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Will stablecoins battle tokenized deposits?
March 02, 2024
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A panel at yesterday’s Digital Euro Conference explored the trade offs between  stablecoins and tokenized commercial bank money. Jón Egilsson, a former Chairman of the Central Bank of Iceland, argued that e-money is a safer option than banks. He made some colorful statements, equating regulated banks to hedge funds and describing central bank digital currencies as ‘nonsense’. There was also some limited discussion about tokenized deposits.

Tokenized deposits are simply a representation of a bank account on a blockchain.

Banks, stablecoins and stability

Mr. Egilsson noted that the Federal Reserve was founded in 1913 to provide stability and address the issue of bank runs. A hundred and ten years later, the challenge of bank runs persists. The problem is that banks lend out their funds. He’s not the first central banker to raise this issue. Miguel Fernández Ordóñez, the former Governor of the Bank of Spain, previously went as far as saying that banks “are designed to fail“.

In addition to being a former central banker, Mr. Egilsson is the co-founder of Monerium, an issuer of tokenized Euro e-money. Others might call Monerium a stablecoin, a label Egilsson resisted because Monerium is a fully regulated entity, whereas most stablecoin issuers are not. Europe’s MiCA crypto regulations talk about e-money tokens rather than stablecoins.

His view is that consumers have lacked a choice about where they can park their money until recently. Talking about deposits, he said, “You were basically lending money to a bank because you didn’t have a choice.” Today the choice isn’t just stablecoins or e-money but also tokenized money market funds.

Jan Rosam from EY countered that if the argument favors greater stability, then Mr. Egilsson is making the case for central bank digital currency (CBDC). Egilsson responded that CBDCs are ‘nonsense’ because they remove the incentive for the private sector to innovate and service the market. He added that talk of a CBDC is discouraging investors from backing European stablecoin projects.

On the same panel was Peter Left, who heads up Prudential Liquidity Management at Lloyd’s Bank. In other words, he’s responsible for ensuring Lloyds has sufficient assets to meet customer demands.

He spoke briefly about the large liquidity pools that banks hold and that bond and equity holders are bailed in, effectively over-collateralizing the customer deposit liability. 

Banks fight back

Mr. Left discussed some of the benefits banks provide, such as loans to buy houses and cars.

Additionally, there’s the issue of consumer protection. “If you make a payment with commercial bank money and it goes wrong, you get protection,” said Mr. Left. “If you make payment with a stablecoin and you send it to the wrong address, no one’s going to give you the money back.” 

Emma Landriault from JP Morgan added that stablecoins lack scalability because there is insufficient short term government debt to support large scale payments. Mr. Egilsson rebutted, arguing that e-money should be allowed to be backed by central bank deposits. 

He noted that the Bank of England’s current plan for large stablecoins is to have central bank deposits. However, he didn’t mention that these deposits will not earn interest

We’d add that in China, balances held in Alipay and WeChat Pay mobile wallets are deposited at the central bank, amounting to two trillion renminbi ($278 billion). 

Ms Landriault also noted that the transparency of stablecoins exacerbates runs because people can see what’s happening.

Banks and the money multiplier

It’s hard to predict the impact of the current changes on bank deposits. Some of that depends on how fast banks move towards tokenizing themselves. However, if stablecoins, CBDCs, cryptocurrencies or tokenized assets grab a reasonable chunk of deposits, it will impact banks somewhat.

Monerium’s Egilsson believes the shift or tokenized assets grab a reasonable chunk of deposits, it will impact banks somewhat.will be sufficient that “we can eliminate too big to fail banks.” However, he also acknowledged there would be trade offs if the role of banks declined.

“Banks create most of the money in modern societies. And if we are moving in this direction, then that will diminish. Then we have to understand how are we going to make sure that we create the money that we need?” said Mr Egillson.

“This is the discussion that should be happening at the European Central Bank and central banks around the world. This is a big issue. Because, in my mind, it’s inevitable.”

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This move comes on the heels of Israeli strikes targeting Iran’s nuclear facilities, as the Islamic Republic cuts off online access.

The former Department of Government Efficiency chief activated Starlink satellite internet service for Iranians on Saturday following the Islamic Republic's decision to impose nationwide internet restrictions.

As the Jerusalem Post reports, that the Islamic Republic’s Communications Ministry announced the move, stating, "In view of the special conditions of the country, temporary restrictions have been imposed on the country’s internet."

