Federal Reserve attorney and a Yale professor call for stablecoin supervision

on Jul 19, 2021
Updated: Jul 20, 2021
  • Per Gary Gorton and Jeffery Zhang, stablecoins can help improve cross-border transactions.
  • Allegedly, stablecoins are unsuitable mediums of exchange because they are subject to runs.
  • Gorton and Zhang believe issuing a CBDC can help the US avert the risks that stablecoins present.

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Gary B. Gorton, a professor at Yale University, and Jeffery Zhang, a member of the Board of Governors of the Federal System, have proposed the supervision of stablecoins. They made this recommendation through a research paper, which they co-authored. Dubbed Taming Wildcat Stablecoins, the paper claims that stablecoins are not an effective medium of exchange because they are not always accepted at par. On top of this, the paper’s authors noted that stablecoins are susceptible to runs, situations in which people doubt the credibility of fiat reserves backing the digital currencies and demand cash instead.

In the publication, Gorton and Zhang acknowledged that stablecoins such as Tether (USDT/USD) and Facebook’s Diem, formerly known as Libra, can help improve cross-border transactions. However, stablecoins are relatively new, and the extent of their use as cash remains unclear. Per Gorton and Zhang, this won’t always be the case, seeing as stablecoins will evolve eventually.

This evolution, according to the authors, could see stablecoin issuers become the money market funds of the 21st century. In turn, governments would have to step in with rescue packages in the event of insufficient insurance. To this end, Gorton and Zhang suggested solutions to addressing the systemic risks that stablecoins present.

Increasing efforts to regulate stablecoins

The authors believe that the US government has five options when it comes to stablecoin supervision. The first one is doing nothing, a choice that would neither eliminate runs on stablecoins nor help the coins achieve a no-questions-asked (NQA) status. The second option is implementing bank-like regulations on stablecoin issuers without insurance. Like the first approach, this option would also not eliminate runs or help stablecoins achieve an NQA status.

This leaves three viable options which can help stablecoins overcome runs and get accepted at par. These are issuing stablecoins within the insured-bank regulatory perimeter, introducing policies that require stablecoin issuers to back their coins one-for-one with Treasuries or central bank reserves, and replacing stablecoins with a CBDC.

Financial regulators continue sharing their opinions on stablecoins. For instance, the Governor of the Bank of England, Andrew Bailey, believes stablecoins are an important piece of innovation. While his deputy, Jon Cunliffe, also has a positive stance on stablecoins, he suggests regulating the sector. On the other hand, the People’s Bank of China (PBoC), which has been making notable progress with its CBDC, claims stablecoins pose a significant threat to financial systems and has moved to limit their expansion into China.