[notch656a]

More like they trusted two (well actually three if you count US gov) centralized entities instead of one. It's like asking permission from both momma and pappa to eat desert. They should have just depended on the single entity backing USDC rather than putting themselves in a situation where they'd be also be fucked if Binance froze by leaving their tokens on exchange.

When you put USD backed stablecoin on exchange you're trusting

1) Exchange won't fail

2) Backers won't fail

3) US gov won't fail

Any single one fail and you're fucked. America decided dollars should float in the 70s, and most of the world followed. IMO sooner or later crypto will end up all floating because pegging relies on centralized points of failure and eventually people will tire of getting wiped out.

[nordsieck]

> America decided dollars should float in the 70s, and most of the world followed.

Except that a bunch of countries in Europe went back to pegged currency with the Euro[1]. Part of the reason the 2008 crisis hit countries like Italy, Greece, and Ireland so hard.

---

1. Yes - the Euro is not technically pegged; but effectively, it's the same thing. Each individual country in the Eurozone can't engage in independent monetary policy.

[MrRadar]

I mean, the US Dollar is a "pegged" currency under that definition too. A while ago I read an economic analysis that said the US would optimally have five regional currencies (instead of the single one that it has today) to account for internal trade and wealth imbalances.

What makes the US dollar work in practice is the active role the federal government takes to internally rebalance the economy through taxation and spending, particularly with defense spending and social programs like Social Security, Medicare, and the FDIC. People in wealthier states (including myself) like to complain that we get a bad deal because we get less back from the federal government than we pay in but that's a crucial feature of the system that keeps it from getting too unbalanced.

Additionally, in the US the federal government (for all practical purposes) is not required to maintain a balanced budget while the state governments are. This constrains the ability of state governments to issue too much debt while still providing a relief valve for emergency spending needed during economic downturns or other crisis (such as the COVID-19 pandemic).

I expect that sooner rather than later the countries that have adopted the Euro will evolve a similar system, shifting the bulk of the costs of their social programs (pensions, unemployment insurance, medical care, banking insurance, etc.) to the EU itself and giving the EU the power to tax and borrow as needed to maintain those programs. It will be a hard sell to Europe's wealthier economies, since it would be a major transfer of their wealth to Europe's poorer economies, but I suspect a future crisis will force their hands if the alternative is the dissolution of the EU (Brexit has shown everyone how badly leaving the EU can hurt).

[HillRat]

Turns out having a monetary union but not a fiscal one is really destabilizing when things go wrong!

[govg]

In terms of the Euro, I find it more useful to view the Eurozone as somewhat similar to the US. There's one central monetary policy for really large economies that in a different environment, would have liked to do things independently. It's especially relevant now as US states have GDPs comparable to the Eurozone constituent nations.

[tacker2000]

What are you talking about? The euro is NOT pegged and your last sentence doesnt change that.

[gpderetta]

A bunch of currencies were pegged to a virtual euro a few years before its actual introduction, but those currencies do not exist anymore, so to say they are still pegged doesn't make any sense.

[notch656a]

Euro floats.

[lallysingh]

America went back to floating in 1971. The convertability with gold was only around for 17 years [1]. I don't know why that's relevant to USDC - there's no absolutely stable store of value, everything fluctuates.

USDC doesn't sound tenable.

[1] https://en.m.wikipedia.org/wiki/Bretton_Woods_system

[thedangler]

And it will eventually because the FED turned off the fractional reserve requirements.

On March 15th, the Fed lowered the fractional reserve requirement to 0%. Yet, since that day banks have been hoarding cash like never before. pic.twitter.com/jpYF4Ypzjq — Mati Greenspan (tweets ≠ financial advice) (@MatiGreenspan) April 13, 2020

So, a bank can lend out what ever it wants. This is why inflation is high all over the world and the currency milkshake theory is playing out.

"Here's a simplified version: All currencies are doomed because they're not actually valuable. The dollar is slightly better because it's the favorite child. When the Fed stops making more dollars — the frothy “milkshake” — demand for existing dollars goes up.Jul 19, 2022" -- Bloomberg

[capitalreqs]

Reserve requirements aren’t relevant anymore because capital requirements have largely taken their place. Capital requirements are not zero.