18 Comments

Dear Brett,

This "origami stablecoin" article gives me strength to write a similar article about the Turkish IOU system (called the Vadeli Çek), which works with blank A4 papers (like your origami IOU) or with bank issued paper cheques. In either case, an issuer with her signature "issues" Layer 3 credit based on her Layer 2 bank account, using Layer 1 Turkish central bank lira as denomination. This mechanism is used (to create personal credit) in Turkey by over 500,000 people and transact more than 1 Triilion TL every year. The mechanism works exactly like what you described in your origami IOU exercise, except for a time value added on the IOU. Hence, there is an expiration date on the Turkish IOUs and the issuer is not liable to put money in her account until that date. This mechanism is protected with a special "Vadeli Çek" law.

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Hi Cemil, I remember you describing this fascinating system to me before, and I'd love to see any new writing you produce about it. Thanks for reminding me.

As far as I recall, the time-lock prevents the issuer having to redeem the IOU for a certain period (i.e. IOU $100 on a specific date in future), giving them short-term financing for a specified length of time. Would be interesting to add that to an origami stablecoin too ;)

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Sounds like European options 🤔

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Certainly in terms of redeemability at least (albeit with an option the 'promise' is the guarantee to buy/sell something at a certain price)

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Sure Brett,

Here is our "White paper" about a similar system we designed using blockchain technology:

https://medium.com/@cemilturun/defterhane-protocol-f4406e4ab070

However it is not easy to find a way to enter the system without disrupting the working mechanism. Still searching...

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Great, thanks for posting Cemil

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Glad you’re creating articles again. This was a good one! (Saying as someone who stays far away from getting involved in crypto)

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Glad you enjoyed it Andrew. Crypto has dropped off the hype cycle somewhat, but I'm planning to revisit the topic a couple times in the coming months

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"[...] which is what central banks use to upcycle their retired physical credits into colourful briquettes" ❤️

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Which in turn can be used as office furniture

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As the 'stability' of the coin relies on the assurance that it is backed by (say) USD, given the decentralised nature of the blockchain, how is the security assured? While you allude to various ways, it seems that so called 'stablecoins', simply add a layer of instability. A Central Bank Digital Currency can be created in a way that maintains the same level of privacy as now exists in the banking system, while still subjecting the money to the laws of the land. People may not like their laws, but trying to use money to skirt them is hardly conducive to creating a strong society which has to be built on trust.

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Most of the big stablecoin issuers will now hire third-party auditors to vouch for the fact that they hold a certain amount of US dollars in bank accounts (or in money market funds and government bonds). They call these 'attestations'

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Tks for your reply. See my amended comment :) We really only need one standard measure for 'units of value'. If these are issued by the Central Bank, they can never be 'lost' (unless the State fails. But if your stablecoin is backed by the currency of the failed State, you are in the same boat). Once a CBDC is in place, all of the services offered by Fin Techs and DeFi's could be provided at the second level. At that point, there would no longer be a risk of system failure due to bank runs, as no 2nd layer organization would own the CBDC. They would simply operate the payments system, moving money from one account to another.

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What are your thoughts on do central banks want that? Why aren't we seeing a strong push towards this variant of CBDCs?

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Central Banks are looking at CBDC, but they are concerned about disintermediating the commercial banks because they are only considering using CBDC in the payments system, perhaps only for wholesale use by the banks themselves. I've written a paper with Biagio Bossone that explains how it is possible for CBDC to be issued to banks for on-lending, so they retain their lending function. It also shows how the banks can continue to manage the payments system, effectively as agents for the Central Bank, ensuring depositors had the same level of privacy as now. But with 100% security, as the deposits would not be on the banks books. If any bank went under, it could not impact any deposits or the payments system. The paper has been published by the Levy Economics Institute in the US: https://www.levyinstitute.org/pubs/wp_1015.pdf

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I'm going to reply to your last two comments:

1) well, we do have one standard measure for 'units of value', but multiple issuers that use that.

2) I don't believe that a central bank would only want for there to be a single issuer of money, and it's also questionable whether it's even possible to prevent private sector players issuing second and tier forms of money on top of the state foundation. Central banks kinda like the fact that banks do money creation in the economy, because - at least in theory - banks are supposed to issue new money ('give loans') for businesses that will in turn create new goods, and I'm not sure a central bank sees their role as to be the sole provider of money. They see themselves as the *anchor* for private money creation.

3) I'll check out the paper though - it sounds quite a lot like what groups like Positive Money in the UK originally advocated - which is to reduce banks to mere intermediaries in the economy, rather than active money issuers

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The idea is for banks to issue the new money to their own customers and to manage the deposits and transactions of their own customers. However, the money they loan would be CBDC issued to the bank 'on demand' by the Central Bank. The Central Bank would have no view into individual accounts. The CBDC of the depositors would be recorded on a series of 'subsidiary ledgers' of the Central Bank, managed by each bank. In this way, no deposit would be 'on the books of the bank, so no bank failure could result in the loss of a deposit. A depositor would only lose their deposit of the STate failed. But this would be the case if a stablecoin remained tied to the the fiat. As the value of the fiat fell, the stable coin would have to match the drop in value, or else it would no longer be 'stable'.

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Jan 6, 2024
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Sweet cupcakes

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