June 06, 2021

The blockchain is an innovation that will greatly impact the payment system. While we believe that there is ample room for cryptocurrencies in the payment ecosystem, we also do not believe that the Cryptocurrencies represent a major threat to the traditional currencies, nor will they become the dominant currency. As discussed, the differences in supply conditions lead to the Cryptocurrencies having a significant degree of volatility relative to traditional money, and that will not make it an ideal or convenient substitute for traditional money. The creation of stable coins is an attempt to deal with the volatility issue. In so far as the private stable currencies are convertible to the national currency, the arrangement would make the stable-coins perfect substitutes in supply for the traditional money. Therefore, the stable coin would solve the volatility issue, the convertibility mechanism could introduce another problem. The possibility of a speculative attack or run on the bank. Again, as already discussed, to the extent that the convertibility mechanism of the stable coin does not require a 100% backing of the currency, it will be susceptible to a speculative attack or a run on the currency. The lower the degree of backing, i.e., the reserve requirement, the more likely the attack. The number of reserves needed to prevent a speculative attack vary with the economic environment. When all is going well and the economy has the wind at its back, the reserve requirement will be minimal. However, during crisis, the reserve requirement could be much higher. A shortfall between the desired reserve requirement and the actual reserves backing the stable coin will be a major catalyst for the run on the bank or speculative attack. Here we need to point out that government issued stable coins will not be susceptible to these speculative attacks. The reason is simple, the government owns the printing press. It will never experience a shortfall in reserves backing the government sponsored stable coin. That is one of the big edges that the government sponsored stable-coin have over the privately issued stable-coins. The other one being the legal tender provisions. Finally, since the government sponsored stable-coin uses the same architecture as the government issued cash and yet has a lower transaction costs, it stands to reason that the Gov-Coin will chip away at the role of cash for transaction purposes as well as bank reserves. Cash is the one component of the money that is at risk of becoming obsolete.

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