Nothing New Under the Sun
Some bankers have reservations about GENIUS.
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A Pirate Looks at 25
Back in the late-20th century, the music industry was on a heater. Pop icons like Britney Spears were routinely selling tens of millions of albums using the new “compact disc” medium. Sleek, digital, nearly free to manufacture, the CD peaked with the Backstreet Boys April 1999 smash hit Millennium—which would go on to sell 30 million copies.
Cable television brought channels targeting youth demographics devoted solely to distributing music videos. In 1998, MTV had launched Total Request Live, which became the cutting edge of cool. For a moment, host Carson Daly was an icon. Music culture had become hegemonic.
But at the same time, in basements in Boston, MA and San Mateo, CA, two teenagers named “Shawn”1 were dreaming up a new system of music distribution which, in waves, would upend the entire industry.
That system, of course, was Napster, the first in a series of peer-to-peer file sharing tools that arose in the early days of the internet. The software rose to near-instant ubiquity because it was an order of magnitude better than anything that came before it.
In the old days, there was no internet. Mass media like radio and television allowed wide distribution of individual songs, but for music fans who wanted to listen to their chosen artist on demand (or anything more than a single), the only option was to pay $10-20 and purchase a physical copy. The culture of collecting music developed into an art form, with movies like Empire Records (1995) and High Fidelity (2000) venerating the record store as sanctums of taste.
But with Napster, and its successors like Kazaa and LimeWire, you didn’t need to do that anymore. Users could simply download, for free, any song that happened to exist on connected servers. Cranky Gen X survivors still may sneer at this as unsophisticated, but this modality was clearly better. As soon as it was introduced it was the future, no doubt. The truth is, whether these particular Shawns had invented Napster or not, digital file sharing was inevitable. The story of the .mp3 has much more to do with the progression of cable technology facilitating greater internet bandwidths than it does with any particular innovation.
Which is what made the music industry’s response such a generational blunder. Napster, it turns out, was more entrepreneurial than libertarian, and was willing to court deals from the industry to sell out and turn the file sharing medium legit. Hank Barry, the VC who bought control of the company in 2000, claims that Napster was that year “48 hours away from a deal” with Vivendi Universal, a major record label. But in the end, the labels chose war instead.
Over the ensuing decade, the record industry pursued litigation against Napster itself (which went bankrupt in 2002) and, more toxically, against individual users like Joel Tenenbaum, a BU grad student who was fined $675,000 in 2009 for sharing thirty songs on Napster and LimeWire.
You really can never hold back spring, though, and this wave of file sharing was only the beginning. Despite the litigation, file sharing proliferated widely, CD sales plummeted, and the industry as a whole contracted nearly in half, with global revenues declining “from a peak of twenty-seven billion dollars, in 1999, to fifteen billion, in 2013.”
Steve Jobs happily picked at the bones, and only Daniel Ek and Spotify really reversed the trend in the mid 2010s. But it very clearly did not have to be that way. The technology for subscription-based music was available in the early 2000s, and was simply passed over by legacy executives too pig-headed and backwards to grab it.
Most people are basically fair and decent, and would happily pay $10 a month rather than copy pirated music from sketchy internet strangers. I remember when I first used Spotify in France in 2012. It was a revelation, but it was also obvious — an unavoidable future, and now the object lesson to discuss today.
What happened to the record industry in the early 2000s wasn’t just about music. It was a case study in how institutions can fail to adapt to inevitable technological change, a mistake the banking industry now risks repeating with stablecoins.
Stablecoins, Stablecoins
If you remember back when GENIUS was just a twinkle in Sen. Bill Hagerty’s eye, there has been a lot of discussion over the banks’ interest in the law. In particular, one provision of the law, the Sec. 4(a)(11) prohibition on yield, is widely seen as a concession to keep the banking lobby happy.
While some in the banking industry expressed interest in adopting the new form of money, many others were concerned about the consequences that it might have for their own business. In particular, they worried that if stablecoins paid yield, people might use them. After all, checking accounts don’t pay yield. And if people used them, they would do so instead of using banks, and then the banks would have less money. This is the kind of straightforward, linear, logic that it's hard to fault too much.
Competitor bad. Try to kill competitor. Easy.
