The singleness of stablecoins

In 1913, the Federal Reserve was created in part to ensure that a dollar would always be accepted as a dollar.

For much of the previous century, bank-issued dollars carried the credit risk of the banks that issued them — and therefore traded at different prices in different places. A dollar issued by a bank in Maine might only be worth 90 cents in Boston. A dollar issued by a bank suspected of being in trouble might not be worth anything at all.

In the 1860s, the US began replacing its patchwork of bank-issued notes with national banknotes backed by US government bonds. Banks still put their names on the dollars they issued, but holders no longer had to know anything about the bank. If the issuer went bust, the notes could be redeemed with the Treasury at par.

But there was still no universal system for moving deposits between financial institutions: Checks had to pass through a tangled network of clearinghouses, correspondent banks, and clearing agents.

The network broke in 1907 when the National Bank of Commerce stopped clearing checks for the Knickerbocker Trust, triggering a run on the Knickerbocker that endangered the entire financial system.

The Panic of 1907 led directly to the Federal Reserve Act of 1913, which put the Fed at the center of a national payments system, settling payments between member banks with reserves they were required to hold at the Fed.

The Fed was also tasked with promoting “par clearing”: A $100 check drawn on one member bank should be worth $100 when presented for payment at another (sometimes minus a small fee).

Economists call this the singleness of money, and they say it’s important. “The singleness of money,” the BIS explains, “is the key coordination mechanism of the economy that sustains the social convention of money.”

Without it, every payment comes with an exchange rate, the way dollars once did. That required people to know not just how many dollars they were getting, but who issued them, and what the market thought they were worth.

Stablecoins still come with an exchange rate — at any given moment, one USDC might be worth more than one USDT, or vice versa.   

The BIS says this disqualifies stablecoins from being used as money: “Money-like claims that are not able to circulate with no questions asked cannot really function as money.”

Two startups aim to change that.

The Better Money Company is, essentially, a clearinghouse for stablecoins: It promises to exchange any two compliant stablecoins 1:1, no questions asked.  

Simon Taylor, author of the Fintech Brainfood substack, calls this “singleness of money as a service.” 

A second startup extends the fungibility of stablecoins to US dollars. Ubyx promises to allow fintechs to exchange any approved stablecoin for a US dollar, 1:1.

“Ubyx helps stablecoins to exhibit singleness of money,” its white paper says.

If both of these work, it should make the crypto economy much easier to coordinate. Exchanges, wallets, merchants, and applications could price things in dollars without caring which stablecoin happens to arrive as payment.

A dollar in crypto could start to behave more like a dollar in a bank.

Not completely, though, because the Federal Reserve Act was only the first step in ensuring that all dollars are treated equally.

Beginning in the 1930s, the US engineered an elaborate system to make bank deposits as indistinguishable from one another as possible — even when the bank behind one of them was failing.

FDIC insurance: If you’re unlucky enough to keep less than $250,000 in a checking account, the upside is you don’t have to think about the creditworthiness of your bank at all. Your credit risk is with the US government, not the bank that holds them.

The OCC: If the Office of the Comptroller of the Currency thinks your bank is getting itself in trouble, they can summarily close it. For your convenience, they’ll do that on a Friday evening so that the FDIC has time to move your insured deposits to another bank before the payments system reopens on Monday. You won’t go a minute without access to your dollars.

Special bankruptcy rules: If you receive a payment from an insolvent company or asset manager, a bankruptcy court might later claw it back from you. There are no claw-backs for an insolvent bank. The special treatment banks get in bankruptcy means that deposit withdrawals are final.

Ad hoc bailouts: If enough people even think something is money, the US government is likely to ensure its convertibility at par. When money-market funds traded just a few cents below par in 2008, for example, the government “temporarily” guaranteed holders could exchange them for $1.

A bank deposit is still an IOU: a promise to deliver dollars whenever you ask for them.

But it’s a promise that has been so thoroughly engineered to be exchangeable at par that you almost never have to wonder whether it will be.

In other words, dollars have become informationally insensitive. 

Stablecoins are not. 

When someone sends a dollar to your bank account, it’s just a dollar. There’s no need to think about where it came from. 

When someone sends USDT to your digital wallet, you do: You have to think about whether Tether is good for the money.

BIS says credit risk is distinct from the singleness of money: "The singleness of money is not a statement about the credit risk embedded in bank deposits but a statement about the payment."

By its definition then, the singleness of stablecoins might soon be solved.

But we’ll still have to think about them.

— Byron Gilliam