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MacDonald also mentioned ongoing tests of "direct-to-cell" capabilities, which could allow smartphone connections without a dish, potentially expanding access and supporting free expression and protest coordination.

Musk confirmed the activation, noting on Saturday, "The beams are on."

This follows the regime’s internet shutdowns, which were triggered by Israeli military actions.

Adding to the tension, Israeli Prime Minister Benjamin Netanyahu addressed the Iranian people on Friday, urging resistance against the regime.

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GENIUS Act lets State banks conduct some business nationwide. Regulators object

The Senate passed the GENIUS Act for stablecoins last week, but significant work remains before it becomes law. The House has a different bill, the STABLE Act, with notable differences that must be reconciled. State banking regulators have raised strong objections to a provision in the GENIUS Act that would allow state banks to operate nationwide without authorization from host states or a federal regulator.

The controversial clause permits a state bank with a regulated stablecoin subsidiary to provide money transmitter and custodial services in any other state. While host states can impose consumer protection laws, they cannot require the usual authorization and oversight typically needed for out-of-state banking operations.

The Conference of State Bank Supervisors welcomed some changes in the GENIUS Act but remains adamantly opposed to this particular provision. In a statement, CSBS said:

“Critical changes must be made during House consideration of the legislation to prevent unintended consequences and further mitigate financial stability risks. CSBS remains concerned with the dramatic and unsupported expansion of the authority of uninsured banks to conduct money transmission or custody activities nationwide without the approval or oversight of host state supervisors (Sec. 16(d)).”

The National Conference of State Legislatures expressed similar concerns in early June, stating:

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Evolution of nationwide authorization

Section 16 addresses several issues beyond stablecoins, including preventing a recurrence of the SEC’s SAB 121, which forced crypto assets held in custody onto balance sheets. However, the nationwide authorization subsection was added after the legislation cleared the Senate Banking Committee, with two significant modifications since then.

Originally, the provision applied only to special bank charters like Wyoming’s Special Purpose Depository Institutions or Connecticut’s Innovation Banks. Examples include crypto-focused Custodia Bank and crypto exchange Kraken in Wyoming, plus traditional finance player Fnality US in Connecticut. Recently the scope was expanded to cover most state chartered banks with stablecoin subsidiaries, possibly due to concerns about competitive advantages.

Simultaneously, the clause was substantially tightened. The initial version allowed state chartered banks to provide money transmission and custody services nationwide for any type of asset, which would include cryptocurrencies. Now these activities can only be conducted by the stablecoin subsidiary, and while Section 16(d) doesn’t explicitly limit services to stablecoins, the GENIUS Act currently restricts issuers to stablecoin related activities.

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Is it that bad?

As originally drafted, the clause seemed overly permissive.

The amended clause makes sense for stablecoin issuers. They want to have a single regulator and be able to provide the stablecoin services throughout the United States. But it also leans into the perception outside of crypto that this is just another form of regulatory arbitrage.

The controversy over Section 16(d) reflects concerns about creating a regulatory gap that allows banks to operate interstate without the oversight typically required from either federal or state authorities. As the two Congressional chambers work toward reconciliation, lawmakers must decide whether stablecoin legislation should include provisions that effectively reduce traditional banking oversight requirements.

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If you find value in my content, consider showing your support via:

💳 PayPal: 
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Dubai regulator VARA classifies RWA issuance as licensed activity
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Irina Heaver explained:

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Matthew White, CEO of VARA, said it perfectly:

“Tokenization will redefine global finance in 2025.”

He’s not exaggerating.

$500B+ market predicted next year.

And the UAE just gave it legal rails.

~Real estate.
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Everything is in play.

This is how you turn hype into infrastructure.

What Dubai is doing now is 3 years ahead of everyone else.

Founders, investors, ecosystem builders:

You want to build real-world assets onchain.

Don’t waste another year waiting for clarity.

Come to Dubai.

It’s already here.

 

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If you find value in my content, consider showing your support via:

💳 PayPal: 
1) Simply scan the QR code below 📲
2) or visit https://www.paypal.me/thedinarian

🔗 Crypto – Support via Coinbase Wallet to: [email protected]

Or Buy me a coffee: https://buymeacoffee.com/thedinarian

Your generosity keeps this mission alive, for all! Namasté 🙏 Crypto Michael ⚡  The Dinarian

 

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