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The Unbundling of Banks: How Stablecoins Change Everything | Charles Calomiris - Bankless | Wave AI Podcast Notes

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The Unbundling of Banks: How Stablecoins Change Everything | Charles Calomiris

Bankless

Mon Sep 22 2025

Summary

Bankless Podcast Episode Summary

"The Unbundling of Banks: How Stablecoins Change Everything" | Guest: Charles Calomiris

Release Date: September 22, 2025

Overview

This episode features economist and banking historian Charles Calomiris in a sweeping discussion of how stablecoins and blockchain finance are unbundling the traditional functions of banks. The conversation dissects the deep historical roots of banking as political institutions, explores the ongoing transformation driven by stablecoins, and issues a call to political action for crypto proponents. Calomiris argues that technological advancements alone are insufficient to disrupt entrenched financial interests—true change in money and payments requires understanding and engaging with political realities.

Key Discussion Points & Insights

1. The Core Function and History of Banks

Banks are Political Creations:
Calomiris emphasizes that banks are not just financial intermediaries, but products of the nation-state. Modern banking began with state charters around the 1600s, and these charters are political bargains that give banks special privileges and responsibilities.

"Banks are the sine qua non of the nation state... Every nation state charters banks." — Calomiris [00:58]
Charters as Political Bargains:
A bank charter isn’t just a regulatory license, but the result of negotiation among political coalitions within a country. Charters define not just permissions but privileges, powers, and even potential bailouts.

2. The Political Economy of Stablecoins

Crypto is Political, Not Just Technological:
Calomiris underscores that the evolution of stablecoins is governed as much by politics as by technology. Both the Trump and Biden administrations sought to slow the rise of stablecoins, captured by incumbent banking interests.

“If you think stablecoins are technologically determined... you’re really missing the boat.” — Calomiris [17:52]
The Genius Act as a Political Shift:
The Genius Act (recent US legislation) is noted as an inflection point — it chartered stablecoins, bringing them into the mainstream, but this only occurred after political coalitions began shifting due to stablecoins’ unstoppable growth.

“You can’t run stable coins without a charter. That’s what the Genius Act did.” — Calomiris [20:06]

3. Unbundling of Bank Functions

Traditional Bundling Explained:
Historically, banks combined payment systems (like checking/deposits) and lending due to information costs and political convenience.
Unbundling via Stablecoins:
Stablecoins and DeFi are severing these functions, as evidenced by “shadow banks” (fintechs, stablecoin issuers, and non-bank lenders) specializing in either payments or lending.

“What we’re talking about is... look at the shadow banks. Stablecoin providers aren’t trying to do lending. Lending providers aren’t trying to do stablecoins.” — Calomiris [34:42]
Threat to Incumbent Banks:
Removing payments from banks’ control undermines their subsidized, semi-monopolistic business model.

4. Political Power of Incumbents

Influence through Organizations:
Calomiris points out entities like the Bank Policy Institute (BPI), likening it to “Darth Vader on steroids” for its power to organize and fight pro-crypto reforms.

"It's Darth Vader on steroids... This group is not just about colluding... but using their power to try to stop things that will help citizens in favor of themselves." — Calomiris [36:40]
Activist Group Contracts:
During the banking merger waves of the 1990s–2000s, activist organizations received around $2.5 Trillion from banks in exchange for political support—showcasing the size of the political machine behind banking.

“No. From 1995 to 2007, two and a half trillion dollars of contracts... That’s why nobody gets it.” — Calomiris [26:14]

5. Stablecoins, Yield, and the Status Quo

Yield Controversy:
There's a political battle over whether stablecoin holders should receive interest ("yield") from the assets backing these coins. Presently, issuers can’t pay yield directly due to the Genius Act, but intermediaries can via various mechanisms.
Incumbent Bank Arguments Debunked:
Calomiris rebuts prominent arguments against yielding stablecoins, such as the risk of bailout (as with money markets), deposit flight, and threats to financial stability.

“Limiting the interest on stablecoins is so stupid... It shows you how the incumbents hate you. They hate the American public. They have only contempt for us.” — Calomiris [59:37]
Alternative Structures Suggested:
Proposes that stablecoins could be constructed more like perpetual preferred stock, supporting direct payment of interest/yield without banking-style bailouts.

6. Stablecoins and the Dollar’s Global Role

Short-term Dollarization:
The rise of stablecoins will likely strengthen the dollar’s role globally, as most stablecoins are dollar-denominated.

“The growth of stablecoins will actually strengthen the role of the dollar in global markets.” — Calomiris [61:46]
Future Unit of Account Innovation:
Predicts blockchain-based finance could allow for new, more optimal units of account tied to actual consumption baskets, potentially allowing for regional and even global “dollars” tailored to users’ needs.

7. The Political Game Ahead

Continuous Political Battle:
Even after stablecoin-friendly legislation, the political struggle will not end. Entrenched interests will work constantly to adapt and maintain privileges.

“You never win the battle. You have to be ever vigilant.” — Calomiris [91:01]
Call to Action:
Calomiris urges crypto advocates to organize politically. Mere technological savvy is not enough; collective action is required.

“There’s no such thing as decentralized political activity. You have to create organized groups to promote this future.” — Calomiris [47:09]

