Why do we think community banks should be the ones holding these loans on balance sheet?
First, the CRA was primarily a response to discriminatory lending practices like redlining.
There is no particular reason, in a fully electronic world, to require stablecoin issuers to serve their "community" (ignoring that defining that for digital natives is very weird... are we going to require PayPal to invest in the @solana ecosystem because of PYUSD?).
However, the question of "think about the lending" has a very simple answer to anyone familiar with the transformation of bank balance sheets, mortgage markets, or insurance companies for the past four decades.
Second, very little risk originated by many banks is kept on balance sheets. It is securitized and sold into capital markets.
Therefore, the question to ask is, instead, what I started with: why do community banks specifically need to provide this capital at above-market costs, instead of distributing this in diversified manner to all of capital markets, which is more efficient for everyone?
If the community banks actually have underwriting expertise, they will simply convert from a issue & hold model to an issue & distribute model, which leverages what they are supposedly best at (credit underwriting locally) and relieves them of the duty to do what they are worst at (asset liability matching and interest rate trading).
If we genuinely believe that without the CRA, capital markets participants will ignore profitable loan opportunities and simply refuse to bank these people, it would also be trivial to federally fund an originator firm to go make the loans?
Instead of accusing community banks, as a group, of acting like a cartel that is solely interested in protecting its monopoly, it would be nice if stablecoin advocates could engage productively on the legitimate policy concerns that are being raised.
Low-cost deposits held by community banks really do fund entrepreneurship in America, particularly entrepreneurship that happens outside of VC hubs like NYC, SF, and Miami.
If you want to allow stablecoin issuers to compete on a perfectly level playing field with banks (including being able to offer yield on stablecoin balances), that's fine. But please also propose ideas for how stablecoin issuers can fill in the lending gaps that will be created by the resulting deposit outflow.
For example, what would a modernized, stablecoin equivalent to the Community Reinvestment Act look like?
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