Cryptocurrencies II: Stablecoins
“In the broad application favored by Populists, the ‘money power’ symbolized much more than the gold standard, private national banks, or the ‘lordly capitalists’ of Lombard and Wall streets. The money power was corrosive because it was changing the rules under which Americans acted politically. The new politics of centralized capital not only seemed to advance through thresholds of privilege unknown to Alexander Hamilton, but the specific procedures were so destructive of representative government that they were undermining the institutional basis of a free society. Nothing less than the democratic heritage was at stake.” – Lawrence Goodwyn, Democratic Promise, 1976
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To address crypto's volatility, the wizards of Tech have come up with another solution, well actually hundreds of solutions. The cryptocurrencies gaining the most recent attention are something labeled stablecoins. Stablecoins are basically blasphemy to the Prophet’s vision of a trust-less currency. Stablecoins underlying value aren't compute power and gullibility, but each coin’s value is tied to an underlying alternative asset. Just as with bitcoin’s retrograde association with gold, stablecoins innovate a neo-gold standard claiming anyone possessing any given stablecoin have a claim on some underlying asset. In fact, the stablecoin boys are using ............ wait for it ........... US Treasuries as an underlying asset! Sound like a bank? You bet – literally. It’d be stupid if it wasn’t so tragic or is it tragic if it wasn’t so stupid.
So much for the prophet’s trust-less system. Stablecoins depend on trust just like money in a bank. The difference being stablecoins various banks, like Coinbase, are unregulated, meaning you need even greater trust in a group of Tech knuckleheads than you need in bank presidents. Holding any given stablecoin, there is only belief, just like with a bank, there are underlying assets to back the coins value and no regulatory guarantee.
In a recent piece titled “How stablecoins are entering the financial mainstream,” the FT lays out the comedy with stablecoin producer “Jeremy Allaire, chief executive of Circle, saying this is a safer form of supervision than a bank that only holds a fraction of its deposits as cash reserves, and lends out the rest.”
Then the punchline,
“His own company hit a crisis in 2023 when Silicon Valley Bank collapsed. Circle had put $3.3bn of customer funds in SVB accounts and its USDC coin lost value when the news got out. The market was only reassured when the Federal Reserve stepped in to guarantee all SVB customer deposits.”
In the immortal words of Walter Sobchek, “Nothing’s fucked here Dude.”
The FT continues,
“Stablecoin issuers have been likened to the US “wildcat banks” of the 19th century, which took advantage of weak national banking regulation and the lack of a nationwide currency to issue promissory notes backed by very little collateral. Many collapsed, leaving customers holding worthless paper.”
A better term would be the “wild money” of the 19th century. After Andrew Jackson revoked the charter of the Second Bank of the United States in 1837, bank notes issued by state chartered banks across the country became paper currency, the beginnings of bank-debt money. As the FT points out, they had an unfortunate habit of crashing on a regular basis and becoming valueless.
Twenty-five years later, Mr. Lincoln needing funding for his war, inserted the federal government into the paper money business with the creation of Office of Comptroller of the Currency, and the first federally, as opposed to state, chartered banks. Mr. Lincoln’s war and his federal banks would help forge the burgeoning national industrial economy – big corporations require big government.
The Bank of International Settlements, and yes they are very prejudiced against private cryptocurrencies as a threat to the established banking system, nonetheless, they know a little about money, wrote in a recent report “Stablecoins and safe assets,”
“Stablecoins have already established themselves as significant players in Treasury markets, with measurable and significant effects on short-term yields. Their growth blurs the lines between cryptocurrency and traditional finance, demanding regulatory attention to reserve practices, potential implication for monetary policy transmission and financial stability risks. Future research could explore cross-border spillovers and interactions with money market funds, particularly during liquidity crises.”
As bank analyst Chris Whalen writes, “The whole point of crypto assets is that there is no basis save human credulity.” Chris might be a little unfair here, as stated previously, belief is a foundational value of every currency. Cryptocurrencies have been in denial about this. There is no greater irony than an established financial system rampant with out of control speculation caused the "innovation" of cryptocurrencies in response, and these cryptocurrencies created the most wildly speculative money values yet.
In another piece the FT adds, “Hyun Song Shin, head of the BIS monetary and economic department, told reporters that stablecoins carried the risk of rapid withdrawals by investors. ‘It’s really asking, if there are such redemptions in the stablecoin space, what would be the consequences,’ he said.” Well, those consequences will be measured by how many actual assets and just as importantly the value of such assets when a rush to cash-out ensues.
In such times of panic, cryptocurrencies have already proved no safe-haven. Whalen writes,
“In fact, Jalan, Matkovskyy and Yarovaya (2021), found that during COVID, 'selected gold-backed cryptocurrencies, their volatility, and as a consequence, risks associated with volatility, remained comparable to the Bitcoin. In addition, gold-backed cryptocurrencies did not show safe-haven potential comparable to their underlying precious metal, gold.'”
I’ve long reminded the remaining goldbugs, if the value of money at some point reverts to the supply of gold, there's going to be a lot more immediate things need to worry about than money.
Whalen adds, “The big winners in the world of crypto are not just the folks who bought bitcoin in the early days, but those smarties who have set up virtual green felt card tables to attract trading and clearing volumes at near-zero cost.”
A recent article reveals the action at one those green felt crypto-tables, “Coinbase stock continued to advance early Friday following its Wednesday breakout. Shares of the crypto exchange rocketed past a buy point after announcing a new stablecoin payments solution.”
A payment solution! Honestly, you couldn’t make this stuff up. What's best and most ridiculous about all this is how quickly trust-less crypto evolved a need for quasi-banks such as Coinbase. The Prophet wept.
Crypto is very much representative of all Tech at this point. Systems ruptured and recreated by people who have zero historical sense and even less understanding of the systems they seek to overturn. They somewhat understand the technology, however they and the rest of us refuse to acknowledge the technology can constrain as much as it frees.
Most disturbing is the increasingly dominant anti-human aesthetic of many of the technologists and their curious desire to displace humanity from human activities – an asocialability best described as sociopathic. Money was always and will always be first and foremost a social system. If the main goal of reforming money is to cut out the social aspect, it will fail. The present money system is completely lacking in trust. It needs great reform starting with a restoration of trust and sociability. Interestingly in this burgeoning era of information, the greatest advance in money in the last two-centuries from its ancient roots as a quantitative token has been the development of bank-debt money, a much more information rich valuing of currency.
Compute information technologies can allow the creation of currencies that are much more information rich. We need to figure out how to do that. Implicitly tied to creating more information rich currencies is the understanding all money is part of the greater political system. As the Jeffersonians, Jacksonians, farmers, and Populists of the 19th century understood, the banking system being established was not democratically structured and as with every other aspect of American political economy became even less so in the 20th century.
Facilitation of a more information rich and democratic currency requires thinking about political organization. Interestingly enough, the notion of a peer to peer network, where the structure of the entire system is distributedly organized offers the greatest possibilities for currencies that are more information rich and democratic. This is in direct opposition to both the continuing consolidation of finance and just as depressingly the massive consolidation of compute technology in massive centralized server farms controlled by a handful of corporations and compute power becomes the defining value.
Thinking about political organization requires thinking about people and their relations with technology, money is very much a technology. In thinking about technology, it’s time to take the keys out of the technologists' hands, understanding decisions around the implementation of technology and how it is organized requires more than juvenile gee-whiz technology crushes. It requires an understanding of history. It requires structuring systems through people not around and above them. This requires politics. Money is politics.
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