Matt Hougan: Why Free-Banking Analogies Distort Stablecoin Regulation

The ongoing debate surrounding stablecoin regulation is often shaped by historical analogies, a practice which Matt Hougan, Chief Investment Officer at Bitwise Asset Management, strongly advises against. Hougan argues that comparisons to the chaotic ‘free-banking era’ of the 1830s are not only anachronistic but fundamentally misrepresent the true nature and regulatory realities of modern digital currencies, advocating for policymakers to adopt more precise, contemporary frameworks.

• Bitwise CIO Matt Hougan warns against using 19th-century free-banking era analogies for stablecoin regulation.
• He argues such comparisons are anachronistic and distort the modern financial landscape of stablecoins.
• Unlike the chaotic free-banking era (1837-1863), modern stablecoins operate within increasingly robust regulatory frameworks.
• Hougan highlights key differences including clearer asset backing, transparent redemption, and global digital tradability for stablecoins today.
• He estimates that over 95% of the stablecoin market will eventually consist of federally regulated stablecoins.
• Policymakers are urged to base stablecoin regulation on current operational realities rather than flawed historical parallels.

Hougan has publicly denounced these “careless comparisons” as misleading, particularly within the escalating discourse concerning stablecoin acceptance and inherent risks. In a recent post on X, he highlighted the significant temporal disparity, noting that the free-banking era began 188 years ago, a time when communication was limited to horseback travel and the telegraph was still in its nascent stages. While recognizing the didactic utility of analogies as teaching tools, Hougan insists that such historical parallels must be reasonable and directly relevant to current technological advancements and regulatory environments.

Historical Context: The Free-Banking Era

The United States’ free-banking era, which spanned approximately from 1837 to 1863, was characterized by the unregulated proliferation of privately issued paper currency by individual banks. In the absence of a national currency standard, individual banks issued their own notes, often backed by speculative or low-quality collateral, such as undeveloped land or unreliable railroad bonds. This system engendered widespread inefficiency and profound instability. Banknotes circulated at varying discounts contingent on their proximity to the issuing bank, compelling merchants to consult intricate reference books to ascertain their true value. Redemption, moreover, required physical presence at the issuing bank, severely impeding liquidity and eroding public confidence.

Modern Stablecoins: A Distinct Framework

Hougan emphatically asserts that none of the inherent deficiencies of the free-banking era are applicable to modern stablecoins. Unlike their 19th-century counterparts, today’s stablecoins operate within increasingly robust regulatory frameworks, exemplified by proposed legislation such as the GENIUS Act. For instance, this proposed act mandates clear rules for asset backing, transparent redemption mechanisms, and operational clarity for issuers. Furthermore, contemporary stablecoins are globally tradable on digital exchanges, providing real-time pricing and the capability for remote, often same-day, redemption – a stark contrast to the profound logistical impediments of the 19th century.

The issue of inappropriate historical analogies has prominently surfaced in significant policy forums, including Congressional hearings and regulatory white papers, as financial watchdogs and economists express concerns regarding crypto’s potential systemic risks. Hougan argues that these concerns are frequently amplified by flawed comparisons. He also noted that state-regulated stablecoins, occasionally viewed with skepticism, currently represent a market capitalization capped at approximately $10 billion, which he deems a “vanishing fraction” of the overall stablecoin market. Hougan estimates that over 95% of the stablecoin ecosystem will ultimately comprise federally regulated stablecoins, which will be subject to rigorous asset management and redemption provisions. Hougan concludes that analogies should serve to clarify, not obscure, urging policymakers to base stablecoin regulation on factual data and frameworks that accurately reflect their current operational realities.