Notable Quotes & Memorable Moments

On the Fundamental Role of Banks:
“Banks are the sine qua non of the nation state... That a nation state creates rules for the existence of banks that it regulates. The chartering of banks is all about deciding as a nation state that the functions of banks have to be ruled by the political nation...” — Calomiris [01:00]
On the Political Challenge:
“What we just experienced is how much the political winds have affected the timing and capabilities of the empowerment of crypto... The main obstacle to getting that to happen is the resistance... from members of powerful coalitions who have vested interest.” — Calomiris [19:32]
On Stablecoins Threatening Banks:
“The history of chartered banks has been the combining of payment system services with lending. But if technology changes information costs, the rationale for bundling evaporates... That’s exactly what I believe, that bundling made economic sense for banks and no longer does.” — Calomiris [31:03]
On Bank Policy Institute (BPI):
“It’s Darth Vader on steroids... This group is not just about colluding... but using their power to try to stop things that will help citizens in favor of themselves.” — Calomiris [36:40]
On Stablecoin Regulation:
“If you think that because we are forward looking people who like technology and want to see good technologies happen, that they will automatically happen, it’s not true. You have to be a political force to build a coalition that represents the public’s interest.” — Calomiris [46:15]
On Political Organizing in Crypto:
“There’s no such thing as decentralized political activity. You have to create organized groups to promote this future.” — Calomiris [47:09]
On Yield and Stablecoins:
“Limiting the interest on stablecoins is so stupid... It shows you how the incumbents hate you. They hate the American public... How disgusting are these incumbent banks?” — Calomiris [59:37]
On Dollar’s Future Role:
“You could even imagine constructing... a global dollar as a unit of account, which would have appeal by virtue of the fact that it is more linked to the global consumption bundle... Maybe one way to compete to preserve the role of the dollar, maybe one way to do it is to make the dollar better.” — Calomiris [80:09]
On Vigilance and Activism:
“You never sleep. Politicians and their coalition never sleep. And you better not be sleeping either.” — Calomiris [91:01]
Call to Action:
“If you don't understand that everything is politically contingent, you can't isolate yourself... You have to organize and play the game, engage. And you haven't done it. Your generation hasn't done it. And I'm really sorry.” — Calomiris [87:48]

Important Segment Timestamps

Historical Role of Banks & Political Bargains: [00:00] – [11:02]
Stablecoins as Political Institutions: [17:29] – [20:06]
Unbundling Payments & Lending (Shadow Banking/Stablecoins): [30:07] – [34:42]
Bank Power, Mergers, and Activist Partnerships: [25:23] – [26:27]
Yield, Risk, and Stablecoins Policy Debate: [50:45] – [60:27]
Future of the Dollar & Units of Account: [61:46] – [83:03]
Call to Political Action: [87:40] – [94:13]

Final Takeaways

Disruption in banking is not just about technology — it is constrained and shaped by politics and entrenched interests.
Stablecoins and blockchain can unbundle core bank services, challenging incumbent business models and undermining traditional privileges.
The path forward for crypto and DeFi requires organized political advocacy, coalition building, and continuous vigilance.
Crypto may strengthen the global role of the dollar in the short term, but opens possibilities for new units of account and monetary innovation — if the political will can be marshaled.
“Going bankless” is as much about winning policy battles as it is about coding or economic theory.

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Transcript

A (0:00)

What are banks like? What function at their core for society do banks perform?

B (0:06)

Wow, I love that question. I have to put a plug in before I even answer it for the book that I wrote about a decade ago with Steve Hable called Fragile by Design, which is about the modern era from the perspective of banks. That is, understanding the history of the world from the perspective of something that started about 400 years ago, which is the chartering of banks. So the first thing in answering your question that somebody has to do is decide whether they want to talk about a generic thing called financial intermediary that does some kinds of transactions involving lending, maybe, or maybe payments, transfers, or maybe both, or maybe managing a portfolio or maybe, you know, who knows what financial transactions. So, you know, by that, by that sort of definition, the Rothschilds were clearly a bank. They were a private bank. Lots of other. The Medici were a bank. But when I use the term bank generally that's not the way I use it. I use it to talk about a modern element. That is, when I say modern, I mean something about the modern world starting around 1600, that distinguishes this world from its prior worlds. And the reason I focus on that way of thinking is that the nation state created by the modern world charters banks. And it's the chartering of banks that makes them, in my mind, so interesting, not just as an economic function, but as a political reality. And I want to really emphasize every nation state charters banks. By the way, not every nation state taxes, Kuwait doesn't tax, not every nation state has an army, Costa Rica doesn't have an army. But every nation state charters banks. Banks are the sine qua non of the nation state because it tells you something about the way of organizing the world with power. That a nation state creates rules for the existence of banks that it regulates. The chartering of banks is all about deciding as a nation state that the functions of banks have to be ruled by the political nation, those that is what a bank is. So that bank has done lots of different kinds of transactions. Economic theory can illuminate why banks combine different transactions. But if you don't start from the political reality that the modern nation state charters banks and regulates them for its political purposes, you're never going to get really very far in understanding how banking systems evolve. Because banking systems don't evolve through some sort of automatic process. They evolve under the restrictions and under the opportunities that are provided by the nation state that can be an opportunity. If the nation state charters a bank like the bank of England, whose sole mission, when it was Chartered was to help organize the finances of the state so that it could fight France. That was the point of chartering the bank of England, wasn't so you, Ryan, could do something that you wanted to do. And by the way, that bank was given a monopoly in England and Wales over note creation, that is, you know, printing money. And so they. That wasn't a coincidence either. That was part of the partnership between the people who operated the bank and the sovereign. There's no way to understand the history of banking in England without taking into account that banks weren't allowed to exist in effect, except as small private entities. Very small. They were restricted in their size. If they weren't the one the state chartered. So a bank. Yes. Okay, we can now talk about all the functions that banks may or may not do depending on what the sovereign allows. And we can also talk about shadow banks, the banks that aren't chartered by the sovereign, which just do any kind of financial transactions that they can get away with if they're not prohibited. But we don't start off, if you start off talking about banks as some kind of natural, abstract idea, you've really missed the boat. In the modern era, banks are either, and this is the most important one, chartered entities of the state or things that operate in the shadow, if they can get away with it and aren't prohibited by the state, all of them do financial transactions. But if you don't start with the state, you don't have a prayer of understanding what's going on in the wild west of Defi.

