In 1861, civil war broke out in the United States. Over the next four years of conflict, the politics of the U.S. were remade and so were its monetary affairs. A new monetary system was born during the war years that exists with us today and is shaping our stablecoin future.
The decentralized currency system
Before the Civil War, there was a decentralized currency system with a myriad of coins and banknotes. All banknotes were privately issued through independent banks. (There was no U.S. government paper money.) If a bank wanted to issue currency it had to deposit bonds with its state’s banking authority. Usually, a bank could issue anywhere from 90% to 100% of the value of the bonds deposited.
However, in some states you could basically deposit worthless bonds as collateral. And some banks just ignored the rules. The result was thousands of different banknotes, all with different values. Making matters worse were wildcat banks. A wildcat bank was a fly-by-night operation that appeared in a region and spent its banknotes far and wide. Then it would just pull up stakes and disappear, leaving worthless banknotes behind.
During the Civil War, Congress and the Abraham Lincoln administration overturned the decentralized system, establishing a government monopoly on money. It did this in a number of ways, but the most relevant to the future of stablecoins were through the redefinition of money and the establishment of the National Banking System.
Birth of the money monopoly
Before the Civil War, money could be “current” or “lawful.” Current money was public or private money that was widely used. Lawful money was official money. Once the Civil War began, Congress began to equate current money with lawful money.
For example, an 1862 law stated that no one could issue any instrument “for a less sum than one dollar, intended to circulate as money … or used in lieu of lawful money.” Meanwhile, in 1864, Congress declared that no one "shall utter or pass ... any coins … intended for the use and purpose of current money." Soon, current money was the same as lawful money. In other words, the only money that could circulate freely and be used in payments was official U.S. money.
Combined with this redefinition of money was the restraint of private banknotes. As we have seen, during the early nineteenth century private banks issued thousands of banknotes. To end this chaotic situation and establish a U.S. currency union, the National Banking System was created in 1863 under the direction of the Office of the Comptroller of the Currency (OCC). These new national banks would be able to issue their own notes called National Bank Notes.
In effect, the OCC re-established the private currency system on a government-controlled collection of national banks that met strict deposit (100% reserves against issuance) and auditing criteria and issued government approved banknotes. Congress completed the end of private banknotes by taxing them out of existence. Eventually, the banknotes of the national banks were replaced by those of the Federal Reserve.
The Civil War and stablecoins
How does the monetary legacy of the Civil War impact stablecoins today? Let us look at some recent developments.
Remember wildcat banks and the fear of a bank issuing a worthless currency, taking its profits and disappearing? The Stablecoin Classification and Regulation Act, often referred to as the Stable Act, was addressing this very fear, but for stablecoins. The bill, introduced into the U.S. House of Representatives in November 2020, called for any institution issuing a stablecoin to be a member of the Federal Reserve System and to hold 100% reserves against any coin issuance. Such federal regulation, it was hoped, would prevent any “wildcatting.” Here, instead of wildcat banks, we have wildcat stablecoin issuers.
But the Stable Act rests on a contradiction. It basically defines stablecoins as private current money and authorizes their issuance. As we have seen, current money is legally the same as lawful, official U.S. money. These authorized stablecoins thus challenge the U.S. monetary monopoly established during the Civil War, clearly violating the laws of 1862 (unless there are no fractional stablecoins) and 1864 mentioned above.
So, are stablecoins illegal? Stablecoins run into legal trouble when they seek to be in direct competition with the U.S. dollar in retail payments. A stablecoin that tries to replace the dollar as a means of payment in everyday transactions will be identified as current money and thus in violation of the 1864 law forbidding private coins (unless you argue that a stablecoin is not actually a coin or token).
Stablecoins more closely resemble a monetary instrument known as scrip. Scrip is non-dollar-denominated private money that only operates in an enclosed or geographically limited system, and that cannot be directly substituted for U.S. dollars. Hence, scrip is not a challenge to the U.S. government’s monopoly on money. The only legal private money in the U.S. today falls into this category. So as long as stablecoins operate in closed, private networks, there should not be a legal problem.
This was the path the OCC took in its interpretive letter in January 2021. Here, the OCC defined stablecoins as a payment mechanism and not current money: "Stablecoins serve as a means of representing fiat currency on an INVN [independent node verification network]. In this way, the stablecoin provides a means for fiat currency to have access to the payment rails of an INVN." This is a fancy way of saying that stablecoins are scrip.
But let’s look at another interpretive letter. On Sept. 21, 2020, the OCC issued a statement that allowed national banks to hold stablecoin reserves for stablecoin issuers. This rule allows national banks to facilitate stablecoin issuance when they hold the 100% backing reserves. One can now envision a nationwide network of stablecoin issuers resting on the National Banking System. Civil War-era National Bank Notes could be replaced with stablecoins.
The Civil War replaced a decentralized monetary system with a centralized one, and in the process established new monetary definitions and structures that exist to this day. This Civil War legacy is shaping the development of stablecoins and cryptocurrency in general.