The arguments they made at the time made some sense. If stablecoins gain mass adoption at the exclusion of checking accounts, it won’t be a simple one-time transfer. Because stablecoins are secured quite differently than checking accounts, this transfer would redound across the whole economy.
This comes down to collateral. Checking accounts are part of a fractional reserve model of banking, in which banks hold customer assets as collateral, and then engage in money creation to lend out to third parties many times more money than they took in. This process creates much of the money supply that insanguinates the global economy. They are able to do this safely, because they have access to FDIC insurance to backstop their reserves in case of crisis, which prevents bank runs.
Stablecoins, on the other hand, are required by GENIUS to maintain 1-to-1 collateral reserves for each token. This is effective at securing their reserves without FDIC insurance, but it has the side effect of prohibiting money creation, and it does mean that if money moves en masse into stables, it will meaningfully decrease money supply. I’ve argued many times here that this is a boneheaded policy, but it is what it is! GENIUS is law now.
This week, though, the banks started to have second thoughts. The Bank Policy Institute (BPI), and institutional industry group, released a thinkpiece on Tuesday, arguing that GENIUS has not done enough. In particular, their focus is on the exchange loophole on the prohibition on yield.
Basically, Sec. 4(a)(11) prohibits issuers from paying yield to token holders, but does not obviously apply to exchanges. This is important, because many exchanges have deals with stablecoin issuers wherein the issuers pay the exchanges, and the exchanges fund rewards programs that pass on some of that payment to users.
BPI is up in arms, arguing that “without an explicit prohibition applying to exchanges, which act as a distribution channel for stablecoin issuers or business affiliates, the requirements in the GENIUS Act can be easily evaded and undermined by allowing payment of interest indirectly to holders of stablecoins.”
In the first instance, this is a bizarre argument, because the workaround for exchanges is hardly an “evasion” of the “requirements in the GENIUS Act.” It is an intentional structure in the law designed to allow existing programs to continue going forward. I have been talking about this issue with stakeholders since spring, and we wrote about it three days after GENIUS was signed into law.
So if the banking lobby is only just now realizing that interest may still make its way to users’ pockets, it is only because it was not paying attention for the last six months when this was a live issue and the law was drafted to allow it.
This development was reasonably (in my view) met with consternation from some in the industry.
The grumbling from Wall Street intensified on Wednesday when the New York Times released a sprawling piece uncritically airing the banking industry's most plaintive concern-trolling about GENIUS.
According to the paper of record, “fear is [ ] rising that the rush into crypto may risk the safety of personal bank accounts in ways that Wall Street and Washington are just beginning to understand.”
The piece lays out essentially the points that we’ve described here in recent months. Stablecoins don’t have FDIC insurance; they can’t engage in money creation. But the accounts of “nine Wall Street executives briefed on their organizations’ crypto initiatives but not authorized to speak publicly for their employers” fail to mention that these limitations are the result of targeted lobbying by their own industry.2
Instead, I read this new messaging as the first salvo in a misguided campaign by some in the legacy banking industry. They’re trying to do what the music industry did in 2000, push back against the inevitable.
Here is the truth, the moment that Bitcoin came online in 2009, a new paradigm was born. Suddenly, it was technologically possible to make payments on the internet without any intermediary, and from that day it was only a matter of time before the possibility blossomed into reality. In the first decade of cryptocurrency, basic systems were just coming online. In the next five years, assets designed for actual transactions were perfected. Now, it is here. And it is better, in a way NYT accidentally highlighted in its piece.
People never wanted to use banks to make payments, they just had to. Now, they don’t. Just like digital music files were better than CDs, disintermediated finance is better and easier than traditional banking.
So legacy institutions should learn a lesson from that bygone era. Don’t try to stop it. Don’t file lawsuits. Don’t lobby for new laws. It doesn’t matter. In fifty years, people will be sending money to each other directly, because it is simply easier and more efficient to do so. There is no way around it.
So get in line, or die out. But stop publishing sanctimonious testimonials in the New York Times. It's unseemly.
Until next week.
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Ok one was “Sean.”
The piece does note that “Bank lobbyists didn’t just support the legislation, but took an active role in shaping it. Bankers who participated in the lobbying said they felt somewhat forced by circumstance.” Poor things.