Academic paper calls Stablecoins are Wildcats; argues the need for regulation

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Stablecoins have been the talk of the town. Lawmakers around the world have held their reservations about this cohort of digital assets citing its use in cross-border transactions as a threat to the use of state-issued currencies. More recently, two prominent financial experts have now weighed in a paper whose title read, “Taming Wildcat Stablecoins.” Interestingly, these digital tokens are inherently stable that helps investors in times of wild volatility in assets such as Bitcoin, Ethereum, etc.

However, it is not this characteristic that the Yale economist Gary Gorton and the United States Federal Reserve attorney Jeffery Zhang are worried about. A major aspect that stood out on the 49-page document, was the comparison drawn between stablecoin and the Free Banking Era – a world of wildcat banking back in the 19th century if the former is remains unregulated.

“Stablecoin prices are independent of geography but not independent of the perceived risk of their backing assets. If they succeed in differentiating themselves from fiat cryptocurrencies and become used as money, then they will likely trade at time-varying”

The writer also added that protecting the monetary sovereignty of the state is crucial for building monetary policy and stated that the policymakers should learn from history and repeat the same mistakes again. According to the paper, regulating stablecoin issuers as banks and issuing a central bank digital currency [CBDC] is the only way to combat risks associated with these digital tokens.

Community Reactions to Gorton-Zhang’s stablecoin paper

Nobel laureate and member of the American Philosophical Society, Paul Krugman lauded the duo’s academic paper and asserted that they are just a modern version of free banking, wherein the “private banks issued their own notes supposedly backed by specie.” He also went on to call the existing system “crisis-ridden.” Krugman is one of the many digital asset skeptics. Hence, his latest comment has faced some criticism.

The joint scientific effort for the paper did not see a very good response from the cryptocurrency community either. Arturo Portilla, a popular XRP proponent and a fintech lawyer tweeted,

“LOL. Option a): Require stablecoin issuers to become banks. Option b): Require stablecoin issuers to become unprofitable businesses. Option c): Introduce CBDCs and tax stablecoins to death. I’m guessing Jeremy Allaire isn’t having a good time right now.”

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