Discussion Post: Taming Wildcat Stablecoins

CTA:In these threads, we attempt to further the discussion of a key problem in this category and evolve our understanding of the domain space where research work has not yet answered the specific problem or question being considered. These posts are living documents, and it is our hope that the community will continue to contribute to their structure and content.


  • Suggested citation (original full-length article, including links to references): Gorton, G. B., & Zhang, J. "Taming Wildcat Stablecoins”. SSRN. 19 Jul 2021. Available online: Taming Wildcat Stablecoins.
  • Desan, C. (2014). Making money: coin, currency, and the coming of capitalism. Oxford University Press, USA.



  • Stablecoins: “are a digital form of privately produced money where each coin is supposed to be backed one-for-one with ‘safe’ assets. ‘Depositors’ buy stablecoins and, for each dollar deposited with the issuer, they receive that number of stablecoins in exchange.”
  • Important properties of money: “the three most commonly stated ones being a store of value, a unit of account, and a medium of exchange.” (Mankiw, 1997; Desan, 2014)
  • The no-questions-asked (“NQA”) principle: “requires the money be accepted at par in a transaction without due diligence on its value.” (Holmström, 2015)
  • Convenience yield: “A convenience yield is the benefit or premium associated with holding an underlying product or physical good, rather than the associated derivative security or contract.”
  • Bank run: “A bank run occurs when many customers withdraw all their money simultaneously from their deposit accounts with a banking institution for fear that the institution is, or might become, insolvent.”
  • Demand deposit: “A demand deposit account (DDA) is a bank account from which deposited funds can be withdrawn at any time, without advance notice.”
  • Saving deposit: “A savings account is an interest-bearing deposit account held at a bank or other financial institution.”
  • Free Banking Era in the United States:“The closest analogy to stablecoins is found in the Free Banking Era, when entry into banking was relatively easy and banks could issue their own banknotes. Starting in 1837, some states changed the way that bank charters were granted. These states allowed free banking—that is, anyone could open a bank. However, there were rules. Banks had to back their note issuance one-for-one with state bonds that were deposited with the state treasurers (the banks received the coupons from these bonds). Each state specified the exact bonds that were eligible to back notes. But, the private bank notes, whether issued by chartered banks or free banks, did not trade at par away from the issuing bank. The market was an ‘efficient market’ in the sense of financial economics, but varying discounts made actual transactions (and legal contracting) very difficult. It was not economically efficient.” (Gorton & Zhang, 2021)
  • National Banking Era in the United States: “The National Bank Act was passed in 1863, establishing national banks in the United States. These banks could issue national bank notes, but they had to be backed with U.S. Treasury bonds deposited with the U.S. Treasury. Subsequent legislation imposed a prohibitively high tax on bank notes other than national bank notes. In other words, the era of privately issued bank notes was over. For the first time in U.S. history, there was a uniform currency that satisfied the NQA principle.” (Gorton & Zhang, 2021)
  • Section 2(c) of the Bank Holding Company Act of 1956: defines a bank as any institution “which (1) accepts deposits that the depositor has a legal right to withdraw on demand, and (2) engages in the business of making commercial loans.” (Gorton & Zhang, 2021)
  • Legal Tender Act in 1862: "authorized the creation of paper money not redeemable in specie (‘greenbacks’). " (Gorton & Zhang, 2021)
  • Section 21 of the Glass-Steagall Act: “prohibited entities [that were] not banks from taking deposits. Section 21(a) of the Glass-Steagall Act is still on the books today.” (Gorton & Zhang, 2021)
  • Title VIII of the Dodd-Frank Act: “In Title I of the Dodd-Frank Act, Congress created the Financial Stability Oversight Council (‘FSOC’) to combat the risk of systemic nonbank financial companies…The FSOC could designate stablecoin issuance as a systemic payment activity under Title VIII of the Dodd-Frank Act. The statute states: The purpose of this subchapter is to mitigate systemic risk in the financial system and promote financial stability by— (1) authorizing the Board of Governors to promote uniform standards for the— (A) management of risks by systemically important financial market utilities; and (B) conduct of systemically important payment, clearing, and settlement activities by financial institutions; (2) providing the Board of Governors an enhanced role in the supervision of risk management standards for systemically important financial market utilities; (3) strengthening the liquidity of systemically important financial market utilities; and (4) providing the Board of Governors an enhanced role in the supervision of risk management standards for systemically important payment, clearing, and settlement activities by financial institutions.”
  • 12 C.F.R. § 5.20(e) by Office of the Comptroller of the Currency (“OCC”): “In 2003, the OCC promulgated a rule that set forth its authority to grant a bank charter to any entity engaged in at least one of the three core banking functions: receiving deposits, paying checks, or lending money.” (Gorton & Zhang, 2021)
  • The Federal Deposit Insurance Corporation (FDIC): “The Federal Deposit Insurance Corporation (FDIC) is an independent federal agency insuring deposits in U.S. banks and thrifts in the event of bank failures. The FDIC was created in 1933 to maintain public confidence and encourage stability in the financial system through the promotion of sound banking practices.” (Gorton & Zhang, 2021)
  • Money market funds: “A money market fund is a mutual fund that invests solely in cash and cash equivalent securities, which are also called money market instruments. These vehicles are very liquid short-term investments with high credit quality.” (Gorton & Zhang, 2021)
  • Systemic risk: “Systemic risk is the possibility that an event at the company level could trigger severe instability or collapse an entire industry or economy.” (Gorton & Zhang, 2021)

