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> I'm assuming these stable coins aren't actually backed by $150bn in actual USD, Maybe I am missing something, how is this different than banks employing frac

> I'm assuming these stable coins aren't actually backed by $150bn in actual USD, Maybe I am missing something, how is this different than banks employing fractional reserve banking?

dnadler 5y ago
That's not a great analogy, you can't redeem currency at a bank. My understanding is that stable coins are stable because they claim to be backed 1:1 by some other currency. If they are not actually doing that, then thats a fraudulent statement, isnt it?
- CryptoPunk 5y ago
  Not all stablecoins claim redeemability for USD. Some claim each unit's redeemability for an amount of some digital asset that is worth 1 USD, with the amount redeemed fluctuating in proportion to the value of the digital asset, to maintain the stable value.
- Nasrudith 5y ago
  And all of the incentives are set up for the maintainer to take the money and run. Excessive ammounts of idle money is an attractive nuisance.
gizmo686 5y ago
Several differences: 1) Fractional reserve banking has caused numerous financial crisies. 2) In the US, banks are required by law to carry deposit insurance (FDIC). While it is theoretically possible for the FDIC to become insolvent, that is far less likely than a bank becoming insolvent. Further, in practice, the FDIC can't fail because the government will just fund it directly if it's actual funds ran out. 3) While banks have less cash on hand than the sum of their debts; they are still solvent. That is to say, they are capable of paying back all of their creditors, they just need to be able to collect from their debtors in order to afford it. When a bank takes a deposit for $100, they have a $100 liability, and a $100 asset in cash. Net worth $0, technically solvent. They then loan out $90. Considering the likelihood of repayment, interest rate, and loan term, this debt is an asset that is worth (hopefully) >$90, so the bank remains solvent. The bank can take some of that surplass worth they have to do things like pay salaries, build offices, fund FDIC, give executive's their bonues, etc. In contrast, when a stablecoin takes a deposit of $100, they have a $100 liability and $100 asset in cash. If they take $90 to pay salaries, they now have only $10 dollars in assets and are insolvent. In theory, a stablecoin could loan out that $90, or use it to invest is something else. If they do this, they are in roughly the same situation as the bank where they are hoping that their asset ends up being worth as much as they expect. They are also less regulated then banks, so the odds of something going wrong (either mallisiously or not) is greater. In practice, even the normal banking system runs into some issues: * Deposits into banks are much more liquid then loans out of banks. In theory, everyone can decide to withdraw all their money tomorrow. But if you took at a mortgage, the bank may have to wait 30 years to be fully payed back. This can be mitigate by selling debt to other institutions, or taking out loans backed by the debt, but you can still run into issue when these markets experience problems. * Debtors do not always pay back what they owe to the banks. In theory this is accounted for, but if banks overestimate the actual value of the debts, they can end up in a situation where they are actually insolvent.
- spiralx 5y ago
  Banks don't lend out deposits though - a $100 loan creates both a $100 liability - the value in the customer's account - and a $100 (plus interest) asset - the loan itself - which also balances out to $0. The process literally creates money, meaning a bank could theoretically lend money even if it had no deposits at all. The constraints on making loans come from central bank requirements and regulations, not deposits made. The fractional reserve model makes sense for commodity-backed money or things such as stablecoins that are backed 1:1 in some way, just not for banking in the modern economy where physical money is only a small part of the money supply. https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy.pdf https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...
  - perl4ever 5y ago
    >which also balances out to $0 >The process literally creates money, meaning a bank could theoretically lend money even if it had no deposits at all If the assets and liabilities balance, why describe it as "literally creating money"? It makes it sound to me like someone gained something, like banks have a special privilege, and like money is a physical resource. And being able to lend money without deposits is possible whenever a bank has money from another source. Are you suggesting that there is something non-obvious going on that permits bootstrapping from nothing?
    - spiralx 5y ago
      > If the assets and liabilities balance, why describe it as "literally creating money"? 1) Say you have an account at FooBank with a balance of $1000, and I have an account there with a balance of $0. The total supply of money at this point is $1000. 2) I apply for a loan of $1000 and get it. My account now has a balance of $1000, and your account still has a balance of $1000. The total supply of money is now $2000! Adding another layer: 1) I have an account at FooBank with a balance of $0. You have $1000 in cash in your pocket. FooBank has $0 of assets and $0 of liabilities. The money supply is $1000 of cash. 2) You open an account at FooBank and deposit your $1000 of cash. FooBank now has $1000 of assets (your cash) and $1000 of liabilities (your deposit), balancing out still. The money supply is also still $1000, now made up of $1000 of bank deposits and $0 cash. 3) I apply for a loan of $1000 and get it. My account now has a balance of $1000, and your account still has a balance of $1000. The bank now has $2000 of assets ($1000 cash plus my $1000 loan) and $2000 of liabilities ($1000 in each of our accounts), which still balances out. However the money supply is now $2000, made up of $2000 of bank deposits and $0 cash. The money supply here is M1 or "broad money" which consists of the total of coins and bank notes plus deposits in checking/current accounts, which you can roughly think about as the total amount of money held by households and companies. 4) I withdraw $1000 in cash from my account at FooBank, leaving me with $1000 cash and $0 in my account. FooBank has assets of $1000 (my loan) and liabilities of $1000 (your account). The money supply is still $2000 but now comprises $1000 of cash and $1000 of bank deposits. The bank's accounting of assets and liabilities always match up, as do ours - you started with $1000 of assets and no liabilities and ended up with exactly the same, while I started with $0 assets and $0 liabilities and ended up with $1000 of assets and a $1000 liability. However the total of our cash and bank deposit assets has gone from $1000 to $2000 i.e. the money supply has increased. So yes, banks really do have a special role in the economy in that most "money" is in the form of bank deposits and most transactions involve moving money between bank accounts. It's not super-intuitive and doesn't quite fit the "common sense" view money as a set of tokens that just get moved about that's ingrained in our thinking - that works for cash, commodity money or cryptocurrencies, but not when viewing modern economies and fiat currencies where money is an IOU between two parties. https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-in-the-modern-economy-an-introduction.pdf https://www.bankofengland.co.uk/-/media/boe/files/quarterly-... https://www.investopedia.com/articles/investing/022416/why-banks-dont-need-your-money-make-loans.asp https://www.investopedia.com/articles/investing/022416/why-b...

