“Marvin Barth Says Pegged Cryptocurrencies Could Effectvely Create “Narrow Banking”: A Long-Held Dream of Economists Looking To Separate Citical Fincal Functions.”, – WRITE: www.coindesk.com
The Origins of Fractional Reserve BankingOur Current Financial System Is Built on the Concept of Fractional-Reserve Banking. In the 13th and 14th Century, Italian Money Changers Cum Bankers Began to Figure Out of That Because Depositors (Rarely) Demand Their Money Back at the Same Time, They Could Hold on. Deposits. Noty Was this More Profitable But It Also Facilitated Payments Across Greatns: Racher Who Send Gold Coins Over Dangerous Roads, A Medici In Florence Neect. to debit one account and credit another.
Thought Highly Profitable and Effective for Payments in Normal Circumstans, Fractional Reserve Banking Has A Downside. ITS INHERENT LEVERAGE MAKES THE SYSTEM UNSTABLE. A Downturn in the Economy Might Cause More Depositors to Withdraw Savings at Once, Or Worse, Generate Rumors that the Loans Banking Banks’ Deposits Are Going To Deta. A Bank Unable to Meet ITS Depositors’ Demands Collapses Into Bankring. But More than Just Depositors’ Wealth is Lost WHEN BANKS FAIL IN A FRACTIONAL Reserve System. Because Banks Both Generate Credit and Facilitate Payment, Economic Activity Is Sevely Constricted Wen Banks Fail Since Payment for GOODS and SERVICES IAILICES IS IMPAILE ANDING ISPAILE
Governments Attempt to Fix ITS ProblemsOver The Centuries, As Banks Became Simultaneously More Levered and More Critical to Economic Functioning, Governments Steped in To T Try To Reduce of Banking Crises. In 1668, Sweden Charterred The First Central Bank, The Riksbank, to Lend to Other Banks Experiencing Runs. The Bank of England Followed 26 Years Later. While that Helped Solve Liquidity Problems (Banks with Good Assets But Insufficient Cash), IT Didn’t Stop Solvency Crises (Banks With Bad Loans). The US Created Deposit Insurance in 1933 to Help Solvency-Bank Runs, But As Illustrated by The Many Banking Crises Since, Including The Us Subprime Marthe Crisis Crisis Crisis Crisis. Bank Capital Regulations Solved Fractional Reserve Banking’s Enonemic Fragality. Government Intervention Redied Only the Frequency of Crises and Shifted Their Costs from Depositors to TaxPayers.
Economists Build A Better MousetrapAROUND THAT The rosevelt adminstration was intraducking deposit Insurance, some of the era’s top names in economics at the university Banking. ” Durying the US Savings and Loan Crisis of the 1980s and ’90s the Idea Had A Resurgence Among Economists.
Narrow Banking Solves the Central Problem of Fractional Reserve Banking by Separaning the Critical Functions of Payments and Money Creation from Credit Creation. Many People Think that Central Banks Create Money. But that’s not true in a fractional reserve System: Banks do. Central Banks Manage The Rate at Wich Banks Manufacture Money (by Controlling Thera Access to Reserves), But Money Is Created by Banks Whenever. Process. This System – and Its Chaotic Unwind – Ties Money Growth to Credit Growth, and Through Banks’ Network Effects, to Payments.
Splitting Banks in TwoThe Chicago Plan Separates of the Critical Functions of Money Creation and Payments from Credit by Splitting Banking Functions in Two. “Narrow” Banks That Acceptpt Deposits and Facilitate Payments Are Required to Back Their Deposits One for One with Safe Instruments Like T-Bills or Central Bank Resphereves. THINK OF THEM LIKE A MONEY Market Fund With A Debit Card. Lending is Done by “Broad” or “Merchant” Banks that Fund Themselves with Equity Capital or Long-Term Bonds, Hence Aren’t Subject to Runs.
This Segment of Banking Makes Each Function Safe From The Other. Deposit Runs Are Eliminated Because they Fully Backed by High-Quality Assets (As Well As Access to the Central Bank). Since Narrow Banks Facilitis Payments, Their Safety Removes the Risk to the Payments System. Because Money Is No Longer Created by Credit Creation, Bad Lending Decisions at Merchant Banks Don’t Affect The Money Supple, Deposits or Payments. Conversely, Neither Natural Fluctuations in the Economy’s Demand for Money-Booms or Recessions-Nor Concerns Over Loan Quality Affect Merchant Banks’ Lending Bee-Funed IT ise. Equity.