Key Problem / Topic Area

  • Are stablecoins issuers violating laws that regulate banks or currencies issuing such as the National Bank Act of 1863?
  • How do policy makers address the systemic risks created by stablecoins?
  • What is the best design for central bank digital currencies (CBDCs)?

Specific Question or Problem Statement

  • Are Stablecoins “Money”?
  • Are Stablecoins “Demand Deposits”?
  • Are Stablecoin Issuers legally “Banks”?
  • Could a stablecoin issuer become a bank in practice?
  • Should the sovereign have a monopoly on money issuance?
  • What is the best design for central bank digital currencies?
    Gorton & Zhang’s article points out that there are two ways to design central bank digital currencies:(1) as a digital currency token and (2) in the form of a deposit account with the central bank. Which one is better? Or is there any choice better than these?

Approach / Methodology

  • In order to understand the legal framework governing stablecoins, Gorton & Zhang’s article makes a historical review of money market funds, which were deemed not to be deposit-taking institutions.
  • In order to propose how stablecoin issuers could be regulated, Gorton & Zhang’s article goes back further in time to the 19th Century and describes the Free Banking Era, the consequences of porous regulation, and the eventual demise of the system via the National Bank Act.

Conclusions / Key Takeaways

  • Gorton & Zhang’s article argues that for a stablecoin to be “Money” in addition to being a store of value, a unit of account, and a medium of exchange, a stablecoin must also satisfy the requirements of the NQA principle. Currently, stablecoins can’t satisfy the NQA principle. Thus, stablecoins are not money. (Gorton & Zhang, 2021)
  • Gorton & Zhang’s article argues that because holders of stablecoins are not the owners of the stablecoin issuer, many stablecoins could be considered deposits. Thus, stablecoin holders are essentially creditors of their own depositories. However, some stablecoin issuers like Tether could be treated like money market funds because their contractual relationship with stablecoin holders is equity, instead of debt. If the redemption process for stablecoins were unencumbered, then that would mean stablecoin issuers were accepting demand deposits. (Gorton & Zhang, 2021)
  • Gorton & Zhang’s article argues that stablecoin issuers are not “Banks”. According to the Competitive Equality Banking Act of 1987, an institution is considered a bank for the purposes of the Bank Holding Company Act if it is either (1) an FDIC-insured institution or (2) an institution that accepts demand deposits and makes commercial loans. Stablecoin issuers are not FDIC-insured institutions. Given the narrow scope of the term “commercial loan” applied by the Supreme Court’s decision in FRS vs. Dimension Financial Corp., stablecoin issuers would not be considered to provide commercial loans. Thus, stablecoin issuers would not be considered banks under the Bank Holding Company Act. (Gorton & Zhang, 2021)
  • Gorton & Zhang’s article argues that a stablecoin issuer cannot be a bank in practice. Reserve Banks can decide which institutions receive master accounts regardless of whether the institution has a charter from the OCC or from a state like Wyoming or Nebraska. Thus, in a practical sense, stablecoin issuers cannot become banks simply by receiving a charter from the OCC or from a state banking authority. (Gorton & Zhang, 2021)

