It’s making the rounds, so I wanted to share my thoughts about the research paper released ahead of the big meeting tomorrow. For those who haven’t read it and wish to do so, it may be found here.
I will not get too far into the weeds in the main post – question me about details in the comments if anyone here is interested – but the main takeaways are this*
The paper discusses both legal and “economics” definitions of what it means to be a bank. The latter is likely to be in order to establish political cover for regulatory expansion. If you doubt that the paper is politically motivated, I will direct you to the title. “Wildcat” banking is a pejorative, and is typically used by those who have not studied the United States’ free banking era very closely.
The lack of citations with major economic historians on that era – and refusal to grapple with the narrative embraced by mainstream economic histories of the free banking era – confirms further that this paper is likely motivated by a regulatory agenda, and perhaps can be a window into the thinking of regulators. As someone who actually studied the era, the authors appear to be very under-read when it comes to the academic literature.
Maker is not in the crosshairs at all. It is not even clear regulators are aware of us, as all of the stable coins discussed in the paper are centralized. Naturally most of them are much smaller market capitalizations than DAI.
It is very important that we stop referring to Maker as a bank, particularly in public. Especially when this paper ensures that Maker fails the tests of what constitutes a bank even “economically” rather than legally. The key points here are that Maker does not custody deposits, it does not (as narrowly defined by the Supreme Court as providing money loans directly to a commercial entity with no intermediary) provide commercial loans, nor does it issue short-term debt. DAI is not redeemable for US dollars, so it is hard to imagine it being considered a short-term debt.
Maker also does not participate in money transmission or payments, which is the other major banking activity discussed in the paper.
The regulatory suggestions are not particularly onerous for Maker. The main ones being the requirement of a 1:1 reserve (Maker is currently collateralizing all DAI at far greater than 1:1), and perhaps a requirement to hold Treasuries and similar debt (a proposal already being discussed with the proposed MPCU). The final one is easy auditability, and we are already as open as possible with regard to that one.
The main point is that decentralized stablecoins are clearly not what is being discussed in policy circles. Whether that means we have more tacit approval or the information gap about crypto assets is so large that they simply don’t know we exist is hard to determine.
A very important point is that this paper, which appears to be establishing a casus belli for regulation of pegged crypto assets, also provides Maker with ample cover to avoid the regulatory hammer. As long as we are consistent in our messaging that we are 1) NOT A BANK, 2) do not custody assets for customers, 3) only issue long-term debt, and 3) do not utilize fractional reserve lending practices, Maker should be well positioned to be the “regulation friendly” or “least bad” alternative to USDC, Tether, GUSD, Paxos, and others named in this paper.
Until we have a marketing or legal CU onboarded, I ask that you remember the above talking points. We are being given – in writing – a way to avoid the “bank” title, both in the letter and spirit of the law. Maker could be materially harmed if we do not ensure we are consistent in messaging that we are fundamentally different from centralized stablecoins.
*Assuming this paper, actually represents what regulators are thinking