Stablecoins Are 150+ Years Old
Happy Wednesday, Fintech Listeners!
I’m in New York City.
And as I understand it, New York Fintech Week is already off to a rip-roaring start. I’m excited to join the fun!
If you’re traveling today (or just walking the dog) and need a podcast to listen to, I have an outstanding one for you today.
— Alex
3 BIG IDEAS FROM THE PODCAST
This week on Fintech Takes, I sat down with Mike Hsu, former Acting Comptroller of the Currency, to do something I wanted to do since watching him captivate a room full of North Dakota bankers for 90 minutes without looking at a single note.
We covered the history of stablecoins.
Not from 2017, but from before the Civil War.
Mike's core argument (the one I wanted to jump up and engage with in Fargo but had to sit on my hands until we recorded this podcast) is that stablecoins aren’t new. At least the idea of them isn’t new. And that matters because financial services regulation isn’t developed by every new generation of policymakers from first principles.
It’s path dependent.
What examiners worry about today was transmitted to them by someone who learned it from someone who lived through a crisis. That inherited institutional memory, what Mike calls the DNA of supervision, explains more about how regulators react to new products than any written policy does.
Once you understand this you understand a lot more about how regulators think about stablecoins.
Tune in for the full conversation here
And read below for my three big ideas...
#1: No More Wildcat StablecoinsCopy anchor linkCopied
Before the Civil War, the American banking system was, even by modern standards, unhinged.
Each state-chartered bank issued its own currency. Notes came in different colors, shapes, and sizes. There was a trade sheet called Thompson's Reporter that listed a hundred banks and what discount to par their notes were trading at that week. There were money changers physically carrying bags of currency across state lines to arbitrage regional imbalances. And there were wildcat banks, institutions whose listed address was somewhere in the wilderness, deliberately chosen so that anyone trying to redeem their notes for gold would spend days wandering through the woods looking for a building that didn't exist.
Abraham Lincoln's answer to this problem was to eliminate these state bank-issued currencies and replace them with a single, standardized currency — the greenback — managed through a federally-regulated banking system (this is when the OCC was created).
The GENIUS Act isn’t quite such a drastic correction, but it is similar.
We have moved from an environment in which anyone could issue a digital currency and call it a “stablecoin,” even if it wasn’t all that stable (remember Terra and algorithmic stablecoins?), to an environment where the goal is to have a smaller number of better regulated and more trustworthy stablecoins.
No more wildcat stablecoins.
#2: How Far Does the Dollar Extend? How Far Should It Extend?Copy anchor linkCopied
The history of the Eurodollar deserves its due.
The short version: in the early Cold War, Soviet-run entities needed to hold American dollars without holding them in America, where sanctions could reach them. Banks in London and Paris said yes, they'd hold the dollars outside the reach of American authorities. That informal arrangement, born from Cold War sanctions arbitrage, became the offshore, Eurodollar market. Current estimates put the size of that market at somewhere between $13 trillion and $15 trillion.
The US government got a lot of benefits from the Eurodollar market: more global dollar demand, dollar-denominated trade, the dollar cemented as the world's reserve currency. What it didn't fully control was where those dollars went once they left American shores. Dollars held by foreign banks were still dollars, but they operated outside US regulatory and sanctions reach. And when stress hit, in 2008 and during the European debt crisis, the Federal Reserve had to set up swap lines with foreign central banks to backstop a dollar system it had never formally sanctioned.
Stablecoins present the same tradeoff: the more dollar-pegged stablecoins spread globally, the more dollar dominance extends, and the more dollars operate outside the reach of American authorities. A Venezuelan small business owner using USDC to escape hyperinflation is sympathetic on a human level, economically rational, and, technically, an evasion of US economic foreign policy.
#3: The Lesson From LibraCopy anchor linkCopied
The conventional story about Facebook's Libra is that regulators killed it.
Central banks panicked, Congress hauled Zuckerberg in for hearings, Europe made threatening noises, and Libra, eventually rebranded Diem, died.
Regulation wins, innovation loses, moving on.
Mike's explanation is more nuanced: Libra failed because it caught regulators and policymakers by surprise.
The lesson wasn't that a globally-interoperable stablecoin can't exist. It was that springing it on every central bank simultaneously isn’t a viable go-to-market strategy.
There are two ways to respond to that lesson, and, ironically, both are present in today’s stablecoin market.
Tether took a "don't ask for permission" approach. Build, scale, get big enough that the world has to accept you as a fact. Circle took the opposite approach: move slowly, invest in regulatory relationships, and make compliance a centerpiece of the product.
Both companies have risen to the top. At the moment, Tether has more market share. Circle has more regulatory legitimacy.
But the Libra story also changed something on the policymaker side that’s under-acknowledged.
Mike borrows Gillian Tett's phrase to describe the central bank reaction: a "Black ships moment," like Commodore Perry sailing into Tokyo Bay at the end of the Tokugawa period and forcing Japan to reckon with how long it had been isolated from the rest of the world.
Every central bank that received the Libra announcement immediately realized it had the capacity to bypass every monetary authority at scale. The mobilization of institutional attention that followed, policymakers suddenly investing seriously in understanding digital money, traces directly back to that shock.
Facebook’s Libra failed, but it forced central banks and regulators around the world to get smart on a timeline they wouldn’t have chosen for themselves (and it taught the stablecoin industry that surprising regulators isn’t good strategy).
WHAT I'M LISTENING TO
#1: Banks Can't Wait on AI, Former OCC Chief Hsu Says (Banking With Interest) 🎧 Copy anchor linkCopied
This might feel redundant with my podcast, but I promise that it’s not. In this episode of Banking With Interest, Mike and Rob focus on AI, an even hotter and more misunderstood topic than stablecoins!
#2: Paul Tudor Jones - Lessons From 50 Years in Markets (Invest Like the Best) 🎧Copy anchor linkCopied
I’m not going to say that this podcast cheered me up, but it was deeply interesting.
Thanks for the read! Let me know what you thought by replying back to this email.
— Alex
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