Sensible

Circumspect & Pragmatic
By Steven J. Grisafi, PhD.

It is my opinion that the Genius Act currently being considered within the House of Representatives is a compromise achieved by the lobbyists working for proponents of the cryptocurrency industry with the lobbyists working for the traditional banking and financial services industry. Senators and Members of Congress seek to reconcile various viewpoints of their constituencies brought before them through the practice of lobbying. The difficulty I perceive regarding the Genius Act is that the viewpoints brought before the Senators who sponsored this legislation only reflect those of the particular industries that paid for the efforts of the lobbyists. This is most unfortunate since the final product of this compromise moderated by the Senators seeking to reconcile the differing interests of the two lobbying camps fails to address the needs of the American People at large.

The two lobbying camps, that of the cryptocurrency industry and the traditional banking industry, agreed upon the final legislation for which the overwhelming majority of Americans would be indifferent. I, as a disinterested observer of the final product, see no significant cause to object to its enactment into law. Except for one point. That the compromise purpose of the legislation appears only to deprive the American People of the innovation both lobbying camps seek to deny to the American People. The Genius Acts serves little else for the public at large. The regulation of Stablecoins which the Genius Act provides serves primarily as a block toward the development of the innovation that would benefit the American People at large. As crafted in the Genius Act, Stablecoins are meant as a substitute and preventive measure against deployment of a Central Bank Digital Currency (CBDC) within the United States. An objective, indifferent, observer cannot avoid that conclusion.

The opposition of the cryptocurrency camp toward a CBDC reflects their understanding that there would be no rent seeking for their industry if the United States were to adopt the use of a CBDC. The opposition of the traditional banking industry toward the adoption of a CBDC reflects fear of the loss of the livelihood for their industry. While little would need to be addressed to assuage the disappointment of the cryptocurrency industry for their lack of an opportunity for intermediation with the deployment of a CBDC. Deployment of a CBDC could be designed such that it would complement the livelihood of the traditional banking industry and cause it no harm. Such a path forward had not been recognized because Senators were presented with Stablecoins as an alternative to a CBDC. The two would need to be very different.

Stablecoins evade the most difficult step in the development of a cryptocurrency. Stablecoins are not true cryptocurrencies. A cryptocurrency is defined by its mechanism for the addition of a new block onto its blockchain. Stablecoins are built on top of a true cryptocurrency and have no mechanism of their own for adding a new block to a blockchain. A CBDC cannot exist as such. There are only two proven to be successful mechanisms for adding a new block to a blockchain. Neither is satisfactory for a CBDC. A central bank creates money. But there can be no profit taking from the public with the addition of a new block to the blockchain. This is what makes Stablecoins unsatisfactory as a model for the CBDC. All Stablecoins ride on top of a cryptocurrency that uses the Proof of Stake mechanism. Both the Proof of Stake mechanism, and the original Proof of Work mechanism of Bitcoin, are wholly inadequate for use with a CBDC. A new mechanism must be devised.

That new mechanism can be devised such that it complements the business practices of the traditional banking industry. Commercial banks are in the business of creating loans for the general public. The primary concern of the traditional banking industry is that the adoption of a CBDC would enable the general public to circumvent the use of their traditional banking services. Quite the contrary. The purpose of the CBDC would be to draw into traditional banks those persons who currently go unbanked. The way of doing this relies on the freedom that the public has to choose to prefer to use traditional paper currency and metal coins. Formerly unbanked persons could visit traditional banks either to exchange cash received from employment into digital currency. Or to exchange digital currency received from employment into physical cash. A demographic group within the general public would have the opportunity to build a relationship with traditional banks that they never had before deployment of a CBDC.

While providing for the needs of the unbanked is one objective of a CBDC it has much more loftier goals. A concern I had about the Genius Act, before I learned that it explicitly prohibits Stablecoins from paying interest for mere storage of the coins in a wallet, was the harm this alternative currency with instantaneous payment clearance would cause to the currency supply equilibrium with its debenture supply of United States Treasury securities, the Bill, the Notes, and the Bonds. As the Bretton Woods exchange system showed having Stablecoins pegged in value to the US Dollar would not preclude their capacity to act as alternative currencies. If Stablecoins were to be permitted to pay yield they would do so at higher rates than both brick & mortar financial institutions as well as Internet banks. The need for issuers of Stablecoins to maintain 100% reserves in either currency or US Treasuries would disrupt the relationship of the M1 money supply relative to the M2 supply. The interest premium Stablecoins would need to pay to attract deposits would spawn arbitrage players worldwide seeking to exploit the capacity of instantaneous payment transfers. The primary means of the Federal Reserve Bank of New York to affect interest rates through its setting of the Secured Overnight Financing Rate (SOFR) would vanish simply because there would no longer be overnight lending.

Since the Genius Act will not grant to Stablecoins the right to pay interest on deposits along with the official recognition they seek from Federal law. We may now put aside any such concerns for the harm an alternative private currency could cause to our monetary system. But that leaves us to define a new mechanism for the impartial creation of money with the addition of each new block upon the blockchain of our CBDC. I can propose one method now. But I am certain people can devise others. One approach would be to recognize that commercial banks create money themselves. They do so each and every time they grant a loan to the public. With America’s adoption of a CBDC commercial banks would create new money when granting a loan by having the Federal Reserve Banks credit the amount to the personal account of the American borrowing the money. The borrower would make all interest and principal payments back to the commercial bank. Never would the commercial bank be required to return the money credited to the borrower’s account back to the Federal Reserve Banks. All that would be required of the commercial bank would be to make judicious loans and maintain its good standing as a lending institution.

This method for money creation would circumvent the need for setting a Federal Funds interest rate. Interest rates have served as the means of control of the money supply. With the adoption of the CBDC we enable direct control of the money supply. The capacity to set an SOFR would still remain and when appropriate could be used. But with the innovation of development of Central Bank Digital Currency it may also prove obsolete.