Will Fractional‐Reserve Stablecoin Banking Replace Bitcoin and Some Traditional Banking Payments?

The former Chief Economist of the OCC discusses how FinTech innovators are developing new ways of improving banking services that promise to increase both the efficiency and soundness of the U.S. financial system. Most of these innovations are focused on either lending or payments, but not both, since FinTech providers, unlike traditional banks, tend to specialize in one of the two activities. This “unbundling” of payments from lending is particularly notable in block‐chain‐based coins used for payments. Although the greatest attention has been paid to Bitcoin in the debate over the future of blockchain‐based payments, the author notes that Bitcoin is not the most promising blockchain‐based payments technology, just the first. For one thing, Bitcoin is not a suitable substitute for the traditional system of checking accounts that execute payments via the centralized Fed‐managed network. Most obviously, account holders with checking accounts want to maintain significant balances in a stable store of value, and Bitcoin's value is anything but stable, owing to its lack of a connection to anything of intrinsic or derivative value. Stablecoins, by contrast, are a rapidly growing segment of blockchain‐based payments with the ability to offer faster, more complex, and more secure payment services, and a virtually riskless store of value. This combination of benefits should allow stablecoins to outcompete both Bitcoin and the existing bank to bank system in the long run. Furthermore, providing stablecoin issuers the option to be chartered as National Banks would, by ensuring their examination by reputable third parties, enable stablecoin issuers to make credible commitments to honest accounting practices—especially, regarding their reported cash resources—and credible disclosure of the algorithms that govern their operations. Despite the potential social gains from creating a blockchain‐based stablecoin payments network and permitting the chartering of stablecoin issuers, both the existence of stablecoin issuers and their prospective chartering as banks remain in doubt because of politics. Incumbent banks, the Federal Reserve, and constituents that benefit from transfers they receive under the current regulatory regime governing incumbent banks all stand to lose power and wealth from the disappearance of the existing system. And so the struggle over the future of payments is not just a matter of economic competition, but also of relative political influence in determining whether socially beneficial technological progress will be permitted.