Stablecoins reconsidered | Invesloan.com

Good morning. The S&P 500 rallied yesterday, as investors rejoiced over Donald Trump backing down, for now, from higher tariffs on the EU (Taco!). The index rose 2 per cent, led by consumer discretionary and info tech; defensives such as utilities and real estate were also up, but by less. Email us: [email protected].

People think I’m wrong about stablecoins

Yesterday, after I wrote that stablecoin issuers are banks and that stablecoins are bank deposits, an above average number of people said I was stupid on the internet (not the highest recorded number; that level is reserved for when I write about gold or Warren Buffett).

The most common argument against me was that what I described, in laying out what a stablecoin issuer does, is not a bank but a money-market fund. Like a stablecoin issuer, a money-market fund takes cash from investors, puts that cash to work in shortish-term assets, and issues the investors a liability that it promises to redeem on demand and at par. The crucial difference is that banks — by virtue of the fact that they can hold fractional reserves — create money when they make loans. For many people, that is the defining feature of a bank, and stablecoin issuers (at least under the Genius act) don’t do it.

Accept this argument for a moment. One awkward fact is that if the stablecoin issuers are money market funds, then stablecoins are securities and must be regulated as such. And there is another problem for stablecoin users. Several readers pointed out that stablecoins are not exactly money market funds, but instead money market exchange traded funds (MMETFs). Here’s John Levine: 

As a regular reader, I rarely disagree with you, but I have to disagree this time. Stablecoins aren’t bank deposits, they’re money market ETFs. If I buy a few Tether, I can’t just cash them in. Their minimum transaction is $100,000 and they only will buy or sell to verified counterparties with a 0.1% fee, not unlike an ETF’s “Authorized Participants.” For smaller amounts you buy and sell them on exchanges, again not unlike an ETF. I don’t think this makes a huge difference to the way they should be regulated, but again like ETFs there’s a handful of large users they know and transact with directly, and a large number of anonymous others, which is quite unlike a bank.

My colleague Bryce Elder pointed out the darker implications of this: 

Unlike MMFs, the existing stablecoins don’t have neat and reliable redemption mechanisms. Without direct access to the redemption window, the average stablecoin punter [is holding] the ETF of a bank deposit. Whether their token can be sold at net asset value will depend on the . . . willingness of the arbitrageurs who can access the ETF redemption mechanism at the same moment. Whether it’s trading at par will be determined by the size of the arbitrageurs’ balance sheets and risk appetites. In an event like the 2020 dash for cash, they’re going to be toast.

On the general point about money market funds versus banks, there is a formally adequate but totally unsatisfying response available to me: I can simply say that MMFs are banks, too. And indeed, money market funds, and similar vehicles, have been labelled “shadow banks” in the past, for good reason: they have runnable liabilities, and that, not whether or how they create money, is the essence of a bank.

Dan Davies, a generally clever person and former economist at the Bank of England, points out that one important feature of MMFs is that they get into bank-type trouble and have periodically needed central bank backstopping. When push comes to shove, in other words, MMFs get bank treatment. Here is Davies:  

MMFs are (shadow) banks! People don’t want to admit this because it has all sorts of unpalatable consequences, but you can call something what you want, if it takes money on the basis of promising that you can convert it instantly at par, a bank is what it is. In the days of Lombard Street these people would be saying that goldsmiths weren’t banks.

My sometime colleague Brendan Greeley, now also an Ivy-league academic, points out that “there are other examples of strict deposit banks. The Wisselbank was pure deposits and on-ledger transfers, no money creation.” On an only marginally less nerdy note, he emails that: 

I’d steal the Morgan Ricks definition: does it issue runnable liabilities? If yes, then sorry, it doesn’t matter what your business plan is or what you call yourself, you’re runnable like a bank and therefore need to be regulated like a bank. This thing where [stablecoin issuers] say they’re [only] buying T-bills and repo is a red herring. I don’t care what you say you’re buying, I don’t believe you until the FDIC has cracked open your books and verified it . . . 

Ultimately no matter how much banks pinky swear they’re holding good assets, they have to hold a reserve. We relearn this every time there’s a banking panic . . . 

Also, I will bet you two beers right now that within a year from today a stablecoin issuer will offer either margin loans on memecoin bets or overdraft lines of credit. There’s just no way we give them a bank-light license and they don’t then immediately go: “Oh, was that money creation? We had no idea!” 

The distinction between bank and non-bank, I would say at risk of sounding squishy, comes down to context. And here the context is provided by the name: it’s a stablecoin, not fundcoin or marketcoin. The product presents itself in terms of its immediate convertibility at par and its usefulness as a payment mechanism, in a way even a money-market fund doesn’t dare to do. I call it a bank deposit because that’s what it wants to be.

Has Trump made solar energy uninvestable?

Solar stocks have had a difficult week. No one expected Trump’s “big beautiful bill” to preserve the Biden-era Inflation Reduction Act as-is, but it contained two major negative surprises for solar energy: a quicker-than-expected end to clean energy tax credits and unexpectedly harsh IRA credit rollbacks. Investors, it seems, were a bit naive to assume that moderate Republican lawmakers would protect the IRA. Shares across the sector dropped on the news — reversing a jump earlier in May fuelled by expectations for IRA leniency — extending a downward trend that began after Trump was elected:

That is not a pretty picture, but there is a crucial distinction here. For the residential solar sector, where “policy is everything”, the bill is a disaster, says Guggenheim’s Joe Osha. Two of the major stocks in this area are Sunrun, which is the largest home solar installation company in the US, and Enphase Energy, which develops microinverters geared towards the residential market. The investment tax credits for third-party ownership systems are critical for the residential sector, as most homeowners aren’t willing to commit to the high upfront costs of solar power. More than 90 per cent of Sunrun’s customers use TPOs, according to BMO. The budget bill now denies solar rooftop companies the credits after this year, and also rolls back tax credits for homeowners installing the systems.

The prognosis is better for utility-scale solar. While the tighter timeframe for project credits is a headwind, the bill preserved tax credits for large-scale solar power projects — explaining why shares in First Solar and NextEra Energy, two of the biggest commercial implementers, have held up. The utility business operates on contracts that typically range from 15 to 20 years, and utility-scale solar is seen as a key source of power supply for AI and data-centre growth.

Solar energy won’t die entirely under Trump 2.0. But policy whiplash is a problem. As Osha puts it: 

There is a market tendency in this space, in part, because it is so volatile — for people to fasten on to these factoids and say, ‘Oh, yes. Okay. I’m going to get on the other side of this.’ And the fact of the matter is that yes, there are ups and downs, but that approach has lost people a lot of money over the past two years. 

Enphase and First Solar are trading at forward price/earnings ratios of 16 and 10 — value territory, if you think the industry will grow at all. But those valuations reflect the fact that there is more policy volatility to come.  

(Kim)

One good read

Presidential taste.

FT Unhedged podcast

Can’t get enough of Unhedged? Listen to our new podcast, for a 15-minute dive into the latest markets news and financial headlines, twice a week. Catch up on past editions of the newsletter here.