[Baek Kwang-yeop Column] The Reappearance of Grade B Private Currencies After 200 Years

Trump-Originated Stablecoin Storm

Beyond Market Shocks, Redesigning the Global Economy

Cloaked as the 'Future·Cutting-Edge Currency,' Yet

Suitability for Payments and Settlements Must Be Proven First

Extreme Overheating Fueled by Distrust in the Current Monetary System

Need to Refrain from Rash Legislation and Hasty Public Sentiment

Baek Kwang-yeop, Chief Editorial Writer

During early capitalism, numerous banks each issued their own 'banknotes.' There was no 'central banknote.' At one point in the 19th century, as many as 3,089 types of banknotes circulated among 35 U.S. states. This period became known as the 'Free Banking Era.' In today’s South Korea, it would be like Seoul Bank notes, Chuncheon Bank notes, and Ulleungdo Bank notes circulating in place of Bank of Korea notes.

Banknotes were, essentially, 'Grade B private currencies.' Compared to 'Grade A public currency'—central banknotes—they were inferior in function and value. Their value depended on the survival of the issuing bank. All banknotes at that time were traded at discounts below face value.

The minimum requirement for a sound monetary system is 'singleness.' Although multiple currencies may coexist, all must maintain their face value. It is difficult to ensure safe contracts and economic stability if currencies break away from their face values.

This is the main reason why bank runs were repeated endlessly during the Free Banking Era. The central bank system, designed as a financial safety net, was invented to escape that fate. With the emergence of a lender of last resort providing government-backed currency with no limit, bank runs diminished drastically. Deposit protection systems developed in the same spirit.

Today’s stablecoin boom resembles the banknotes of the Free Banking Era in several ways. Although wrapped in the unfamiliar tech of blockchain, their essence and attributes are similar. Most dollar stablecoins are designed as '1 coin = 1 dollar' and are backed primarily with U.S. Treasury securities as reserves—just as U.S. private banknotes were issued backed by state bonds.

Another similarity: both are 'unstable private currencies.' Despite being branded as 'stable coins,' stablecoins are, in fact, 'unstable currencies.' This instability comes from the lack of complete payment and settlement functions. While 'payment' and 'settlement' are often considered together, they are distinct. Payment initiates a transaction, while settlement is the process by which everyone trusts redemption in legal tender to complete the deal. Banknotes and stablecoins both fail to guarantee contractual settlements for the agreed amount. Even Circle, the hottest stablecoin issuer these days, saw its 1 coin fall to 0.88 dollars during the collapse of Silicon Valley Bank (SVB) two years ago. The moment the belief in 'always redeemable in legal tender' is shaken, there’s a 'coin run.'

The overwhelming impact of stablecoins—with their digital, borderless, and secretive nature—cannot be compared to that of banknotes from that period. If dollar coins gain global universality, domestic demand for won in the payments and settlement market will be hit proportionally. This is a matter of monetary sovereignty.

Just as clean air is essential for healthy living, a sound monetary system is the backbone of an advanced economy. That is why the sudden whirlwind is so controversial. The essence is that coin issuance is tantamount to 'money creation.' If someone deposits ₩100 million with a coin company, the monetary base rises to ₩200 million: ₩100 million coins are issued, and the remaining deposit returns to the market via purchases of Treasury securities. The seigniorage (profit from currency issuance) of digital currency creation is thus privatized. The risk-free interest income coin operators collect from their Treasury holdings is, in effect, seigniorage.

Stablecoins turn monetary management into a complicated equation. They are not captured by M2 or any broad measure of the money supply. Coin operators are incentivized to issue more coins to earn more seigniorage, which clashes with the interests of other economic entities thirsty for stable monetary value.

Amid intense debate, Trump's United States is betting big on dollar stablecoins—eager to source demand for MAGA-purpose Treasuries and to maintain monetary hegemony threatened by astronomical fiscal and trade deficits. In response to major changes upending the dollar-based system, the Lee Jae-myung government’s solution is promoting won-based stablecoins. Declaring a head-on confrontation with dollar coins, they are fast-tracking radical legislation.

It is an idea that stirs nationalist pride, but suspicion arises that it’s a political decision overlooking feasibility. If the 'Free Coin Era' arrives, it is more reasonable to think Korean financial consumers would prefer dollar-based coins over won-based ones. The EU and China are limiting issuance and circulation of dollar stablecoins within their borders and are taking a cautious approach. The Bank for International Settlements (BIS) warns against stablecoins as future payment systems and proposes central bank digital currencies (CBDC) instead. So did Biden’s United States.

Why is the world so enthusiastic about 'Grade B private currencies' with no center, despite their risks and obvious limits? It’s hard not to mention the immense distrust that has accumulated, like the Tower of Babel, toward the existing monetary system and its decision-makers. The coin craze provokes ever-deeper pessimism and dilemma—that is the root fear.