> I'm assuming these stable coins aren't actually backed by $150bn in actual USD, Maybe I am missing something, how is this different than banks employing fractional reserve banking?

dnadler 5y ago

That's not a great analogy, you can't redeem currency at a bank. My understanding is that stable coins are stable because they claim to be backed 1:1 by some other currency. If they are not actually doing that, then thats a fraudulent statement, isnt it?

CryptoPunk 5y ago
Not all stablecoins claim redeemability for USD. Some claim each unit's redeemability for an amount of some digital asset that is worth 1 USD, with the amount redeemed fluctuating in proportion to the value of the digital asset, to maintain the stable value.
Nasrudith 5y ago
And all of the incentives are set up for the maintainer to take the money and run. Excessive ammounts of idle money is an attractive nuisance.

gizmo686 5y ago

Several differences: 1) Fractional reserve banking has caused numerous financial crisies. 2) In the US, banks are required by law to carry deposit insurance (FDIC). While it is theoretically possible for the FDIC to become insolvent, that is far less likely than a bank becoming insolvent. Further, in practice, the FDIC can't fail because the government will just fund it directly if it's actual funds ran out. 3) While banks have less cash on hand than the sum of their debts; they are still solvent. That is to say, they are capable of paying back all of their creditors, they just need to be able to collect from their debtors in order to afford it. When a bank takes a deposit for $100, they have a $100 liability, and a $100 asset in cash. Net worth $0, technically solvent. They then loan out $90. Considering the likelihood of repayment, interest rate, and loan term, this debt is an asset that is worth (hopefully) >$90, so the bank remains solvent. The bank can take some of that surplass worth they have to do things like pay salaries, build offices, fund FDIC, give executive's their bonues, etc. In contrast, when a stablecoin takes a deposit of $100, they have a $100 liability and $100 asset in cash. If they take $90 to pay salaries, they now have only $10 dollars in assets and are insolvent. In theory, a stablecoin could loan out that $90, or use it to invest is something else. If they do this, they are in roughly the same situation as the bank where they are hoping that their asset ends up being worth as much as they expect. They are also less regulated then banks, so the odds of something going wrong (either mallisiously or not) is greater. In practice, even the normal banking system runs into some issues: * Deposits into banks are much more liquid then loans out of banks. In theory, everyone can decide to withdraw all their money tomorrow. But if you took at a mortgage, the bank may have to wait 30 years to be fully payed back. This can be mitigate by selling debt to other institutions, or taking out loans backed by the debt, but you can still run into issue when these markets experience problems. * Debtors do not always pay back what they owe to the banks. In theory this is accounted for, but if banks overestimate the actual value of the debts, they can end up in a situation where they are actually insolvent.

