A policy paper written by former Federal Reserve analyst Brendan Malone on behalf of Paradigm, a technology investment firm, argues that stablecoins should not be equated to bank deposits in terms of risk. The paper examines the risks posed by stablecoins to the financial system and suggest that current legal proposals in the United States should consider incorporating encrypted payment instruments into the existing banking and securities framework. Malone asserts that stablecoins present less risk than bank deposits and are distinct from money market funds.
Stablecoins are cryptocurrencies designed to maintain a stable value against a specific asset, often a fiat currency like the US dollar. In contrast, money market funds are mutual funds that invest in short-term assets and cash equivalents, generally carrying lower risk than other mutual funds. Banks engaging in maturity transformation, where in short-term deposits fund long-term loans, face ongoing risks and require continuous risk management. Malone points to the collapse of Silicon Valley Bank in March, where customer deposits were allocated to long-term m assets , leading to a bank run and regulatory shutdown.
The paper contends that stablecoins, which are typically backed by short-term Treasury bills and kept separate from the issuer's assets, do not inherently pose the same risks as maturity transformation. While federal regulations may require specific safeguards, stablecoins in holders can redeem short-term liabilities at face value at any time, unlike bank deposits that may be tied to long-term or risky assets. Stablecoins also differ from money market funds in their primary usage, being mainly utilized for payments and transactions with a dollar peg rather than as investment options or cash management tools.
The concern raised is that if stablecoins are regulated under existing frameworks without considering their unique characteristics, it may result in strict bank-like regulations for stablecoin issuers. This oversight could stifle competition and further solidify the market dominance of a few large firms. The paper advocates for regulatory measures that address the technology-specific risks of stablecoins while still allowing room for innovation. With over 50 digital asset bills introduced in the US Congress since 2022, some specifically targeting stablecoins, the document hi highlights the need for legislation that strikes a balance between maintaining confidence in stablecoins as a form of money and fostering a diverse and innovative crypto market.