C (5:02)

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B (8:23)

In some literal sort of strict and narrow sense? The answer is yes. But to answer that way misses a big point. A chartered bank is the outcome of a bargain. That's the more interesting thing. A chartered bank is something that's the outcome of what Steve Aber and I called the game of bank bargains. So there's always a coalition, whether it's autocratic regime or democratic regime, populist versus liberal democracy, different kinds of regimes that are going to strike a bargain. There's going to be a coalition formed coming out of the power of the individual entities within that nation that's going to decide what they want to achieve with a bank charter. And the bank charter is the answer to that question. It's not just a license. It does, it defines the powers of the entity and the limitations on those powers. It also defines things like what will happen when the entity can't fulfill a contract. Does it get bailed out or not? Some of those contracting provisions are explicit, some of them are implicit. So if you really want to understand what's going on, you don't just look at the letter of the law. And of course a bank has to function under the law. And so if it writes contracts, those contracts are only going to be as good as the legal system, which is another political outcome. So the nation state is going to create laws governing creditors rights and debtors rights generally. But it's also going to create, as part of the licensing of the banks, limitations on powers, opportunities for powers for the bank. And then also policies that are either explicit or implicit about bailing out that, that call that a loss sharing arrangement. So that the bank is set up with a certain explicit or implicit loss sharing arrangements like all chartered entities. It's so helpful when you're starting to think about this to go back to 1600 when this whole idea was created, because then you remember that chartered corporations were special privileged corporations created by the state at that time. Special corporations, not general incorporation acts that allowed anyone to apply to be one special corporations. And you know, our own revolution is caught up in some of that and also caught up in some of the loss sharing arrangements. So let me just take us a little bit out in the weeds for a minute. What was the Boston Tea Party about? And I'll bet you you'll get it wrong. What was it about, Ryan?

B (11:07)

Completely wrong. That's what the Stamp Act Congress was about in 1765. And some of that still fed into some thinkings about the revolution. But the Boston Tea Party was about special monopoly privilege that the East India Company was given because it had fallen on hard times, it was suffering losses. And so the Crown and Parliament decided to change the Navigation Acts, which are acts governing transport in the British Empire, to give a special privilege. I won't go into the details. To give a special privilege to the East India Company for transporting tea, which ended up having the effect of sidelining the New England merchants who were acting in trafficking the tea. It cut the price of tea dramatically. My recollection is about in half. Why did the Boston merchants. Why did people in Boston have do this? What I think is a reprehensible thing. By the way, there's nothing. Most of our founders found it reprehensible except the people in Boston. The other founders found it reprehensible. Why? Because they were really just acting in a way to preserve their own interest and acting contrary to the well understood principle that the sovereign England got to choose international rights and privileges as part of its sovereign power. And it granted special privileges to the East India Company. When the East India Company fell into trouble, they tried to help it by changing the menu of privileges. It disadvantaged some people, but it was not viewed by most people in our country at the time as some kind of terrible action by the Crown. It was just part of the Navigation act system, part of mercantilism, imperialism. And if you weren't one of those merchants in Boston, like the Adamses, by the way, you didn't have a big problem with it. What you did have a problem with was the Stamp act, which was in 1765, tried to say that for the first time the Parliament was going to impose taxes on local domestic transactions, which should be under the purview of the legislatures in the colonies because the colonies had their own legislatures. That was unprincipled. That was a violation of the rights of British citizens. And that's why we didn't like it in 1765. The reason I illustrate our discussion with that example is not to just highlight the widespread ignorance that Americans have about our own history. Like the American Revolution, the Boston Tea Party was not popular outside of New England and was viewed as unprincipled and wrong by most of our leaders. But that's not the way we learn it. But the more important thing is to understand the whole system that was taken for granted of the management of the interests of the nation state had to do with creating charters, both for corporations and for banks, which were corporations, to try to be a kind of representation of and a way of executing the interests of the sovereign. And that wasn't viewed as somehow wrong. So the notion of general incorporation, the notion that you, Ryan, have the right to form a corporation, to act as an abstract entity to engage in transactions and maybe have stockholders in that corporation and maybe even have limited liability in that corporation, the notion that that's going to happen as a matter of general right, what's called general incorporation laws. And also along the other side of that, that we're not going to do specially privileged corporations, that was not something that became part of the American way of thinking until the 1840s. So what happened with banks, to get back to them, is of course they started off being specially privileged entities, just like the East India Company, chartered by the national government or by the states. And it wasn't until the 1830s in some states that we had general incorporation laws governing banks, giving anyone the opportunity to charter one under pre specified rules. And then of course, we have the national banking system created by Lincoln in the 1860s and 1863, which then created a national government set of charters. Again, licenses as you said, but not just licenses. Just like the East India Company, there are deals, explicit or implicit, about how losses are going to be allocated. And the reason I mention that is because you can't understand the modern state of the 21st century without understanding the way that bank charters effectively create loss sharing arrangements that are bailing out banks and that those are all about imposing losses on others to subsidize banks. So once you understand that banks have always served from the very beginning the interests of the state and are the result of the political game of bank bargains, then you really have some insight and you understand it's not just about their license, but it's about who supports them, who creates them, who will bail them out. And that's all part of the political game that creates banks. And I know we've spent some time, we're taking time on this, but I want to emphasize you can't have a prayer of understanding what the future of stablecoins is without coming to grips with this fact. If you think stablecoins are technologically determined, that the future of stablecoins is something that comes from my fantasies about the economic logic and empirical evidence of what works and doesn't work, you're really missing the boat. Stablecoins have to be if they're going to work. They have to work within that coalition building game of bank bargains. And we've already seen in the genius act the way that that coalition tried to shape the way stablecoins would or wouldn't happen. And Ryan, the most important fact is four years ago, the Biden administration wanted to kill this idea as best they could. And in fact, even before them, the first Trump administration, which I served in as chief economist at the OCC with Brian Brooks as the acting comptroller, the Trump administration didn't want this to happen either. They've changed, they've changed their tune. So when Brian Brooks and I, I, I'm now going to tell tales out of school here. Brian Brooks and I were very eager to see the crypto future realized, to see stablecoins realized. And we recognized that would have to happen by chartering entities that were allowed to do stablecoin transactions. There are a lot of advantages that come from that. And of course, what's the administration in U.S. history, the only one that since 1863 that did not actually appoint a comptroller of the currency confirmed by the Senate. The answer is the Biden administration. Why? Because they wanted it to do nothing. They wanted the OCC to be a complete nothing, to not do anything, to go down the road that Brian Brooks and Jonathan Gould and others at the OCC and I had hoped to start, which was bringing into the game of bank bargains a formal crypto presence so that it could actually occur as a legitimized financial transaction that would have real legs. The Biden administration, completely captured by the incumbent banks and by other political interests that are part of a coalition of the status quo, did not want that to happen. The Trump administration this time wants it to happen. The first time it didn't.

