went unmentioned. Her presence came after a November Treasury report on stablecoins, which are digital assets tied to a national currency.
If you own a dollar stablecoin like Tether, USD Coin, or Binance USD, you’re holding something that’s meant to be worth precisely the same as a dollar bill.
Stablecoins, according to the Treasury, may enable transferring dollars from one location to another cheaper and more efficient, a development that is critically needed and long overdue in the United States.
However, the Treasury also suggested that stablecoins be issued exclusively by insured depository institutions, such as the one in Almena.
This is a more problematic proposition, and one that will be debated in the near future.
The total quantity of dollar stablecoins has increased from $6 billion to $174 billion since January 2020. To give you a sense of magnitude, one of the largest US consumer banks, Wells Fargo, recorded $864 billion in consumer deposits last quarter.
Stablecoin supply is now nearly one-fifth of that — brand-new, liquid financial liabilities that did not exist two years ago.
Republicans on the committee said that requiring stablecoins to be held in FDIC-insured banks would stifle innovation. But the trouble with innovation is that the type that financiers most crave is essentially just a variation of the oldest financial trick: borrowing short-term liabilities and balancing them against long-term assets that are either bad or non-existent. Take, for example, the Almena State Bank.
According to an FDIC inspector general’s investigation, the bank launched an aggressive strategy of taking on government-backed small-business and agricultural loans in 2014.
The bank chose to sell the guaranteed portions of the loans while keeping the remainder of the risk on its books. Making a large number of loans rapidly is an excellent method to develop non-performing loans, as Kansas examiners repeatedly warned the Almena State Bank.
That isn’t what we call innovation. That’s simply retaining bad assets. A bank is a stablecoin supplier. It is not similar to a bank; it is a bank.
When you buy a stablecoin, you are making a $1 loan to the provider, similar to when you deposit a dollar in a bank. The stablecoin supplier, like the bank, must have enough performing assets to redeem the dollar loan for a real US dollar on demand.
Stablecoins, like bank deposits, are “runnable” – if individuals are concerned about the integrity of a coin provider’s assets, they can withdraw all of their funds at once.
Morgan Ricks, a former Treasury official and professor at Vanderbilt Law School, refers to this as the “money problem”: if you construct a financial liability that is liquid like money, it is inherently runnable. You can choose not to name yourself a bank if you want to make money, but you will still have a money problem.
Stablecoins are therefore not necessarily risky. However, banking is inherently risky, which is why countries create complex regulatory frameworks to safeguard deposits. Every regulation can be read like a disaster’s history.
Hundreds of banks failed every year in America during the roaring 1920s. Consumers had to be cautious about where they put their money because if they made the incorrect decision, their funds would vanish.
4,000 banks fell during the early-Depression banking crisis of 1933.
The Federal Deposit Insurance Corporation (FDIC) was established by the US Congress in 1935 to protect deposits.
You may argue that people are adults who should do their homework before purchasing a dollar stablecoin, but that isn’t how real-world financial crises work.
There is discontent when a large number of people witness what they thought was money abruptly vanish.
As a result, countries have learnt how to aggressively control consumer banks while also preparing for when they fail. There are many issues with American finance, but customer deposits are not one of them. Because stablecoin providers are deposit institutions, the Treasury Department has proposed treating them as such.
America already has a framework in place to keep deposits safe. The regulatory purpose for stablecoins should be the same as it is for banks like Kansas’ Almena State Bank: to prevent them from failing, and if they do, to ensure that they do so quietly.
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