Full reserve wins again.

 
It’s always nice when you find that a solution to a problem which you’ve advocated for years turns out to also be a solution to an entirely new problem. The problem I have in mind is the possible systemic risks caused by the recent big increase in crypto currencies (especially the stablecoin variety), a possible problem which others are concerned about. And the solution I have in mind is full reserve banking.

The basic rules of full reserve were actually imposed on mutual funds in the US a few years ago: that is, funds which did not have $X of US government debt for every $X deposited in those funds where barred from claiming they would not “break the buck”, i.e. that they would never fail to repay depositors $Y for every $Y deposited / invested.

Exactly the same rule would probably solve the “crypto systemic risk” problem. The result would be a clear distinction between on the one hand crypto outfits which are seen by everyone as being risky, i.e. which amount pretty much to shares / equity rather than money, and which would not cause a big disruption if they crash, and in contrast, crypto outfits which everyone DOES EXPECT to be genuinely stable, or “not break the buck”. As former governor of the Bank of England, Mervyn King said (p.2) in his “Bagehot to Basle” lecture, stock market setbacks tend not to cause as big a problem as bank crises. Certainly the recent collapse in the value of Bitcoins did not cause a big disruption: reason (to repeat) was that everyone knew that was on the cards all along.

Having claimed above that the rules of full reserve solve a “new” problem, it should be admitted that that is a slightly dishonest claim in that arguably the problem is not new at all: crypto outfits are essentially banks, thus it is perhaps no surprise that the best rules for governing banks are also the best rules for governing crypto outfits.