Powered by 
In this Weekly Rant, John Cochrane explains stablecoins as an old financial idea implemented with new technology. A stablecoin functions like a money market fund: a share fixed at one dollar, backed by short-term Treasuries, designed to maintain stable value. What distinguishes it is payment functionality. Stablecoins can be transferred more easily than traditional money market shares and can execute transactions automatically, including conditional payments that would otherwise require escrow services.
Regulation shapes this development. Cochrane notes that other safe alternatives—narrow banks, segregated accounts backed by Treasuries, and payment-enabled money market funds—were not permitted. Stablecoins developed in that environment. The GENIUS Act now authorizes regulated stablecoins but bars them from paying interest. Stablecoins underscore a recurring institutional dynamic: when regulation restricts one structure, markets construct an alternative.
Transcript
Hi, I’m John Cochrane. I’m a senior fellow here at the Hoover Institution, and welcome to my Grumpy Economist Weekly Rant.
Today we’re going to talk about stablecoins, crypto — what fun. It’s in the news because the federal government passed the GENIUS Act, an interesting name, which allows regulated stablecoins.
What are stablecoins? Like all crypto, stablecoins implement an old financial idea with new technology. They are basically a money market fund. In a money market fund, you have a share that’s always worth a dollar, that pays interest, and that share is backed by short-term Treasuries. So that always, if you want to get out, they can sell the short-term Treasuries at almost exactly a dollar. It’s 100% safe. That’s a great idea.
It’s a money market fund, but it offers better payment services because you can trade a stablecoin faster than you can trade a money market. Now, why do we need that?
We already have money market funds. Well, unfortunately, the federal government regulated away many of the alternatives. In particular, if you’re a large institutional investor and you have lots of cash, then how do you put that cash somewhere that’s safe? In a bank, it’s not insured if you put it in a bank account, and they pay horrible interest.
Well, many ideas have come up. Money market funds could offer swift payment services. Regulations won’t let them. There could be segregated accounts where you put your account in the bank. That account is backed by short-term Treasuries so that even if the bank fails, you get your money back. Sorry, the Fed didn’t allow them.
Narrow banks. You could put your money in a bank, and the bank could turn around and put that money in reserves at the Fed, the safest thing possible. The Fed said, “No, thank you, not allowed.” Hard to know why the Fed did this, but boy, does it look like they were protecting the deposits of the big banks.
What happened? Many of those institutional investors went to places like Silicon Valley Bank. I know of one that had a $400 million checking account that nearly failed, and now the government has guaranteed the big deposits at those banks as well.
Stablecoins are a way around that regulatory prohibition. Also, they’ll be very useful for international transactions. If you’ve tried to buy anything big from out of the country, you’ll notice how complicated the system is — and especially if you’re trying to send money back and forth to less advanced countries.
Stablecoins may make those international transactions much more seamless. They also offer the possibility of interesting combinations of transactions and escrow: “I’ll pay you money only when I receive something from you,” and the stablecoin can execute that and avoid the escrow service.
The GENIUS Act hobbled the stablecoins a bit. It didn’t allow them to pay interest, I think, again to protect the big banks’ deposit franchise. But they’re already coming up with the digital equivalent of toasters from the 1970s, which is how banks got around non-payment of interest, and we’ll pay interest soon.
So it’s very nice. Is it genuinely important? Largely, it’s a technology that works around regulation. The crypto interests were so strong that the banks couldn’t stop them the way they stopped narrow banks, segregated accounts, and swift-payment money market funds — sort of the way Uber came in and demolished the taxiing monopoly by sheer force of size.
It’s too bad. Those other innovations would have been good, but stablecoins may come in their place. I would love it if the Treasury were to offer directly the same kind of security — fixed value, floating rate, electronically transferable government debt. Then we wouldn’t need lots of these intermediaries. But we do.
It’s a wonderful case in which the weeds of free markets and technical innovation can grow around the edges of regulation. But don’t be scared. It’s a perfectly sensible idea.
If you like this rant, don’t forget to click to subscribe.
John H. Cochrane is the Rose-Marie and Jack Anderson Senior Fellow of the Hoover Institution at Stanford University. An economist specializing in financial economics and macroeconomics, he is the author of The Fiscal Theory of the Price Level. He also authors a popular Substack called The Grumpy Economist.