Stablecoins and FDIC Insurance
Once again Wall Street asks the financial regulators to jump and the financial regulators ask “how high”.
In this case, the Presidential Working Group, aka Wall Street, has come out in favor of the idea of the FDIC insuring the value of stablecoins. Stablecoins are a form of cryptocurrency similar to a money market mutual fund. Their value is suppose to remain stable as any investment in the cryptocurrency sees the proceeds of the investment invested in financial securities like US Treasury bills.
Naturally, Wall Street has a self-serving argument for why insuring stablecoins should be done. According to Wall Street, if investors were to “run” and try to get their money back by selling their stablecoins, it would result in the sale of the collateral backing the cryptocurrency. Included in the collateral are US treasury securities. And it is this sale of US treasury securities that would be destabilizing to the global financial system.
Should the FDIC insure these stablecoins to prevent this from possibly happening?
NO!
What makes stablecoins possible is modern information technology. This same technology could be used so every investor knows the exact value of the collateral backing these coins at all times. When investors can see their share of the value of the collateral equals their investment, they have no reason to “run” and sell their coins in a panic.
Since transparency effectively prevents “runs”, there is no need to extend FDIC insurance to these stablecoins.
Of course, if stablecoins is simply misleading marketing and the proceeds are invested in high risk securities, the FDIC has no business insuring these investments.
So in every case, there is no role for FDIC insurance.