While the technology underlying cryptocurrencies is new, the economics is centuries old. Oftentimes, lawmakers are so focused on understanding a new technological innovation that they fail to ask what exactly is being created. In this case, the new technology has recreated circulating private money in the form of stablecoins, which are similar to the banknotes that circulated in many countries during the nineteenth century. The implication is that stablecoin issuers are unregulated banks. Based on lessons learned from economic theory and financial history, we argue that circulating private money is not an effective medium of exchange because it is not always accepted at par and its issuers are vulnerable to destabilizing bank runs.
March
2024