Taming Wildcat Stablecoins

53 Pages Posted: 19 Jul 2021 Last revised: 3 Mar 2022

See all articles by Gary B. Gorton

Gary B. Gorton

Yale School of Management; National Bureau of Economic Research (NBER); Yale University - Yale Program on Financial Stability

Jeffery Zhang

Board of Governors of the Federal Reserve System

Date Written: September 30, 2021


Cryptocurrencies are all the rage, but there is nothing new about privately produced money. The goal of private money is to be accepted at par with no questions asked. This did not occur during the Free Banking Era in the United States—a period that most resembles the current world of stablecoins. State-chartered banks in the Free Banking Era experienced panics, and their private monies made it very hard to transact because of fluctuating prices. That system was curtailed by the National Bank Act of 1863, which created a uniform national currency backed by U.S. Treasury bonds. Subsequent legislation taxed the state-chartered banks’ paper currencies out of existence in favor of a single sovereign currency.

The newest type of private money is now upon us—in the form of stablecoins like “Tether” and Facebook’s “Diem” (formerly “Libra”). Based on lessons learned from history, we argue that privately produced monies are not an effective medium of exchange because they are not always accepted at par and are subject to runs. We present proposals to address the systemic risks created by stablecoins, including regulating stablecoin issuers as banks and issuing a central bank digital currency.

Keywords: Stablecoins, central bank digital currencies

JEL Classification: E00

Suggested Citation

Gorton, Gary B. and Zhang, Jeffery, Taming Wildcat Stablecoins (September 30, 2021). University of Chicago Law Review, Vol. 90, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3888752 or http://dx.doi.org/10.2139/ssrn.3888752

Gary B. Gorton (Contact Author)

Yale School of Management ( email )

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HOME PAGE: http://mba.yale.edu/faculty/profiles/gorton.shtml

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
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Yale University - Yale Program on Financial Stability

165 Whitney Avenue
P.O. Box 208200
New Haven, CT 06520-8200
United States

Jeffery Zhang

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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