Before the Treasury Secretary Janet Yellen met with SEC, OCC, and FDIC officials on Monday to discuss stablecoins, a paper called “Taming Wildcat Stablecoins” was released by the Federal Reserve and Yale over the weekend.

Written by Gary Gorton, Professor of Finance at the Yale School of Management, and Jeffery Zhang, an attorney at the Board of Governors of the Federal Reserve System, the paper laid out the regulatory options for US dollar stablecoins and footnote references to Yellen’s upcoming meeting.

According to these authors, while crypto is all the rage, there is “nothing new” about privately produced money, but the difference is its goal to be accepted at par with no questions asked.

They point to history, the Free Banking Era when private money made it hard to track due to fluctuating prices, which were then curtailed by the National Bank Act of 1863. “Subsequent legislation taxed the state-chartered banks’ paper currencies out of existence in favor of a single sovereign currency,” they noted.

Now, Gorton and Zhang propose regulating the issuers of stablecoins like Tether and Facebook’s Diem as banks and the central bank to issue its digital currency (CBDC).

With regulation outpaced by innovation, an uneven playing field has been created that needs to be corrected.

While stablecoins do not appear to be used as money currently, as they evolve further, “the stablecoin world will look increasingly like an unregulated version of the Free Banking Era—a world of wildcat banking,” it adds.

The paper proposed a couple of ways to address this development and wants regulators to “better get going.”

These options include transforming stablecoins into public money by passing new legislation requiring issuers to become FDIC-insured banks or require stablecoins to be backed one-for-one with Treasuries or reserves at the central bank.

CBDC is also proposed as a substitute to privately produced digital money like stablecoin, mainly because the central bank must have a “monopoly on money issuance,” and paper and metal coins won’t be used forever.

With the introduction of a central bank digital currency, the purpose is to have digital fiat and “tax private stablecoins out of existence.”

“Free banking in the US was a failure DUE to state regulation, not despite it,” argued Nic Carter of Castle Island Ventures and co-founder of CoinMetrics.

“The difference between now and then is that blockchain-based assets are more resistant to state capture, being natively digital (compare with gold specie), are more global in nature (compare binance with say, the royal bank of Scotland), and enable a more egalitarian relationship between depositors and depository institutions as the cost of verification is low, and thus the ease of taking ‘physical' delivery is high. So easier to hold custodians accountable, and the threat of a ‘run' is higher.”

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