Stablecoins and Anonymity

Stablecoins and anonymity

James McAndrews TNB USA Inc., and Wharton Financial Institutions Center February 2020

In general, any “crypto coin� can be thought of as a bank, even if it is a robot. The bank issues electronic banknotes (crypto coins), and maintains assets to support the value of the coin.

Bitcoin is a bank with an unusual balance sheet.

Assets

Nothing

Liabilities

Bitcoins

The Financial Stability Board defines a stablecoin as “as a crypto-asset designed to maintain a stable value relative to another asset (typically a unit of currency or commodity) or a basket of assets�.

A stablecoin balance sheet looks more familiar: Assets

Something

Liabilities

Stablecoins

The U.S. has a lot of experience with banknotes. Weber (2014) 1.

Free Banking Era (1837-1863) free entry, but not laissez-faire, regulation by the states:

In the United States prior to 1863 each bank issued its own distinct notes. E-money shares many of the characteristics of these bank notes.

•

State bank notes did not generally exchange at par. This lack of par exchange was not caused by any regulations, but rather by the general lack of any mechanism to facilitate its occurrence. Without some type of mechanism in place, exchange rates between different financial instruments are indeterminate. That is, any exchange rate is possible.

•

The bank note experience shows that par exchange is unlikely without government intervention

•

The safety of privately-issued e-moneys can be achieved through either of two types of government intervention.

• •

The first is to require issuers to back all issues 100 percent with government currency, short-term government bonds, or deposits at the central bank.

The second type of government intervention is government insurance.

The U.S. has a lot of experience with banknotes (continued).

2. National Banking Era (1864-1913) The second is the period from 1864, when the National Banking Act was passed, to 1913, when the Federal Reserve System was established. The banks established under this legislation are called national banks. This period provides an interesting contrast to the previous one because, during it, all banks that issued notes were uniformly chartered, supervised, and regulated by the federal government (the Comptroller of the Currency), rather than by the individual states. Two other contrasts are that during this period there was a centrally organized mechanism for bank note clearing, and bank notes were insured by the federal government. (Again, Weber, 2014). •

In particular, National Banks were required to maintain uniform backing of more than 100 percent collateral for notes, in the form of U.S. bonds, and to accept one another’s notes at par.

The lesson for stablecoins is that for stablecoins to become stable, we need at least three interventions by the government: • • •

Requirement of uniform backing A clearing mechanism Supervision of the stablecoin providers

Will stablecoins provide anonymity?

Modern banking principles are built around the requirements of banks to Know Your Customer (KYC) and Anti-Money Laundering (AML). Anonymity is difficult to reconcile with these requirements.

In addition, while private stablecoins can conceivably provide anonymity or pseudonymity, it seems less likely that central banks would provide a stablecoin, or digital currency, with anonymity.

More important is the value of payment data to the provider of the payment system.

Brunnermeier, James, and Landau (2019), in “The digitalization of money,” hypothesize that payments are complementary to large social “platforms.” Payment systems such as Alipay, WeChat pay, PayPal, etc., all make use of the data of their users. To date, those payment systems have outcompeted stablecoins.