Taming Wildcat Stablecoins

Gary B. Gorton

Frederick Frank Class of 1954 Professor of Finance at the Yale School of Management.

Jeffery Y. Zhang

Assistant Professor at the University of Michigan Law School.

The authors thank Michelle Tong for excellent research assistance as well as Jordan Bleicher, Lucy Chang, Jess Cheng, Randall Guynn, Howell Jackson, Jeremy Kress, Timothy Massad, Jai Massari, Bill Nelson, Mark Pocock, Mark Van Der Weide, David Warsh, and Evan Winerman for their suggestions. In addition, the authors thank the editors of the University of Chicago Law Review—Connie Gong, Adrian Ivashkiv, Annie Kors, Gabrielle Dohmen, Josh Leopold, Mario Ramirez, Burke Snowden, and Daniel Landy—for their thoughtful feedback and edits. Finally, the authors are grateful for discussions with seminar participants at Columbia Law School, the Northwestern Pritzker School of Law, the University of Chicago Law School, the University of Michigan Law School, the Wharton School of the University of Pennsylvania, the Council of Economic Advisers, and the Office of the Comptroller of the Currency.

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Abstract

Cryptocurrencies, including stablecoins, are all the rage. Investors are exploring ways to profit off of them. Governments are considering ways to regulate them. 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.

We also explore the treatment of stablecoins under the existing legal framework and examine the upsides and downsides of interpretive, regulatory, and legislative options that attempt to mitigate the financial-stability risks associated with stablecoins. These options include requiring the issuance of stablecoins through banks, backing stablecoins one-for-one with safe assets, and establishing sovereign digital money to compete against private digital money.

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