“A member bank cannot pay interest on deposits paid on demand, directly or indirectly by any device.”
– Section 11(b) of the Banking Act, 1933
Money market funds (the world’s most boring financial product) quickly began to fear bankers as soon as they began to catch up in the 1970s.
When interest rates skyrocketed beyond what banks were legally allowed to pay deposits, money market funds that were not facing such restrictions suddenly appeared to be a threat to the entire banking system.
Paul Volcker is what is known as a “regulatory ruling” because it “hastened the financial system” by “sucking deposits from the bank.”
The problem was that banks were unable to compete with the higher interest rates offered by money market funds due to regulatory Q.
In the 1920s, banks engaged in a catastrophic “rate war” and offered higher interest rates to attract deposits.
To pay these fees, banks had to make more and more dangerous loans, creating a dangerous cycle that ultimately destabilized the banking system.
Rule Q attempted to avoid such competition by prohibiting banks from paying interest when limiting the amounts that can be paid in checking accounts and CDs.
This is why banks have become famous for offering gifts in exchange for new deposits. They were unable to offer higher interest rates than their competitors, so instead offered a toaster oven and a television.
For example, in 1979, I deposited $1,475 with the National Bank of the Republic for 3. I won a 17-inch color TV for five years, and a 25-inch one for the same amount I deposited for 5.5 years.
Want to make a better deal? 5. Deposit $950 for only five years and Stereo was won Comes with built-in disco light.
But even Disco Lite was not enough to prevent bank depositors from fleeing to unregulated money market funds.
Money market funds were able to pay these higher interest rates because they didn’t pay “interest.” dividend Instead.
This was an indistinguishable distinction (and remains), but regulators chose to allow it in the name of financial innovation.
The bank warned that the regulations ruling would siphon down deposits and undermine lending capabilities.
They were right too: in the decade or so after the money market funds were introduced, retail savers moved hundreds of millions of dollars from local banks to the new “shadow banking system” money market.
As foreseen, this undermined the ability of a regulated banking system to serve its core purpose of creating the money needed for the US economy to grow.
For their trust, regulators recognized the issue and in 1970 began offering banks various exemptions from regulations Q.
By 1986, the interest rate cap had almost completely abolished. However, it wasn’t until after the major financial crisis caused by panic beyond unregulated money market funds that lawmakers decided to completely abolish Regulation Q.
But Bell didn’t feel uneasy.
Worse, the decision to allow money market funds to pay interest while banks were unable to move the foundations of the US financial system from bank loans to capital markets.
The government’s decision to allow Stablecoins to be put into the US banking system may now do the same.
The Genius Law, which is currently expected to be signed into law at any time, legalizes stubcoins as a new form of money.
Specifically, stubcoin becomes non-bank money that appears to look eerie similar to money market funds that were effectively legalized in the 1970s over banking dissent.
But lawmakers seem to have long memories. This time, the new form of money they are allowing will not be profitable.
The Genius Act prohibits issuers from paying interest to Stablecoins in the hopes of protecting the banking system from the same kind of catastrophic “rate wars” designed to prevent.
Interested stubcoins are afraid that they will emit more banking systems for demand deposits and make it even more difficult for friendly neighborhood community banks to give you a loan.
It might happen anyway.
If money market funds can innovate how to avoid regulatory Q, do you have any doubts about how Crypto can innovate genius behavior?
Stablecoin publishers will understand the equivalent of rewarding Toasters to users instead of interest.
And even if not, the Defi protocol will know how to pay interest.
Stablecoins yields can already be obtained above 5% by acquiring Smart Contract risk slivers with compounds like protocols.
Needless to say, it could represent less risk than the bank depositors were initially willing to accept money market funds.