B (19:32)

Yeah, but I just want to point out what am I really getting at? What I'm getting at is what we've already experienced, if we understand what we just lived through for the past eight years. What we just experienced is how much the political winds have affected the timing and capabilities of the empowerment of crypto if you think crypto is happening now because of some exogenous, technologically driven reality, you really are just completely hopeless. Right? Because the technology has been there all along. It's been there for. And that's going to matter for what we're talking about today, because I'm going to point out the technology that exists today will predictably completely transform. Can predictably completely transform financial transactions. But the main obstacle to getting that to happen is the resistance that's coming from members of powerful coalitions who have vested interest. Contrary to that, the incumbent banks finally saw that they were not going to be protected enough. So they needed to get. That's what happened in the Genius Act. They needed to get the ability to make chartering the way that stablecoins could happen. Notice you can't run stable coins without a charter. Now, that's what the Genius act did. The genius Act. But notice that the incumbents changed their political strategy. Pay attention, listeners. Pay attention. The incumbents changed their political strategy from ignoring stable coins and having Biden's report say, oh, risky, risky, risky, risky, but still allowing them. You know, they didn't have the power to stop them legislatively. They didn't have the coalition built to stop them, so they just threw a lot of sand at them, said they were risky, risky, risky, and definitely didn't want to follow up on what Brian Brooks and his team, including me, had been trying to do, which is bring them into the modern chartering of the banking system, legitimize them, allow them to be regulated, but regulated in a way that gave them a future. While the incumbent banks didn't want that to happen, they were very happy with the Biden administration's approach. But then as things started to change and they realized there would be an inevitable growth of stable coins, which have grown dramatically over the past five years. Then what did they do? They said, well, we have to somehow try to limit stable coins and allow them to be part of the chartered entity. I don't think that's ultimately a crippling limit. In fact, I think it's very helpful for stable coins to be part of chartered reality, especially if we have other ways for stablecoins to exist. For example, they don't have to be just chartered by the national banking system. They could be chartered by the individual states or different ways. So there's competition. So anyway, I think that it's a very positive step, but I really think you can't understand this as a technological phenomenon only. It is a technological phenomenon. But notice the Federal Reserve is Extremely threatened by stablecoins because stablecoins can create a payment system network that completely sidesteps fedwire. And they will eventually. It's so much better that it has to beat the Fed. But the Fed isn't just sitting there passively. What are they trying to do? Oh, let's create central bank digital currency. It's going to be so great. And then what was the Biden administration's view? Well, they didn't beat up central bank digital currency. They knew it wasn't very popular, so they didn't push it too hard. But then they completely just threw sand at stablecoins so that. What are the incumbent banks doing? Well, they're part of that same coalition. And by the way, there are a lot of other community and other activist organizations that have benefited from their partnerships with the chartered incumbents, the big banks, which became big banks very recently in US history, in the 1990s and the 2000s. We didn't have big banks prior to that. That was the merger wave. And when we got those big banks, the way they got big was to avoid political opposition from activist organizations. They gave the activist organizations money in order to testify for them in support of their mergers. I bet your listeners don't know that either. Do you know how much activist organizations were granted contractually for merging banks from 1995 to 2007? Take a guess. Ryan. Total contractual. These are explicit financial contracts. You, Ryan, come testify at the Federal Reserve Board to say, I'm a good guy. That's it. I'm a good guy and my merger should be approved. And if you do that, I'm going to give you a contract that gives you some money. Some of that money is to pass through to your friends as subsidized loans. Some of that money is outright grant to you, 10% of it. How much do you think change stands? When you want to understand the politics of what charters mean, this is crucial. The entire creation of the big banking system since the 1990s was the result of a bargain among several parties. But in fact, a lot of those parties were community activist organizations. So let's just get your listeners to learn something. What's the total dollar amount of those contracts over the period 1995 to 2007? What do you think?

B (27:25)

I'm not trying to be a jerk. Right. I'm just trying to tell people that they're stupid. Not that, or ignorant. But I am telling people that it's not easy. And the reason it's not easy is so, first of all, if you don't understand the political equilibrium, then you can't oppose it, you can't change it, you can't try to build your own group. And yes, they have started to build their own group, but the point is these things exist within a legal framework, within an engineering framework, and within an economic framework. What I found when I was involved in crypto is those are three different minds and they rarely come together. And then that's too limited because then there's the political framework that makes, that allows the bringing together of these three minds. And so what I found when I was working crypto is there are people who know one of the three ways of thinking, engineering, economics, or legal. Very, very few who understand the combination, and almost none who understand the political contingency of actually being able to succeed. And I hope we're going to talk, you know, about the distant future because, you know, I think crypto, but especially stablecoins, everyone understands that they have extraordinary promise as a medium of exchange. Right? But I want to go a lot farther and point out that the amazing thing about the blockchain distributed ledger technology is that it can allow not just the best medium of exchange system the world has ever seen, but it can also allow the best unit of account system. It can basically create a substitute, or I wouldn't say a substitute, let's just say a new definition of the dollar. And of course, when you start thinking that way, now we're talking about not only replacing all the incumbent banks and all their entrenched allies who have gotten so much money from them, but also the Federal Reserve. And let's remember that chartered central banks, which weren't called central banks, they were called banks of issue when they were chartered in the 1600s. But central banks like the Fed, which are really something that's only been around and called the central bank since about the middle of the 19th century, they're very young. They're not likely to be a permanent feature of our economy. In fact, my own work suggests that this is a technology that's really, it's time to get rid of it. And they're not going to go easily. Right? Those, those people aren't going to go easily.

