Crypto: The history of private bank notes in 1800s may hint at the future for stablecoins: Not a good one, says Goldman Sachs

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The current state of stablecoins shares similarity with private bank notes, which circulated as money in the 19th century and were later replaced by national bank notes subject to federal oversight, according to analysts at Goldman Sachs. 

Stablecoin is a type of cryptocurrency pegged to other assets, often fiat currencies such as U.S. dollars. Regulations for such coins “seems likely,” analysts at Goldman Sachs wrote in a Monday note. 

The analysts drew a comparison between stablecoins and private bank notes issued during the Free Banking Era in the U.S. from 1837 to 1863. Such notes were used as money, but traded at discounts, due to the large number in circulation and the difficulty of discovering bank-specific risk across the system, the analysts noted.  

Similar to how the bank notes respond to bank-specific risks, different stablecoins are exposed to protocol-specific risk, according to the analysts. Meanwhile, “there are a large number of alternative stablecoins that can coexist, each with its own risk profile, making them difficult to use across platforms, much like private money once was away from issuing banks,” the analysts wrote. 

“The second key lesson from this experience is that while private and public money can coexist for a time, the private money system is eventually regulated and/or later supplanted by public money,” according to the analysts. Private bank notes were replaced by national bank notes after the National Banking Act was passed in 1863. 

Appropriate regulation could improve stability and lower risks in the stablecoin market, the Goldman Sachs analysts noted. However, it’s also possible for the regulators to “displace stablecoins through an alternative government-backed medium,” the analysts wrote.

The stablecoin market has attracted increasing regulatory attention, especially after the collapse of TerraUSD USTUSD, -3.44%, once the largest algorithmic stablecoin. Treasury Secretary Janet Yellen said the case shows the potential threat to financial stability posed by unregulated cryptocurrency markets.

In November, President Joe Biden’s Working Group on Financial Markets called on Congress to pass legislations that would require stablecoins to be issued by federally regulated banks.

Read: This 24-year-old quit his job at hedge-fund powerhouse Citadel to build on the blockchain Terra. It collapsed two months later.

Also read: Terra crash sharpens Washington’s attention on crypto regulations

This article was originally published by Marketwatch.com. Read the original article here.

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