University of Chicago Law Review

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Cryptocurrencies, including stablecoins, are all the rage. Investors are exploring ways to profit off of them. Governments are considering ways to regulate them. While the technology underlying cryptocurrencies is new, the economics is centuries old. Oftentimes, lawmakers are so focused on understanding a new technological innovation that they fail to ask what exactly is being created.

In this case, the new technology has recreated circulating private money in the form of stablecoins, which are similar to the banknotes that circulated in many countries during the nineteenth century. The implication is that stablecoin issuers are unregulated banks. Based on lessons learned from economic theory and financial history, we argue that circulating private money is not an effective medium of exchange because it is not always accepted at par and its issuers are vulnerable to destabilizing bank runs.

We also explore the treatment of stablecoins under the existing legal framework and examine the upsides and downsides of interpretive, regulatory, and legislative options that attempt to mitigate the financial-stability risks associated with stablecoins. These options include requiring the issuance of stablecoins through banks, backing stablecoins one-for-one with safe assets, and establishing sovereign digital money to compete against private digital money

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