B (30:48)

Great, Great question. Okay, so first a confession. I made my reputation largely off of the theory of bundling of bank services. My most cited article is a theory article that explains. And there's another theory article, using slightly different logic that explains why banks do and have historically bundled payment services with lending services. Why do banks lend and clear payments? Why do they do both? Because there are entities historically that have done just one or the other. For example, the world's most successful intermediary of the early 17th century was something called the weasel bank, the bank of Amsterdam, it's also called, and it was initially entirely about clearing bills of exchange in international merchant commerce. But then I mentioned the sort of merchant banks, the Medici, the Rothschilds. Well, they weren't operating clearing systems, they were lenders. So banks can do one or the other. But if you look at chartered banks, what you realize is the history of chartered banks has been the combining of payment system services with lending. So we as economists have developed a few different theories about this. I'm happy to go into the weeds on it, but the theories really have to do with some kind of mechanism design advantage, generally related to some kind of information cost or information problem that encourages banks to do both. So that the competitive equilibrium isn't that banks do one or the other because it's more efficient to do them together. Now, that idea has a lot of empirical evidence behind it and a lot of theory. But let me just point out, because it's grounded in a theory of information cost, it's contingent. The idea that bundling is efficient depends on some kind of information cost argument. If one of the things that modern information technology is doing is changing the cost of information and reducing the cost too, if that's happening, it might undermine the logic it creates. Bundling. That's exactly what I believe, that bundling made economic sense for banks and no longer does.

B (34:42)

Not quite, but yes. I mean, you got it. But let me just complicate it a little. Let me point out that there are shadow banks, not just chartered banks, shadowed banks that specialize in lending just as their shadow banks or shadow payment services to specialize just in payments. So yeah, there's the shadow payment provider is Tether. They have more than 90% of the market right in stablecoins. But then there are all these lending services that are done online. They don't fund themselves with deposits and they're not connected to stablecoins. So the first thing for us to notice is in the shadow banking area, where only market competition and efficiency governs the structure of the intermediaries, what have they chosen to do? They specialize. They don't combine services. They're not doing lending and stablecoins, they're doing lending or stablecoins. I think that makes perfect sense. And in my articles recently, I've talked about why unbundling is so illuminating. So when you look at the shadow, you're seeing that the modern solutions are unbundling. Now that's partly because if you're a shadow bank, it's very hard to do. You can't be involved in the checking system. But there's more to it than that because people aren't choosing. Tether is finding itself strongly driven toward what trying to create a kind of payment system without a lot of risk on the asset side. So that is very important that the whatever those old bundling advantages were, I would argue that they've been undermined by improvements in information technology that no longer required these two things or really are benefited from doing these two things together. That's a complicated and fairly deep economic argument. But I think people can get the basic gist of the jive that what we're talking about is look at the shadow banks. You see, stablecoin providers aren't trying to do lending. Lending providers aren't trying to do stablecoins. That's very interesting because if there were big synergies, as there have been in the past between combining the two, they would be trying to do both, but they don't. So the future I think is now coming back to your statement, which I agree with. The future is that the incumbent banks see that they no longer are going to have this basically chartered bank subsidy of having this kind of oligopolistic control of a deposit based system that then funds and subsidizes their lending activities. That is not going to be, that is not a permanent feature of our financial system. But it's not going to go away easily. It's because the banks have huge power by virtue of their political influences. They are extremely powerful organizations and they even operate through the organization that today is the most evil organization in the United States. I wonder if you've ever even heard of it. I'll guess your listeners haven't. It's called the Bank Policy Institute. It sounds so objective, it sounds so scholarly, it sounds so wonderful that someone who is out there doing the public good of talking about bank policy. No, no, no, no, no, it's the worst. It's Darth Vader on steroids. Okay? Darth Vader on steroids. This group is not just about colluding. Not just the biggest banks colluding, but using their power to try to stop things that will help citizens in favor of themselves. And they are, they're really evil, I can tell you. When I was chief economist at the Office of the Comptroller of the Currency, I would read their statements whenever we had a regulation. They were the most execrable things I ever read. The idea that an economist working for the Bank Policy Institute could write such things must be so alienating for them and so miserable their existence that I, I, you know, I don't see how they can stand it. Yeah, but that's what power is all about. These aren't just operating individually, they're operating collectively through this collective action entity. And it funnels, it sponsors conferences at universities like at, where I used to be, Columbia University, and, and controls professors through the money that it provides for sponsoring those conferences. You gotta understand politics to understand banking. Yeah.

B (40:42)

