Excellent writing, as always. We're moving into an environment where reserve assets can be attested essentially in real time, where clearing can be automated, settlement instant, and compliance baked in to the asset itself.
The only people complaining about this are the central bank cadre who see a lot of their core functions being obviated by an unequivocally superior system.
As someone who has only heard of "wildcat banking" tangentially, and in the context of criticisms of the new system, this was a great explainer.
Good piece! Learned a lot. I don't find this requirement, "Issuers are required to honor same-day redemption at par," in the GENIUS Act. Wonder if it's buried or implied somewhere in the Act.
Nic. My understanding is that the Scottish model also benefited from shareholders having unlimited liability. Could you expand your essay to address this feature.
Yes, they did. That is one of the most interesting things. The Ayr bank collapse led to a huge fraction of the land in Scotland changing hands as the creditors were slowly made whole (as the lairds behind the Ayr Bank had to sell their estates). Aside from Ayr, there were virtually no collapses in Scotland during the period.
I don't think many bankers would sign up for that today! But it's fun to think about.
Nic. Too be clear, I think you noted this factor. I am interested in how much that model created extra incentives for prudence in the Scottish Free Banking that we don’t have in the current stablecoin model. I also acknowledge that the assets held by stablecoin issuers are arguably less risky than was the case in the free banking era.
Question - won't stablecoin issuers that keep their reserves at the Fed be far safer (for customers) than those that keep their reserves at an insured depository institution (due to insolvency risk)? And won't there then be a premium on the price of these 'safer' dollar stablecoins?
good question. I don't think we'd see a "solvency" premium or discount unless there's some sort of giant shock like we saw in 2023 with USDC and SVB. I think the days of stablecoin issuers parking a lot of cash in uninsured deposits in banks is over. Any meaningful amount of cash held in the bank would be above the FDIC insurance limit. So beyond short term liquidity needs stablecoin issuers won't hold cash there.
Nic-You stated that owners of capital will have to pay a disproportionate share to fund UBI recipients. What is the best way to minimize or shield oneself from paying such a draconian tax? Borrowing against assets or relocating to Puerto Rico. Not legal or financial advice.
Nic. At face value it could be argued that this unlimited liability was a significant factor underpinning the integrity of the Scottish free banking model and hence something to consider when using that model as an example of how stablecoins can maintain their par value to the USD? I agree no banker or stablecoin issuer wants to sign up to that today but it seems you do not consider it material when using the free banking example. Apologies if this seems pedantic but I am very interested in the lessons that free banking have for modern banking and this seems material to me. Perhaps I am missing something. Thanks for engaging with my question.
Great and relevant financial history lesson.
Excellent. Thank you
Thank you for writing this!
Facts. Case closed.
Excellent writing, as always. We're moving into an environment where reserve assets can be attested essentially in real time, where clearing can be automated, settlement instant, and compliance baked in to the asset itself.
The only people complaining about this are the central bank cadre who see a lot of their core functions being obviated by an unequivocally superior system.
As someone who has only heard of "wildcat banking" tangentially, and in the context of criticisms of the new system, this was a great explainer.
Good piece! Learned a lot. I don't find this requirement, "Issuers are required to honor same-day redemption at par," in the GENIUS Act. Wonder if it's buried or implied somewhere in the Act.
Nic. My understanding is that the Scottish model also benefited from shareholders having unlimited liability. Could you expand your essay to address this feature.
Yes, they did. That is one of the most interesting things. The Ayr bank collapse led to a huge fraction of the land in Scotland changing hands as the creditors were slowly made whole (as the lairds behind the Ayr Bank had to sell their estates). Aside from Ayr, there were virtually no collapses in Scotland during the period.
I don't think many bankers would sign up for that today! But it's fun to think about.
Nic. Too be clear, I think you noted this factor. I am interested in how much that model created extra incentives for prudence in the Scottish Free Banking that we don’t have in the current stablecoin model. I also acknowledge that the assets held by stablecoin issuers are arguably less risky than was the case in the free banking era.
Maybe free banking on the internet happens with blind signature / zero knowledge ecash redeemable for bitcoin. So different from stables.
Great work, Nic!
Question - won't stablecoin issuers that keep their reserves at the Fed be far safer (for customers) than those that keep their reserves at an insured depository institution (due to insolvency risk)? And won't there then be a premium on the price of these 'safer' dollar stablecoins?
(Obviously this assumes that any stablecoin issuers are actually granted master accounts)
good question. I don't think we'd see a "solvency" premium or discount unless there's some sort of giant shock like we saw in 2023 with USDC and SVB. I think the days of stablecoin issuers parking a lot of cash in uninsured deposits in banks is over. Any meaningful amount of cash held in the bank would be above the FDIC insurance limit. So beyond short term liquidity needs stablecoin issuers won't hold cash there.
Nic-You stated that owners of capital will have to pay a disproportionate share to fund UBI recipients. What is the best way to minimize or shield oneself from paying such a draconian tax? Borrowing against assets or relocating to Puerto Rico. Not legal or financial advice.
Jeff
I learned a lot reading this. Thank you!
Nic. At face value it could be argued that this unlimited liability was a significant factor underpinning the integrity of the Scottish free banking model and hence something to consider when using that model as an example of how stablecoins can maintain their par value to the USD? I agree no banker or stablecoin issuer wants to sign up to that today but it seems you do not consider it material when using the free banking example. Apologies if this seems pedantic but I am very interested in the lessons that free banking have for modern banking and this seems material to me. Perhaps I am missing something. Thanks for engaging with my question.
Nic. Just confirming you want to discuss this?