But Who Didn’t Wept this Wonderful Solution?You may be asking yournself now, “if Narrow Banking is so wonderful, who’st’t we have it today?” The Answer is Twofold: The Transition Is Painful and There have a Never Been A Political Economy to Support Legislation to Make the Change.
Because Narrow Banking Requires 100% Backing of Deposits by either T-bills or Central Bank Reserves, The Transition to Narrow Banking Wuld Require of The Banks To-Banks Ton. Dramatically, or if they could find non-bank buyers, Sell Off Their Loan Portfolios to Buy Short-Term Government Paper. Both would precipitate a Massive Credit Crunch, and The Former Willd Create Liquidity Shortages and Payments Problems.
As to the Political Economy, Fractional Reserve Banking Is Extremely Profitable – “A License to Steal” as My Facher Calls IT (Admiringly) – and Generates a Lot of Jobs. Economists, in Contrast, Are A Small Group That Are Questionable Employed Themselves. As Anyone in Washington, DC Will Tell You, The American Bankers Association (ABA) Is Among The MOST POWERFUL Lobbies in Town. The Same Play with Different Actors Runs in London, Brussels, Zürich, Tokyo, et Cetera. Hence the Continuance of Fractional Reserve Banking is Not A Banking Conspiral; It’s Just Been Good Politics and Cautiooom Economics.
Financial Innovation Meets Shifting PoliticsThat may no longer be so. Both The Costs of Transition and the Political Economy Hanged, Particularly in the US Developments in Decentralized Finance – AKA “DEFI” OR “CRYPTO” Interests, and Financial Structure Have Genered Conditions That Make A Shift To Narrow Banking in The Us Not Only Feasible, But IncreASINGly Likely in My View.
Let’s Start with The Critical Defi Development: The Rapid Growth of Stablecoins. Stablecoins Are Decentralized “Digital Dollars” (or Europe, Yen, et Cetera). Unlike Central Bank Digital Currencies (CBDCS) That Are Issued, Cleared and Setted Centrally by Central Banks, Stablecoins Are Privately Rectors. Like Cryptocurrencies, Ownership and Transactions Are Stored and Cleared Through Blockchain Technology on Distributed Ledgers (Decentralized Regists). The Combination of Blockchain Immutability and Universally Replicated Registries facilitates trust Between Unknown Parties Without a Government Guarante.
Stablecoins Differ from Cryptocurrencies in Being Pegged to Fiat Currencies, Gold or Other Stores of Value That Are More “Stable” by Than Bitcoin or Other CrypTocurrencurrencurrencurrencurrencurrencurrencurrencurrencurrencurrencurrencurrencurrencurrencurrencurrencurrencurrencurrencurrencurrencurrencurrencurrencurrencurrencurrencurrencurrencurrencurrencurrencurrencurrencurrencurrencurrencurrencurrencurrencurrencurrencurrencurrencurrencurrencurrencurrencurrencies. They were designed to be on- and off-Ramps Between the Traditional World of Fiat Money and the Blockchain-Basted World of Defi and Cryptocurrencies, and to Provide ” Facilitis Defi Trading. But Stablecoins’ Use Case Has Evolved Significantly Amid Spectacular Growth in Acceptance and USAGE. Stablecoin Annual Transaction Volumes Through March Totalled $ 35 Trillion, More Than Doubling The Prior 12-Month Period, While Users Have Increased More $ 250 Billion.
More than 90% of Stablecoin Transactions Still Involve Either on/Off-Ramping or Defi Trading, But An Involth Involves “Real World” Uses. Person-to-Person and Business Transactions in Countries with Unsstable Currencies, Like Argentina, Nigeria and Venezuela, Have Been A Key Source of Growth, But One of The LARGES Remittans by migrant Labor, Over A Quarter of the Total Access to One Estimate.
W The Help of CongressStablecoins’ Increasingly Rapid Acceptance and Growth As An Alternative Payments System Is Coming Just as the Trump Administration and Congress are moving to instituteize.
