The banking system is going to see a major transformation.  Once legislation is enacted in the United States regarding stablecoins, we will see a massive explosion in the number that are offered.

Over the next couple years, it is likely most commercial banks enter this realm. 

Of course, there are those who are still detractors, people like Elizabeth Warren.  It is sad to see someone who has such power so clueless about what is taking place.

The threat to the financial system are the banks.  Actually, over the last few decades, it is the MBAs who are running things at these banks that are the hazard.  

In this article we will discuss how a major flaw in the system is removed, one that provides more stability while removing the ability to cause a bank run.

 https://img.leopedia.io/DQmTW3BwNwmPuLpc43seHqThnmRz6g2WRSyigaH3f21F9m1/image.png 
<center> [Source](https://www.financemagnates.com/cryptocurrency/coins/stablecoins-and-monetary-policy-implications-for-central-banks-and-regulators/) </center>

# Stablecoins Are Less Risky Than Bank Deposits

As stated, these will be the norm.

Even today, we have a headline where [Societe Generale Unveils US Dollar-Pegged Stablecoin on Ethereum and Solana](https://beincrypto.com/societe-generale-launches-us-dollar-stablecoin/).  This is going to be a growing trend.  Banks will flock to stablecoins like mosquitoes to light.

The question is the risk that is brought to the financial system.  Some opine there is far greater risk being taken on.  Here, I disagree.  Actually what you have taking place is the exact opposite.

To realize why this is, let us look at Silicon Valley Bank and what went wrong.

Many believe banks deposits are backed by nothing.  This is the view under fractional reserve banking.  Like usual, this is Internet fodder that has no basis in reality.

The reason why this is the case is double entry accounting.  Every liability is offset by an asset.

When a bank takes in cash as a deposit, that is a liability on the balance sheet.  Of course, the offsetting asset is the cash itself.    Since the bank typically pays interest to the depositor, it has to generate a return on the money.

In the US, banks have two options.  They can lend the money out or buy government approved securities.

By making a loan, the bank expands the money supply.  A note (liability) is created for the borrower.  This is, however, an asset to the bank.  The note goes on the balance sheet which, in many instances, is then sold to Wall Street.  In return, the banks gets cash.

At this point, the bank can either lend or buy a security.  If the former is chosen, it is rinse and repeat.  However, if a security is purchased, we see the balance sheet swap cash for a MBS or Treasury.

Hence, all deposits are ultimately backed by securities.

## MBA Blowing Up Banking

The problem is not that deposits have no backing, they do.  It is a question of liquidity.  Here is where the MBAs get it wrong and what happened with Silicon Valley Bank.  That institutions had the resources to back all the outgoing cash.  The problem was it lacked liquid assets.

Traditional bankers understand not all deposits are the same.  Having the proper time expectation on a deposit matched with the appropriate assets is crucial.  For example you do not want to back a payroll account with a 10 year bond.

When MBAs started to take over, they applied Finance 101.  Generate the highest return on the money by putting it to work.  As we can see, will the ROI might be there, liquidity could be missing.

It is the situation which Silicon Valley Bank found itself in.  The assets were there.  Where the bank ran into the problem was nobody was willing to lend against them since they were Off-The-Run (lacked liquidity).

Stablecoins are likely to fix this.

## Asset Backed With Liquidity

The present bills all contain language where the asset backing has to be "highly liquid".  This means mostly T-Bills and Repos.  These are assets that can be swapped for cash easily and quickly.  They are always On-The-Run.

It basically makes the system idiot proof.

Each stablecoin is backed by a liquid asset.  This differs from deposits, which can be backed by non-liquid instruments.  Hence, there cannot be a shock to the system unless the stablecoin issuer is out of compliance.  If that is the case, we are seeing fraud, something that is an entirely separate subject.

Outside of that, issuers will be required, by law, to maintain liquid backing.  This is a major step forward over the traditional deposit system.

Therefore, stablecoins actually remove risk from the system, not add to it.  



Posted Using [INLEO](https://inleo.io/@taskmaster4450/stablecoins-are-less-risky-than-bank-deposits-2zt)