Yale Economist Gorton Questions the Stability of Stablecoins


You don’t have to dig deep to find reasons to question the stability of stablecoins. Take Tether, the most widely circulated stablecoin, which is designed to be worth precisely $1. (Hence “tether.”) Right on the company’s home page, under the headline “100% Backed,” there is this: “Every Tether token is always 100% backed by our reserves, which include traditional currency and cash equivalents and, from time to time, may include other assets and receivables from loans made by Tether to third parties, which may include affiliated entities (collectively, “reserves”).

Backed by “traditional currency”? Great. “Cash equivalents”? Well, probably OK. “Other assets and receivables from loans made by Tether to third parties”? Those are of questionable value. Loans to “affiliated entities”? Even sketchier. 

Gary Gorton, an economist who is a finance professor at Yale School of Management, is known for diagnosing the instabilities in the financial system that led to the global financial crisis of 2008-09. He cited Tether’s disclosure language on April 15 in a video talk in which he said stablecoins amount to a form of “wildcat banking.” Here’s how Wikipedia defines wildcat banking, a term that dates to the period from 1836 to 1865: “Operating primarily as banks of issue rather than deposit banks, wildcat banks circulated currency that was formally redeemable in gold or silver coin, but practically based on other assets such as government bonds or real estate notes.”



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