a century late and a hegemony short

dollars, and it's different this time

Hello, presumed New York Times readers that clicked on the link! Everyone else; having seen the success of “Wolverine and Deadpool”, the Times decided that they also needed a dynamic duo of a beloved and iconic hero with a curiously punchable comedy act, and so we have Farrell and Davies, basically arguing that the GENIUS Act, by bringing stablecoins into the dollar system, is probably taking a few more Jenga blocks out of the tower, and increasing the risk that the global dollar itself may lose its place.

I won’t reproduce the details here – read it at the source! But there is some context here, because this is linked to a more general project on the dollar system which Henry and me have been working on, as a little twig of the British Academy/Carnegie Endowment’s “Global (Dis)Order” project. I won’t give too many of the details of that either, except to say that it’s the crossover of our two big projects – from Henry’s side the way in which “weaponised interdependence” distorts the networks it tries to exploit and from my side the way in which systems are shaped and defined by the kinds of information and feedback they are able to process.

My other contribution, of course is “an absolute tsunami of irrelevant technical detail about banking and payments regulations”, and someone might make a pretty good movie about the heroic struggle of the NYT editors to protect their readers from it as I rained down more and more of the stuff. There are, though, a few details about that which I’d like to expand on a bit, on the theme of “stablecoins really, really are different, this isn’t just more offshore dollars”.

Basically, there is a respectable point of view (Martin Sandbu suggested as much, and something like it appears to have been part of the motivation for otherwise sensible Senators to vote for the GENIUS Act) that stablecoins are really useful, convenient products for a lot of use cases, and so bringing them into the dollar banking system reinforces it. Effectively, the “power” of “global dollar hegemony” is really nothing more nor less than “the US dollar is a really fantastic product, with a quite gnarly set of terms & conditions, but the product is so good that everyone just grits their teeth and clicks yes on the EULA”. So adding a new functionality to the product makes it better, so more valuable, so it strengthens the system, right?

I think wrong. It’s more like planting a bit of Japanese Knotweed in your garden because you like the flowers. Although the US dollar feels like it’s just a natural and convenient ecosystem, it’s actually an incredibly regulated and guarded system. (I’m reminded of people eulogising the natural beauty of Dartmoor, the Lake District or the English hedgerows, some of the most man-made landscapes you can think of). It’s reliable; you can let it into your financial system without worrying too much about what you’re in for.

What do I mean by this? Well, you know that the Federal Reserve will provide dollar liquidity all over the world, and has set up swap lines with central banks to do so. Every offshore dollar is a deposit in a bank, and you get to give or refuse permission for that bank to do business in your own jurisdiction. Either it’s a legal entity set up in your back yard, or it’s a branch of a foreign bank, in which case you have a set of agreements with its domestic supervisor governing the extent to which it’s their responsibility not to cause you too much trouble. (This was the original purpose of the Basel Concordat).

This is very unlike a system of “people emailing each other magic numbers”, which is IMO a reasonable description of distributed ledger technology from the point of view of a financial regulator. If you get into the habit of sending small amounts of physical gold through the post to pay for things, you will quickly attract the attention of law enforcement, and this is uncomfortably similar to what a lot of crypto finance does.

But the problem is worse, because even if you successfully exclude stablecoin dollars from your own system, you’re not really safe from them. In “Lying for Money”, I referred to money laundering compliance as having the “Trainspotting Problem”, after the book and film in which a lot of people died from sharing needles. It’s ubiquitous problem in banking – just trusting your counterparty isn’t enough, you have to be confident you can trust everyone they trust, reasonably confident that you can trust everyone who everyone they trust trusts, and even the fourth and fifth degrees are potentially material.

So if USD stablecoins are in the system, they’re in all of the system. If one of them collapses, or blows up (or even has a major IT outage), people will immediately worry about whichever banks had exposure to the bust stablecoin. Then they will worry about who might have exposure to the banks on that list, and so on.

Which means that GENIUS makes the product more convenient and better for a subset of users (crypto speculators, crooks, and people who really really want to save a little bit of time and effort on correspondent banking by taking a small but significant risk).But it makes it much worse for a key set of decision makers; the stakes are now that as well as all the other grabby extraterritorial power claims, you now have to agree that your financial system is letting in a bunch of unregulated and untransparent shadow banks.