Coin Taxes

Abstract

New kinds of private money are thriving, with increasing circulation, growing acceptance, and rapid technological innovation. But this new suffers from an old problem: bank runs. Bank runs can destabilize even well-regulated and healthy banks, and their contagion can catalyze and amplify a system-wide financial crisis. Since the 1930s, policymakers have sought to protect our financial system from bank runs through public deposit insurance and other emergency response mechanisms. Those historically effective policy tools, however, are critically unavailable or ineffective in the context of these new types of money. As a result, these new types of money remain critically vulnerable to bank runs, and the potential for financial contagion from their failure poses catastrophic risks to society.

In light traditional legal tools’ inadequacy, the Article proposes an unconventional solution to the financial contagion risks these new kinds of money impose on society writ-large: taxation. A corrective or Pigouvian tax—unlike traditional banking regulation or traditional response mechanisms—can effectively reduce the risk of financial contagion by forcing private money issuers to internalize the social costs of contagion in their private decision-making. In this Article, we make the case for such a tax, discuss its main design features, and explain how tax instruments can partly replicate the success of public deposit insurance. Further, we explain why tax instruments can be superior to traditional tools at addressing the risk of financial contagion from new money, challenging banking-law-centered policymaking. In doing so, we show that more than a second-best solution, Coin Taxes exemplify a set of efficient and adaptable alternative tools that policymakers could use to regulate new, innovative, or regulation-avoidant banking—from stablecoins to shadow banking.