They don't like, they're a coordinating entity. Just as, and I'm not trying to be partisan here, the Democratic National Committee is another coordina entity. The Democrat Party is all in on this. A lot of the Republican Party is too. But the Republican Party isn't in agreement against this future as we can see now. And in fact, you even saw the Genius act had bipartisan support. So you're seeing cracks in the coalition. That's what's so interesting. This coalition that had decided not to even appoint an office, an OCC comptroller, that it decided to just block all the progress Brian Brooks had tried to do. All of a sudden now we have legislation allowing this with bipartisan support from this Congress that can't even agree on what day of the week it is. That's pretty interesting. That tells you that there's been a political shift and it's worth analysis. And I don't claim to be fully understanding every aspect of that, but that's where we need to go. And of course you're right that you're seeing it with Ethereum. And by the way, my understanding is, I think you said it, that you have your stable coins in a wallet on Ethereum. And you can also. My understanding is tether can be both in Ethereum and in Bitcoin. You can either put it on the platform of an exchange or you can put it within the blockchain. And I think that's really interesting. So yeah, that's where we're going. Of course we have a long way to go because as you pointed out you still pay your landlord with a check, right? So we have to get it so that you can buy coffee off your cell phone with stablecoins. And that means that we have to create a decentralized network for stablecoin retail transactions. So it's not just about buying and selling crypto mainly using tether, mainly for crypto transactions, but using them in the real world. But this is easy. This is just creating a little box on, on you know, retailers just as they have credit cards where they're doing it with stablecoins the technology is already there. In fact the technology is already there not just to completely sidestep the bank incumbent payment system with stablecoins but to actually change even. I know this is very futuristic. We'll get to it to, to supplant the dollar to create a new concept of transacting a new unit of account. But I want to emphasize that can't happen without politics. Under Article 1, Section 8 of our Constitution, Congress has the power to determine, to control the money and they have used that power and interpreted that very much as their own right to decide what a legal tender is. That means something that can actually be used as a payment mechanism legally to satisfy debts. If Congress doesn't want the new unit of account to happen that I have in mind creating this new synthetic dollar out of the blockchain to and get rid of the Federal Reserve dollar then it doesn't have to happen. So until the politics, what we see with the genius act is the beginning of the cracks in the anti stablecoin coalition. Now we have a bipartisan agreement to have to make chartered to allow chartered banks to do stablecoins. By the way, this is huge because when I was at the OCC I can tell you the one thing the OCC has done right for the last 160 years has been examining as a credible third party. So you want stablecoin issuers because let me tell you something, a lot of your listeners aren't going to like it. I think tether is kind of sleazy. They have been right. They're kind of, let's just use the word that your generation likes. Sketchy. They're sketchy, right? They are a little sketchy. And imagine now instead you've got some boring bureaucrat who's paid just to examine the algorithm, make sure that the algorithm is what you what the stablecoin provider says it is and examine the reserve balance held at some fiduciary and make sure that it is what, what they say it is. And that examination is pretty much the entire role that we need the regulator to do. And what we really need is for the regulator to somehow commit not to let the political compromises of the future lead it to try to control stablecoins. And that's tricky because let's, you know, I'm not telling you I got the magic bullet for that either. So the genius act cuts both ways, right? Once you stay stable, coins have to be part of a chartered entity. You open up the possibility that that thing can be regulated to start giving subsidies to Jesse Jackson just like our chartered banking system decided to do in the 1990s. So it's all politically contingent. So if you guys think that because we are forward looking people who like technology and want to see good technologies happen, that they will automatically happen, it's not true. You have to be a political force to build a coalition that represents the public's interest. If the public isn't informed like you guys weren't informed, the two and a half trillion dollars had been contracted from merging banks to these activists, local activist organizations. That's why they succeed. Right? So the political coalition doesn't always represent the common interests of the public. In fact, it almost never does. So this is where the real problems are. We can talk about how, yes, of course, we can circumvent this whole centralized payment system run by the Fed and we can have immediately a medium of exchange done more securely, more quickly in ways that allow you to combine messaging with payments so you can enrich the whole process of the payment system. All of that can happen at the speed of light in a decentralized network that can't be hacked. Unlike Fedwire, which will definitely be hacked. All of this is true. However, it's all contingent. And then going beyond that to use the data that's in the blockchain in some kind of anonymized way to create information about what the consumption bundles are so that you can then construct a new unit of account that's more optimally configured than the dollar is using economic theory that we've had for 150 years. So yes, that that can happen, but not if Congress decides that that definition of the dollar won't be a legal tender. So, so we have to, we have to get mobilized to educate ourselves and to therefore exert the power on politicians. So you're going to have to create organized groups. There's no such thing as decentralized political activity. You have to create organized groups to promote this future.

C (48:08)

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B (52:56)

Okay, so first of all, money market funds bailouts were not economically inevitable. They were a political outcome. So to say that the fact that money markets were bailed out when they broke the buck was somehow had to be true is, is wrong. If, if instead the government hadn't bailed them out, the world would just be fine. Okay, so, so then, now, now let's give him a little bit of a credit and say, well, what he's saying is that the real politique will be that stable coins will, that path of least resistance will lead to bailing out of stablecoins when they have losses. Okay, so I don't believe that's true either because one of the things that we can do with stablecoins is we can require them to have automatic resetting algorithms so that if they suffer a loss. Now we have a couple of alternatives. One is to restrict what the assets can be so they only hold short term debt, treasury debt as assets, in which case there's no real possibility of loss. Or we can allow them to have broader set of assets, but then to have an automatic reset algorithm that then when there's a loss in assets, has an automatic thing happen in the stable coins so that people, when they buy stable coins know exactly what they're getting into. My own view would be to allow both, to allow both the riskless stablecoins and the risky stablecoins with the reset. And I think that my understanding of political economy, which is fairly deep, is that if it's done that way, there won't be bailouts of stablecoins. So the, the notion of stablecoins will be risky if. No, that's not true. If they're examined and if they have either the algorithmic adjustments with full transparency or, or if you don't believe in that, you could, you could say, well, I want to initially restrict them to only hold treasury bills, again, chartered and monitored. I can understand that, that argument makes sense. But no, he's wrong. Of course this is what the advocates of the incumbents are all about doing, whether they're BPI or Aaron Klein. What they're really about doing is they operate in organizations who pay their salaries to make up arguments like this. So I'm sorry, go ahead, tell me more. I just wanted to let's get into that.

B (55:59)

Maybe they don't like it. They don't like it. And Aaron knows they're paying his salary at Brookings. Believe me, they are. Believe me, they are. Can I ask you, I know Aaron, he's a nice guy, but I know where his salary comes from. I know where Brookings. I know what Brookings is all about. And so yeah, of course they don't like it. They don't like competition. They're going to fight it and they're going to hire people at the BPI or the Aaron Klein's of the world or they're going to have politicians like Maxine Waters say, risky, risky, risky, risky. Or Joe Biden creating his white paper from his little commission. It's all risky, risky, risky. No, it's not risky, risky, risky if it's designed properly. And I think as a historian and a theorist of bank runs, I don't think there's anybody who knows them as well as I do. That just doesn't have to be the equilibrium. Let me also point out stablecoins should not be debt obligations, in my opinion. They should not be constructed as debt obligations. They should. It's so in my papers about this, I pointed out why not take advantage of some existing law and make them perpetual preferred stock. So I know that this isn't necessarily the way people are all thinking, but if it's perpetual preferred stock, then notice you could have dividends in principle. And I'll come back to your question on that. Because of course when I asked the person at Circle before they announced their IPO how they were going to deal with the genius act, the answer was you can create a securities wrap for owning the stable coins and the securities wrap can pay interest. Think of it as perpetual preferred stock. So perpetual preferred stock never has a maturity date. If you don't pay the coupon, you're not in default, you don't go into bankruptcy. So you could have an algorithmic readjustment if there were a problem. But think about perpetual preferred stock with a dividend that actually owns the stable coin so that you, when you buy the stable coin, you also buy preferred stock that owns the stable coin. Preferred stock pays you. Is a perpetual preferred stock that pays you a dividend. And let me tell you another reason this is so potentially advantageous. Have you ever heard of the, the global Dollar network?

