Will you yield?
Late on Friday, our Claire Williams reported, two senators
Crypto firms seemed supportive. "Mark it up," Coinbase CEO Brian Armstrong said on Twitter (or X, as some people call it). And why wouldn't they be? I mean, that definition would probably exclude almost all stablecoin balances.
An analysis last month from the Kansas City Fed found that the vast, vast majority of stablecoin traffic was being used within the crypto ecosystem. They were being used as trading assets, either liquidity or collateral in lending and borrowing. They were used for transfers between blockchains. About a fifth were in a nebulous category labeled idle, meaning they were mainly small balances either lost or forgotten. Less than 1% was used outside the crypto world, for payments. How much of that sounds like the equivalent of a bank deposit to you? Less than 1%?
There is a long, long history of defining terms that's worth mentioning here. In medieval Europe the fight was over the definition of the term "usury." Official church doctrine banned it outright. Any interest payment, no matter the amount, was illegal. Yet there were plenty of prominent, prosperous banking families – the Medici, of course, but also the Pazzi, the Bardi, the Fuggers and others. They were all ostensibly usurers. So how were these banking families operating so openly? Loopholes.
There was an endless exploration of loopholes around the meaning of the word usury that allowed these businesses to engage in what today is called banking. One practice was to characterize loans as gifts. The "gift" exchange somehow always ended up with the banker getting more back than he gifted out, but he wasn't technically collecting interest. Another practice was the bill of exchange, which would see a banker loan a customer x amount to be paid back on such and such a date. The bankers were very good at making sure they could manipulate exchange rates and ensure that the value of the loan was higher on the payment date, thus ensuring a repayment that included what was essentially interest. And on and on. Raymond de Roover's excellent "The Rise and Decline of the Medici Bank" explains it in minute and fascinating detail.
And then there were supportive officials. One of the most influential clergymen was Florence's archbishop, Antoninus, who was a vocal supporter of the Medici and other prominent families. He argued in myriad sermons that what the Medici did was good because it was good for the city. He wasn't the only ecclesiastical supporter; the Medici counted among their clientele several popes. With all that backing, the word usury was endless spun around, and holes continually poked in it. The bankers were able to redefine the ban to allow for their businesses to operate.
I see great potential for loopholing that Tillis-Alsobrooks compromise language. But no matter how it goes down, the banks are still in a stronger position, in my opinion. The crypto firms need yield as an inducement because they are struggling to expand their business beyond the crypto degens (degenerates, for all you normies). For example, the number of active retail traders on Coinbase, what it calls monthly transacting users, has barely moved in years, and in fact is lower today than it was in 2021.
The ingenuity of bitcoin was that it automated the ledger in a way that renders centralized control superfluous. But once centralized control is reintroduced – as in, once a private company such as Circle or Tether is the sole custodian of the digital currency – then the entire purported advantage of decentralized finance is gone. Then you are back to what is really just banking. Digital banking, but still.
What banks should be focused on now isn't necessarily the yield fight but on leading the development of stablecoins as a new part of the financial system, as our Market Intelligence analyst Megan Ryan
