The Federal Reserve, which manages the current currency, was explicitly made independent of such checks and balances.
Smaller jump then gold -> usd -> btc which actually means changing the global reserve currency.
If you think about it didn't the U.S. government did a similar thing by gold. USD was pegged to gold initially, then they changed it.
metal coin usd -> paper usd -> digital usd (closed, permissioned system) -> crypto usd (transparant, permissionless system)
The jump is a lot less between digital and crypto should be small.
In principle, miners or the infrastructure maintainers could be forced to never mine your transactions (well, transactions to/from particular wallet IDs), by the way. It would be of course harder, since your money is in a single bank, but all miners would have to agree to the ban for it to work.
I think you give Governments far to much credit, they can’t even manage to peg the penny to 1cent or a nickel to 5cents.
In 2020 a penny cost 1.76cents and a nickel cost 7.42cents.
Technically there is no seniorage when there is a loss, historically it was called an inflationary tax, meaning a loss in value to the existing money supply you hold.
Notice how you qualify your statement as many such papers treat it as such.
Yes, you can find some people, articles that refer to a loss as seniorage, but that’s a misuse and inconsistent with the actual definition. That’s also why when they do use the term improperly they typically add “negative”, specifically because the definition of Seniorage refers specifically to revenue/profit from printing money.
Nowadays coins are usually not made of pure and/or very valuable metals, but the notches have stayed to help impaired people and automatic identification of coins.
If I put a dollar in my savings account and the bank loans it out to someone else, who has the dollar? It's on my balance, but it's in their pocket. How many dollars are there?
This is the question of money supply, it's very complicated but the TLDR is there is no fixed "all dollar" amount. This scenario just further muddies the question, but also explains why stable coins keep central bankers awake at night.
I don't think that's how banks work; at least in the US and England.
Below is an extract from an excellent article/tutorial from The Bank of England[1]
In the modern economy, most money takes the form of bank deposits. But how those bank deposits are created is often misunderstood: the principal way is through commercial banks making loans. Whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower’s bank account, thereby creating new money.
The reality of how money is created today differs from the description found in some economics textbooks:
1. Rather than banks receiving deposits when households save and then lending them out, bank lending creates deposits.
2. In normal times, the central bank does not fix the amount of money in circulation, nor is central bank money ‘multiplied up’ into more loans and deposits.
[1] https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/m...
Note that for every dollar you put into a U.S. bank account that's subject to reserve requirements (I believe just checking accounts?), the bank can loan out much more than 1 dollar, based on the legally required liquidity ratio or "reserve requirement ratio."
Note also that since 2020 that reserve requirement ratio is zero.
A zero percent reserve requirement does not lead in all cases to infinite inflation, because banks are also afraid of a default. Bank's desire to avoid defaults adds another fraction to their reserve ratio and limits money multiplication even when the Fed would technically allow it to proceed infinitely.
Another thing you should know is that Fed chairmen have said that Friedman's equation underestimates bank's ability to create money, because in practice the Fed will allow any bank that desires liquidity to borrow it. The Fed, especially post-great-depression, will happily loan banks however much they needed to cover their reserve requirements, meaning that even before the ratio was set at zero, the number of times a single dollar could be spent was decided primarily by a balance of interest rates and fear of defaults.
at the end of every month and especially every quarter the bank submits its capital ratio and a bunch of other calculations to the regulators. if the ratio isn't good it has to increase capital reserves. if the ratio is good it can do share buybacks and dividends.
They can't loan out more than the deposits they have.
If you could open a bank, accept 10 dollars in deposits, and loan out 100, you'd do it! You'd loan it out to your best friend and keep the cycle going until you're rich AF.
You can't loan out more than you have, but even loaning out 10 of 10 dollars has some risk - if someone comes for their money and you can't get your money back from the people you loaned it to. And it definitely increases money in circulation since it's not parked there. But it's not a magic money printing machine.
Bank regulations have moved one from having such a specific requirement. Nowadays, you essentially need a minimum amount of equity per risk-weighted assets. So you need something like $8 in cash for every $100 in loans you give out.
Ask someone with non-cash investments their net worth. They'll give you a number that includes a lot of non-cash assets. They can borrow against them. They expect to be able to cash many of them out, so they often spend as if they're "real" dollars. But they aren't "real" printed dollars.
Can you elaborate on this?
It was called the Argentinian Peso, and it was pegged to the dollar. It didn't get to 50% of the existing dollars, it crashed and burned way before that
But fundamentally if you were to reach that size the assets you were using to collateralize the coin would in some sense have to have some leverage against the coin itself. Ie be loans backed partially by the coin or something. But because you can’t pull yourself up by your own bootstraps that would never work, and because 50% of all the US dollars in existence is a mindbogglingly large number no player in any market could ever be that large. In particular, regulation actually prevents you from being that large in lots of important ways. For example if you try to participate in equity markets more than a certain percentage you will have your exchange access shut off and you will be investigated for trying to run an illegal market corner. Even if you set regulation aside, as you try to buy 50% say of a government bond issue to have those assets to pledge you will find the price moves further and further against you. This is the supply/demand mechanism forcing you to give more than 50% of the dollars away to other market participants meaning you can never get to the goal that you mention in your hypothesis.
Quite separately your thought experiment doesn’t apply to the situation Vitalik is talking about- he specifically says in the article he is talking about pure algorithmic stablecoins rather than ones backed by assets held by custodians of the type you mention here.
(This is kind of an exceptional circumstance, though)
> Now, what specifically are the assets being held by the sponsor?
By definition, they hold every dollar in existence. Holding any other type of good would wipe them out as soon as the exchange rate to the dollar changed.
US Treasury bills?
Also, the larger it gets, the bigger the money laundering question gets. "We're providing seventy billion dollars of financial services to unknown parties" is not a sustainable position with a reputable bank. Tether have already got banned from several banks and are being very cagey about who they bank with.
A sponsor organization maintains a stable coin pegged 1:1 to the US dollar. The token is bought and sold on the open market to keep the peg.
Because it works so well, demand for the stable coin rises for years on end, resulting in the issuance of trillions of dollars worth of stable coin. Eventually the stable coin market cap hits 50% of all US dollars in existence. Numerous audits prove that the dollars are indeed responsibly held by the sponsor.
Now, what specifically are the assets being held by the sponsor?
This might seem like a trick question, but it's not. In what form would a stable coin of that magnitude keep its assets to ensure sufficient liquidity that the peg is never broken and can't be attacked successfully?