B (61:46)

So not completely. Okay, so, so now this is really important. We have to distinguish the role of the dollar as a medium of exchange from the role of the dollar as a unit of account. Notice tether. And almost all stable coins are denominated in dollars. Some are denominated in euros and yen, but more than 90% are denominated in dollars. I think the short term, the growth of stablecoins will actually strengthen the role of the dollar in global markets. It'll allow people in countries that have really bad currencies to switch some of their liquid balances to dollar denominated accounts. So the first thing to note is the short term effect of using stablecoins as a medium of exchange will actually be probably to strengthen the role of the dollar as a unit of account. There are only a couple trillion of these actual physical dollars that are being handed back and forth mainly by criminals. I have some in my wallet too. I'm not a criminal, but yeah, but mainly by criminals. So the dollar doesn't serve a very big function right now as a medium of Exchange in physical dollars. But then there are other dollars that are called reserves that banks hold that are basically what is the backing thing, the sort of small piece that allows deposits to work. So that's another medium of exchange. So the Federal Reserve not only creates. It creates two media of exchange. Effectively, one are reserves, the other is dollars, and that's a medium of exchange use. But it also the dollar as a valuable thing that's exchanged in the market, that has a value relative to your commodities and services and other currencies, that's a valuable unit of account. Stablecoins are denominated in dollars, so the dollar doesn't disappear just because stablecoins displace deposits and currency as medium of exchange, because the dollar still retains its role as a unit of account, but it doesn't have to. Why? Because what is a unit of account? A unit of account is just how we denominate all of our transactions we could decide to create. So let me give an example. Suppose that we lived, we all of us lived in Champagne Urbana and Champaign Urbana. Pretty much the whole local economy, other than the university, is soybean and corn. That's what's produced there. And in fact, even the stores that sell other things. If soybeans and corns do badly, they do badly, right? So think of it for a minute like, let's get rid of soybeans. It's just corn. They grow corn and eat corn. Let's say it's a really simple life. That's all there is to it. All that we do in this one location is we grow corn and eat corn. And when we work, we. We work to grow corn. So when we work, should we be paid in dollars? Should we denominate wages in dollars? Should we denominate prices in dollars? Wouldn't it be just simpler? Yes, the answer is yes. If we just pay people in units of corn and we denominate everything in corn, because there's only one commodity called corn. Why should you, if you lived in Champagne, Urbano, you wouldn't want to if, if, if you were only eating corn. I'm not saying that's true of people in Champagne or ban. But suppose it were. Then they wouldn't want to denominate things in dollars. They just denominate them in corn. They'd be paid in corn and they'd eat corn. They grow corn, eat corn, get paid in corn. That's it. You wouldn't need a dollar numerator. Okay, now let me generalize that point. Jevons, one of the great founders of modern economics in the late 19th and early 20th century, developed the theory of the unit of account and what an optimal unit of account is, and basically showed us something very intuitive. Which is the optimal unit of account that we want to be paid in would be our consumption bundle. Because then if we know. So if, if you consume 10 different things in certain ways, you'd really like your, your payment to be denominated in that. Because then when you get paid, you know, you, you get, you know in advance, you're going to get a certain amount of consumption. So your, your pay contract translates directly into your consumption. And that means that when the, there's no like, slippage coming from variation in the value of your payment relative to your consumption preference. Right? So that's what Jevons realized. Now here's the amazing miraculous thing. Blockchain records and allows you to extract in an anonymized way what the consumption bundle is. Once it becomes a network in which services and commodities are all transacted through the blockchain, we actually can know in a particular location what the consumption bundle is. So we can get a lot closer to an optimal unit of account. And we could even now it gets really interesting. Maybe some locations will have their own specialized unit of account. So we don't just have one unit of account, but we have subunits of account. Now they'd be aggregated to create the national dollar that would be trading with other economies, but that they could have separate units of account so that people could have their own value of the sort of New England dollar and the southeastern dollar and the western dollar, and then allowing those to all be legal tender. And then having a national dollar that's awaited aggregation of that would allow us to all be paid in ways that would be much more optimal for us as a as from the perspective of consumers. Is this really practical? The answer is yes, because blockchain allows the recording of all that information in perpetuity, which we know we can access in an anonymized way. It's not trivial, but the technology already exists to do that. Selective anonymity is what it's sometimes called in blockchain transactions. And so, yeah, of course you can do that. Physically, it's not a problem. But then will the political game of bank bargains allow it? How do we get that to happen? The other thing that's an important wrinkle of that is to actually transact in something that's this sort of basket, you're going to need reserves that the different stablecoin issuers Transact with each other, basically bundle of the consumption good. And how do you do that? Well, you have, believe it or not, you would have not everyone, but some finite group. You denominate the bundle, let's say as a steak from Roots Chris Steakhouse, a filet mignon from Roots Chris Steakhouse, plus a bag of lay's potato chips, both sold by particular sellers. Okay, and then those. So how do those sellers create a reserve bundle that combines the two they issue? Instead of issuing these little cards that allow you to buy, you know, Ruth. At Ruth's Chris, you issue a filet mignon IOU. So the really interesting idea is to tokenize IOUs that are linked to specific commodities provided by or services provided by particular local firms. This sounds really far out, but actually technologically it's trivial. The tricky thing is to actually create how somebody comes up with what the optimal bundle should be. And in my papers I talk about the different trade offs there. It's going to be. There's going to be a trade off where you want to have some. You don't want everyone in the economy to be producing these tokenized reserves, but you do want it to be a small number who kind of span the consumption bundle reasonably well, but who have very low default risk. We're going to have to have algorithms about what to do with the tokens when you want to go to Ruth's Chris to redeem your filet mignon, but they're out of business, so we're going to have to. There's a fair amount of algorithmic kind of complexity to creating these reserves, but the promise of it, the reason it's worth doing is it will create so much better outcome in terms of making the unit of account much closer to what we consume. So right now we have this compromised unit of account, the dollar. It's a one size fits all. No matter what location you're in, you have to deal with it. Now, there are going to be lots of other issues like, well, should this, whose consumption bundle should this be? Should it be kind of an aggregation of the whole region? That would be my preference. But you could also imagine that this could be a political football where we use poor people's consumption bundle. Some people advocate that because they think of it as it's a form of trying to subsidize or help the poor. So I just want to keep emphasizing all of these economic ideas have to be filtered through the political system because politically, Congress decides what the legal tender is. And then finally just point out, once we get this Great system. It's still contingent. I mean, Congress could decide to start taxing stablecoins. Congress could decide to require stablecoins to give subsidies to particular targeted individuals. But I think from the standpoint of economic theory, we can see clearly that getting rid of the Federal Reserve, getting rid of the incumbent banking system in terms of the payment system, forcing the banks to fund their loans through securitization and other kinds of market means, getting rid of the Fed, not just as a clearing mechanism but even as a creation of the unit of account, would be hugely beneficial. Finally, I want to emphasize that doesn't mean that you couldn't do countercyclical policy. The way that the Fed affects the economy during recessions to try to counter recessions is that it all operates through an interest rate spread, basically by exchanging reserves for Treasuries. That's its whole mechanism. It's affecting the yield on Treasuries by exchanging reserves for Treasuries. That's what the Fed does. That's it in a nutshell. Well, you could imagine a fiscal authority constructed in the same kind of independent way as the Fed that would instead just tax and subsidize loans to affect loan spreads. So you could just say, oh, you know, we're in a recession. From now on, when you're paying a loan on your consumer debt or your mortgage, you're paying, let's say, X percent. We're going to now tell the government's going to pay 5% of your X and then that will make economic activity happen more. And then if we think the economy is going too fast, the government taxes it, the interest rate adds to the interest you pay by 5%. So we could imagine using, just as we operate on the interest rate spread between Treasuries and cash, we can operate on the interest rate spread in loan contracts with a physical device. So I just want to emphasize there isn't just, there is no real need. In fact, it's kind of strange. These central banks that have been operating for the last in the world, let's say about 150 years, there's just no reason to think that this is the technology we need for the payment system or for countercyclical policy or for lending for that matter, of course they are an entrenched interest. And all of the decisions about what our financial system can be are political decisions. We can't fool ourselves. This is not about technology. Technology is required but not sufficient.

