Jan 17, 2023·edited Jan 17, 2023

I would say a key distinction between banks and other issuers of short-term debt is that when banks issue deposit liabilities they buy a newly created credit instrument, when tether does so (buying a us treasury for example) its buying an asset already in circulation. Another would be that I assume non-banks settle most of their transactions with bank deposits, whereas banks settle their transactions with reserves, which would entail a hierarchal relationship not an equal one. Maybe the hierarchy has flattened with the numerous fed facilities. In any case, I could be just nitpicking here, but I’ve heard this line of thinking before (not just with stablecoins but with all non-bank FIs) and wanted to get your opinion. Are you using the word ‘bank’ just to describe issuers of short term liabilities where those liabilities are expected to maintain a stable value?

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One larger difference between stablecoin liabilities and those issued by banks (deposits) and mmfs ($1 shares) is that stablecoin issuers also have the ability to defend their peg in the secondary market with their own liquidity resources. This seems to me a new function of this system and something a) not widely discussed, but also b) has many more unknowns as to how the stablecoin issuer will use it’s liquidity resources - is that to defend the secondary market price or will it be to satisfy redemptions. What is the interaction between one of these mechanisms on the other?

What are other thoughts on this? Are there other analogs that I may not be thinking of?

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Do you mean, for example, that issuers can buy up their own tokens to push up the price? If that is what you have in mind, it seems to me that it is equivalent to reducing tokens in circulation, which is something that other bank-like entities do. If the stablecoin issuer has its own tokens on both sides of its balance sheet, it can be netted out when thinking about the amount in circulation.

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