Crypto reflexivity and the ultimate stablecoin reading list

The day of reckoning so many naysayers warned the stablecoin market would eventually experience has finally arrived.

In some respects, the shakeout is probably a good thing. We need to see these aspiring systems fail in controlled ways to understand the scope of their potential contagion if they were ever to get huge and thus too systemic. Now is the time for learning.

What’s more, part of me has always thought of the crypto market as a type of honeytrap for the worst irrational exuberance emerging from the quantitative easing and zirp era. Rather than infecting the core financial system, with crypto it was possible to direct a lot of the worst financial mania into a relatively compartmentalised zone underpinned by the principles of caveat emptor (due to the sector’s libertarian principles).

It’s not nice that the lives of so many people — some of the most financially naive — might be wrecked by this deflection, but it’s not like the regulators didn’t try to warn them. And sometimes you just can’t teach people any other way than through experience.

The scale of the fallout on civil life will be indicative of just how well regulatory risk warnings have been getting through to the public. Sadly, if messages like this popping up on Reddit are anything to go by, the answer is not well enough. Tragic really.

One of the reasons for this, of course, is corruption. By which I mean there was so much money made in certain quarters of crypto, it inevitably became a power political lobby in its own right.

This, as an example, is a UK Treasury select committee I participated in a few years back. In this case, crypto voices were invited to share their perspectives with lawmakers. Which is fair enough. But lobbying can get far more nefarious when it muscles in on political consciousness without invitation, usually by throwing huge amounts of money at creating an influence machine.

If the crypto Defi/Stablecoin/NFT fallout is really very massive, and it could be, I daresay it will be as much a function of a dysfunctional political system that allows vested interests to lobby regulators into changing the rules to suit them.

To be clear, I did change my view on crypto at the end of 2020. I still stick with my new perspective. But I also want to be clear about what that perspective is.

As I have said in every interview that I’ve ever done about the topic, I became more open minded about bitcoin – and only bitcoin – because I finally understood the problem it might potentially be solving in society. That problem is offering a hedge against a world of CBDCs and total government-controlled money linked to identity and social behaviour.

CBDCs and social credit scores in the right hands can do great good I suspect. In the wrong hands, however, they can do untold damage. The Diia app being used by Ukrainian refugees is a great example of this inherent dualism. Right now, it is helping Ukrainian refugees integrate in host countries, it is passing on cash subsidies to them and it is allowing them to pool intelligence to better fight the Russians. But if that app infrastructure was to be taken over by the enemy, it could be used to destabilise the Ukrainian refugee community. Cancel their access to the financial system. And, perhaps most frightening, turn the data they themselves provide into intelligence which can be used to intimidate or hurt them.

This is why I limited my pro-crypto stance to bitcoin alone, comparing myself if anything to a bitcoin maximalist. And my position was pretty clear: as a rule bitcoin serves society best if it exists in the background as a last resort system which never has to be used. This is because it simply cannot compete with the efficiency of a centralised system. The best comparison in my mind is to think of it as a financial “right to bear arms”, which can be funded for the benefit of all by the most diehard enthusiasts who can afford it. I stick with that metaphor today.

Everything else in the crypto world, however, seemed an anathema of speculative madness to me. A massive disaster waiting to happen.

Defi especially made my head hurt, and I’m still at a loss as to what problem it is solving.

And while it’s true I have been a little softer on NFTs, that’s only in the scope of their potential as ideological marketing tools for the very rich – not as investments for the retail classes. In that regard, I’ve compared them specifically to Renaissance patronage systems. And while NFTs might one day have the potential to manage creator copyright cashflows in a smarter way, I’ve been very clear that this will not happen until the law itself has caught up with the technology. Until it does, the claims are likely worthless.

The definitive stablecoin reading list

To understand where the stablecoin market goes from here it’s worth getting to grips with the formal literature. To wit, I thought I would share an incredibly useful reading list of public domain papers and other materials that was recently shared with me by Iñaki Aldasoro (BIS) and Federico Grinberg (IMF). I think this is an excellent resource, and since I didn’t compile it personally I think it’s only fair to encourage you to share it in the name of learning (though do please give The Blind Spot a shout out if you do).

• The President’s Working Group report on stablecoins is a key reference: see here. Gary Gorton, Dan Awrey, and Morgan Ricks are among the limited list of experts consulted for this report (see bottom of page 23).
• IOSCO report on DeFi (March 2022).
• Comments by money market expert Daniel Neilson.
• Gary Gorton has two papers on stablecoins: Taming Wildcat Stablecoins, and Making Money.
• Dan Awrey has two related papers that are a bit broader but still relevant: Bad Money, and Unbundling Banking, Money and Payments.
• Morgan Ricks, author of The Money Problem and a key expert on eurodollar systems, has two relevant papers: Money as Infrastructure, and FedAccounts: Digital Dollars.
• BoE (March 2022): “Financial Stability in Focus: Cryptoassets and decentralised finance”.
• Charles Kahn and Manmohan Singh: If stablecoins are money, they should be backed by reserves.
  
• IMF GFSR (April 2022) Chapter 3 “The Rapid Growth of Fintech: Vulnerabilities and Challenges for Financial Stability”.
• BIS QR Article: DeFi risks and the decentralisation illusion.
• The BIS Innovation Hub ran a workshop titled “Does safe DeFi require CBDCs?”, featuring mostly private sector people, plus some academics and mid-level CB people. You can find the full video here; with the very relevant points starting around 1hr40min in.
• More relevant videos BIS Innovation summit featuring discussions with high-level CB officials can be found here.
• UK Gov announcement about recognising stablecoins as a valid form of payment as part of wider plans to make Britain a global hub for cryptoasset technology and investment.
• Hyun Shin on DeFi, stablecoins, and CBDC.
• From Twitter: Morgan Ricks, David Andolfatto, and Dan Awrey discussing bank intermediation and money creation.
• Risk.net with a good summary of US regulatory proposals
• Yellen’s speech on April 7 2022 on crypto regulation.
• Yellen’s speech on April 15 2022 on the International Monetary System
• Coinbase disclosure that their customers are general unsecured creditors in the event of in bankruptcy procedures.
• And Dan Awrey on how he wrote about the unsecured creditor issue in 2016.
• Though here’s me in 2014 making similar points in response to the Mt. Gox meltdown. And also reminding about the Coinbase commingling point here.