B (84:46)

I'm not saying that, I'm not saying that it's that. I, I know it's Better. I'm just pointing out that if you're worried about inflation coming from the government debt, and I am, and by the way, my estimate of the inflation rate, depending on accompanying policies, if we don't solve our fiscal problem, we're going to have at least let's say 10% rate of inflation a year. And I would say more realistically, it's complicated to explain it. Maybe as much as 30%, 40% inflation per year. Like CPI, right, exactly. That's, that's what you know, that's, that's what the arithmetic tells you. It has to be if you don't fix the government debt problem. Now, my St. Louis Federal Reserve, I have a paper in 2023 published by the St. Louis Fed Review that basically explains that you have me on for another time. I'm happy to explain that, but. So yeah, that's a pretty high inflation, you could say, well, which would I prefer? Having the US government default on its debt when it runs out of room to issue debt or being able to inflate its debt away? Well, that's a choice. I'm just pointing out that if you went to blockchain based unit of account, then you wouldn't have the government with the option to inflate away the debt. It would have to default. But maybe that would mean it's more likely for the government to do something different, which is called fix the problem. Maybe. You know, so your generation of course is going to be completely screwed. I mean, you guys are really idiots if you ask me. Like why you haven't been out there with pitchforks and torches and you let these organizations like the aarp. By the way, if the BPI Bank Policy Institute is Darth Vader, I think that the AARP is like Darth Vader's captain that was strangled, whatever his name was. General something, right? They are pretty bad too. And they, they make it sound like we older people have this. Oh, oh, we've paid this money. No, no, no, no, no. Medicare benefits and Social Security benefits for, for this current generation that are getting it far, far exceed what they paid in. And because something doesn't come from nothing. What this means is the very generous welfare state that is created for me is not going to be available for you because I'm stealing from you. That is real. That is not just some, that is not. That's arithmetic, right? How come you guys don't seem to know how to advocate for yourself? How does Donald Trump or the entire Democratic Party get away with just avoiding talking about this? How do they do that.

B (91:25)

No. That's what competition will do. Yes, that's what. And you know that that's what we need. We need competition which will, will get them to relinquish that yield. And that's the future that we're, we're really all hoping for, you know, that the little guy doesn't have a representative in Washington unless he insists on it by organizing and has clear vision, understanding of history. I don't say cynical, but I say realistic. And I don't trust any of those politicians. And I don't think the organized groups that are lobbying in Washington generally really are informed and have aligned interests with, you know, the average person. So you really, you know, you have to somehow convince people. It's very hard because we all have our own jobs, we all have our lives. How much time can you take out? So the answer is you have to come up with a credible delegation of this interest. And they have to have money, they have to have political power that comes from money and influence and having a great network of people who will pressure politicians. So I think we're already seeing a little bit of that, but it's very fragile. This is not something that you can say, oh, well, we've won the battle. Oh no, you never win the battle. You have to be ever vigilant, as you just said. And you know, I think, you know in. That's something, you know, in memory of. And in. In gratitude to Charlie Kirk, who I think very highly of. I think we. That's a good way for us to be thinking. He was somebody who really went out there and did that and had a huge effect. But he had an organization, you know, turning point. And we need. We need to be thinking about that. We need to think about how to really create intelligent organizations that aren't captured by incumbent interests and that really can put forward our collective interests. And that means fiscal lobbying, and that means protecting crypto from being seized by some other special interest. The whole history of banking is great ideas. Bank checking accounts were a great idea in the 19th century. Loans were a great idea. Lines of credit with the Scots, which the Scots invented in the 18th century. Great idea. These are all great, but they all have to work through the political process and then they get captured and transformed. Stablecoins are the same thing. Great technology. Blockchains are great technology. Don't believe for a minute that you're immune to the government, that you can operate in the cloud or something. No, no. You operate off of a machine, and that machine is governed by US Law. You can't escape it. We need to really get engaged. Anyway, that's my view.