Money Reimagined: Stablecoin Demand Foreshadows Financial Disruption

It's built on a fractional reserve model by which banks lend out deposits, which creates new money without the equivalent held in reserve.

Speaking of demand for a new USDC payments service his company launched for businesses last month, Allaire told our Nikhilesh De:. Examples of new businesses opening accounts span e-commerce marketplaces, advertising networks, luxury goods makers, recruiting platforms, digital content markets, P2P lending and payments companies, software companies, professional services firms, loyalty and rewards businesses, mobile banking providers and other internet services.

Will it stop there? What's to stop other big players joining the stablecoin business? Mastercard? Visa?The big question is what this all means for banks themselves and whether they too will join this stablecoin movement?

For some time, advocates for protecting the plumbing of payments from the financial system's periodic crises, and their accompanying "Too-big-to-fail" bailouts, have argued for a "Narrow banking" model.

You deposit money with your bank, which it invests in super safe securities such as Treasury bills, and the only service it provides is to enable you to make electronic payments with your funds.

Under this model, your money is not re-lent into the economy; providing credit is the domain of fund managers and professional investors, not for bankers who simultaneously manage our payments system.

Narrow banking hasn't taken off for the simple reason that it's not nearly as profitable as politically backstopped fractional reserve banking.

A bigger question is whether fractional reserve banking ultimately survives and, if it doesn't, what's the best way to generate the credit our economy needs? Also, how do central bank digital currencies fit into all this?

A Bank of England webinar about central bank digital currencies would struggle to compete with Netflix's and HBO's offerings in social distancing households.

Whatever one thinks about central bankers' power over fiat monetary policy in the post-Nixon Shock era, the public's faith in money has hinged on an understanding that policymakers are subordinate to the core principle that a currency must be scarce.