CTA: Future Work / RFP

Following Nobel laureate Paul Krugman’s tweet “This, by Gorton and Zhang, is very good: stablecoins are just a modern version of free banking, in which private banks issued their own notes supposedly backed by specie. That system was crisis-ridden, and the same will be true no.”

  • As the SEC Chair Gary Gensler said, “We already have an existing stablecoin market worth $113 billion.” Do stablecoins constitute a revival of the free banking era? Is that really a problem? If so, how can we manage it?
  • Is there any way to encourage the global wild stablecoins to fit into the NQA principle legal frameworks?

In order to facilitate the fine development of stablecoins, it is important for those who are expecting its future to think about these questions.

  • Gorton & Zhang’s article points out that “there are three main takeaways from our historical experience. First, the use of private bank notes was a failure because they did not satisfy the NQA principle. Second, the U.S. government took control of the monetary system under the National Bank Act. Third, runs on demand deposits only ended with deposit insurance in 1934. In this context, the researchers suggest that the government has a couple of options: (1) transform stablecoins into the equivalent of public money by (a) requiring stablecoins to be issued through FDICinsured banks or (b) requiring stablecoins to be backed one-for-one with Treasuries or reserves at the central bank; or (2) introduce a central bank digital currency and tax private stablecoins out of existence.”
  • Gorton & Zhang’s article is in favor of the design that a central bank digital currency would be issued as a digital currency token. It allows the central bank to avoid the operational tasks of opening accounts and administering payments for users, as private sector intermediaries would continue to perform retail payment services. It can also avoid the consequence of designing central bank digital currencies in the form of a deposit account with the central bank that the Federal Reserve would be engaging in fiscal policy with all the political ramifications that would entail and jeopardize its independence.

Why does the researcher suggest the government transform stablecoins into money? Is it necessary to do so to meet the NQA?

It’s also curious to me why the government should be playing a role in enforcing the nature of stable coins at all. How does he or she justify the government’s role?


I think the researchers mean that if stablecoins can’t satisfy NQA, then it can’t be deemed as money. Being money may result in many concerning regulations. On the other hand, stablecoins are issued by private sectors, they are not backed by the national treasury, so traders who use particular stablecoin may need to take another step to check if that stablecoin is well back so that their interests could be safe. This additional step will produce a lot of costs in an entire society. Maybe these are why the researchers regard NQA matter in the discussion of stablecoin’s nature.

The researchers suggest the government issue digital fiat currencies which money backed up by the national treasury, so-called CBDC, that are issued by central banks and are different from stablecoins which are issued by private sectors. I think some fiat currencies may not satisfy NQA because their countries are in huge debt or at war what will diminish their back, and people still need to check their value. So I think fiat currencies or CBDC might not definitely satisfy NQA.


George Selgin from the CATO Institute argues that the comparison with the US’s wildcat banking years is flawed — it had nothing to do with consumers. “If it had,” he said, “there’d be no need for a punitive 10 percent tax to force state banks to quit issuing their own notes.” (from Sebastian Sinclair at CoinDesk). Who would really be benefiting from forcing stablecoins to adhere to NQA standards?


It reminds me of a mystery story I have heard about Die Rothschild Familie. Though I’m not sure if it is true and if this topic has anything to do with them. On the other hand, I believe levying on issuing notes would be beneficial to the government. Think about the battle of currencies between countries can tell.


Yeah, I agree it is undeniable that the United States has benefited from a strong currency (especially now), I think the quotation above is aimed more at the idea that the federal government is benefiting at the expense of the people it serves… which is a constant struggle in American history (states rights vs. federal). It’ll be very interesting to see what happens with El Salvador and to see who comes out ahead.