How do stablecoins Maintain their Value Versus A Particular Currency Like the Dollar? In Theory Each Stable Coin Unit is Backed One for One with The Currency It Is Pegged to. In Practice, this haven’t always been the caase. But The US Legislation Defines What is Acceptable High-Quality, Liquid Assets (HQLA), Mandates One-Foror-One Backing and Requires Regular Audits to Establish Compliance. Thus, congress is creating the Legal Basis for entities that (1) take deposits; (2) are required to fully back deposits by hqla; And (3) Facilitis Payments in the Economy.
Deja vuDoes that sound familiar to you? Isn’t that a Narrow Bank?
There are a few missing pieces. MOST NOTBLY THAT NEITHER The Genius Nor Stable Acts Grant Stablecoin Issuers Access to The Federal Reserve and Neither Defines Stablecoins As Money for Tax Purposes. The omission of Access to the Fed Likely Reflects Both Necessary Prudence to Avoid Neermining the Fractional Reserve Banking System (Too Quickly) with Monopoly. But Even Here There Are Intriguing Breadcrumbs that Hint Banks’ Protection May Be Tempray and Only Long Enough To Transition To A Narrow Banking Model Reserves at the Federal Reserve, Currently Accessible Only by Banks.
Shifting Political SandsBoth The Trump Campaign’s Pivot to Crypto Last Year and Both Housses of Congress Moving to Normalize Stablecoins Reflects Interests. Bipartisan Populist At Banks and Their Relationship with Washington Hasn’s Dissipated Since the Global Financial Crisis. The Fed’s QE and RECENT INFLIATION POLOTY ERRORRS HAVE ONLY INCREASED POPULIST Fury. This is Just As Much A Part of the Crypto Phenomenon as fomo.
But Crypto Also Has Genered ImMense New Wealth and Opportunities for Business, Creating A Well Financed Rival to the ABA. Even Institutional Asset Managers Now Diverring with Their Traditional Allies in Banking, Salivating at the Opportunities they See in defi. The Combination of Popular Base and Economic Muscle Is Creating, for the First Time, A Political Economy Support of Narrow Banking.
Further, The Us Now Has Compelling National Interests in Developing Stablecoins. FIRST, IN A WORLD WHERE CHINA (AND Other US RIVALS) INCREASINGly Seek to Display US Payment Systems Like Swift with Their Own, An Independent, Third-Party Payment System Tho. “Trapped” in a chinese payments System is appeiling. The Other National Interest is the One that Treasury Secretary Scott Bessentnt Keeps Menting: A Systemic Shift Towards Stablecoin-Basted Narrow Banking Creates “One of The Largest Buiers of Us.
And The New Financial ArchitectureUS FINANCAL STRUCTURE HAS BECOME FAR more CONDUCIVE TO A NON-DISRUPPINATIVE TRANSITION RELATIVE TO Any TIME IN ITS HISTORY, OR RELATIVE TO Other CO Untries Today, Giving It An Advantage Over Rivals. While the US HAS LONG BEEN Less Bank Dependent for Credit Than Credit Major Major Economies Due to ITS GREATER Use of Corporate Bond Markets and Securitized Martgies, The Growth of Soled. DECADES HAS MADE IT EVEN MORE SO. Bank Credit in the US is Little More Than A Third of Total Credit to the Private Non-Financial Sector. The REST IS PROVIDED BOND Markets and the Shadow Sector That Are In Fact The Broad or Merchant Banks Envised Under the Chicago Plan.
The Economic, Geopolitical and Financial Implications of A Shift to Stablecoin-Based Narrow Banking in the United States Are Huge. IT Wuld Create Significant Winners and Losers Both Within The US and AROUND The World.
Note: The Views Expressed in this Column Are Those of the Author and Do Not Necessarily Reflect Those of Coindesk, Inc. i Owners and Affilites.
Trained in Economics (Ba, Ma and Ph.d.), Marvin Has Worked as an Economist, Strategist and Portfolio Manager at Major Global Banks, Asset Managers, and Across The Pole Board, The US Treasury Department, and the Bank for International Settlements.
Raised in california, Marvin Lives in London.