spiralx 5y ago
Banks don't lend out deposits though - a $100 loan creates both a $100 liability - the value in the customer's account - and a $100 (plus interest) asset - the loan itself - which also balances out to $0. The process literally creates money, meaning a bank could theoretically lend money even if it had no deposits at all. The constraints on making loans come from central bank requirements and regulations, not deposits made. The fractional reserve model makes sense for commodity-backed money or things such as stablecoins that are backed 1:1 in some way, just not for banking in the modern economy where physical money is only a small part of the money supply. https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy.pdf https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...
- perl4ever 5y ago
  >which also balances out to $0 >The process literally creates money, meaning a bank could theoretically lend money even if it had no deposits at all If the assets and liabilities balance, why describe it as "literally creating money"? It makes it sound to me like someone gained something, like banks have a special privilege, and like money is a physical resource. And being able to lend money without deposits is possible whenever a bank has money from another source. Are you suggesting that there is something non-obvious going on that permits bootstrapping from nothing?
  - spiralx 5y ago
    > If the assets and liabilities balance, why describe it as "literally creating money"? 1) Say you have an account at FooBank with a balance of $1000, and I have an account there with a balance of $0. The total supply of money at this point is $1000. 2) I apply for a loan of $1000 and get it. My account now has a balance of $1000, and your account still has a balance of $1000. The total supply of money is now $2000! Adding another layer: 1) I have an account at FooBank with a balance of $0. You have $1000 in cash in your pocket. FooBank has $0 of assets and $0 of liabilities. The money supply is $1000 of cash. 2) You open an account at FooBank and deposit your $1000 of cash. FooBank now has $1000 of assets (your cash) and $1000 of liabilities (your deposit), balancing out still. The money supply is also still $1000, now made up of $1000 of bank deposits and $0 cash. 3) I apply for a loan of $1000 and get it. My account now has a balance of $1000, and your account still has a balance of $1000. The bank now has $2000 of assets ($1000 cash plus my $1000 loan) and $2000 of liabilities ($1000 in each of our accounts), which still balances out. However the money supply is now $2000, made up of $2000 of bank deposits and $0 cash. The money supply here is M1 or "broad money" which consists of the total of coins and bank notes plus deposits in checking/current accounts, which you can roughly think about as the total amount of money held by households and companies. 4) I withdraw $1000 in cash from my account at FooBank, leaving me with $1000 cash and $0 in my account. FooBank has assets of $1000 (my loan) and liabilities of $1000 (your account). The money supply is still $2000 but now comprises $1000 of cash and $1000 of bank deposits. The bank's accounting of assets and liabilities always match up, as do ours - you started with $1000 of assets and no liabilities and ended up with exactly the same, while I started with $0 assets and $0 liabilities and ended up with $1000 of assets and a $1000 liability. However the total of our cash and bank deposit assets has gone from $1000 to $2000 i.e. the money supply has increased. So yes, banks really do have a special role in the economy in that most "money" is in the form of bank deposits and most transactions involve moving money between bank accounts. It's not super-intuitive and doesn't quite fit the "common sense" view money as a set of tokens that just get moved about that's ingrained in our thinking - that works for cash, commodity money or cryptocurrencies, but not when viewing modern economies and fiat currencies where money is an IOU between two parties. https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-in-the-modern-economy-an-introduction.pdf https://www.bankofengland.co.uk/-/media/boe/files/quarterly-... https://www.investopedia.com/articles/investing/022416/why-banks-dont-need-your-money-make-loans.asp https://www.investopedia.com/articles/investing/022416/why-b...