The quality of a currency depends on the credibility of its issuer

Why do we look back and uncover the ghosts of the Free Banking Era?

Written by: Thejaswini M A

Translated by: Block unicorn

In 1840, a shopkeeper kept a ledger under the counter. When you paid with a banknote, he would pull out the book and check how much your money was worth that day.

A $10 bill from the Cincinnati Bank wasn't worth $10 everywhere—maybe only $9, perhaps much less. Its value could vary wildly. If the bank failed and the news hadn't reached his county yet, it could be worth nothing at all. The most famous of these books came from Philadelphia: the *Bicknell's Counterfeit Detector.* It was essentially a price sheet for money, printed in series because the value of a dollar changed depending on the names printed on the note.

This was America between 1837 and 1863. Any bank with a state charter could print its own bills—and it was very easy to get that charter. Michigan pioneered this in 1837, requiring almost nothing to open a bank, not even legislative approval. Thousands of different bills circulated simultaneously across the country. About one-third of these bills in circulation were outright forgeries.

Every bill represented a gamble on the issuing bank. This system collapsed during the Civil War, when the government printed a unified dollar—partly to fund the war, but more importantly, because relying on 8,000 private bills had bled the nation dry of trust.

On June 22, the Senate overwhelmingly (85-5) passed the 21st Century Housing Act, and the House approved it the next day. Hidden in the housing bill is a clause prohibiting the Federal Reserve from issuing a Central Bank Digital Currency (CBDC) before 2030.

This is why we look back and resurrect the ghost of the Free Banking Era.

The dollars in your Venmo account are a promise from a bank; if that bank fails, your money is at risk beyond the Federal Deposit Insurance Corporation (FDIC) coverage. A CBDC would bypass banks, allowing holders to own national currency directly in digital form.

The Senate rejected the proposal for two reasons.

A digital dollar issued by the government could track every cent you spend, and, like China's digital yuan, freeze your wallet at any time.

Secondly, banks fiercely opposed it because money held directly at the Federal Reserve would never reach their deposit accounts. They would lose the float they rely on to survive.

Now, even those set to sign the bill seem unsure about what they're signing. On June 24, an hour before the signing ceremony, Trump canceled it and called for a vetoed voter identification bill instead. But it's likely that this ban will become law eventually.

Fine—the government won't issue a digital dollar. Instead, it's handing the job to private companies. That means we're back on the road from 1840.

Even after the GENIUS Act is signed in July 2025, the main regulatory focus remains on the quality of reserves, not strict entry barriers. A dozen companies are lining up for licenses so they can issue their own dollars. Every fintech wants its own branded currency.

The market currently stands at about $312 billion. Tether's USDT and Circle’s USDC make up almost 80% of it. Then there's PayPal's PYUSD, Ripple's RLUSD, and white-label tokens minted by Paxos for anyone who needs them. All echo the Cincinnati Bank: Trust us, these are backed.

This isn't 1840, and Jim Carrey is still trying to prove he's not his clone. None of us trust anything, do we? That’s both good and bad. This lack of trust makes issuers bring out evidence to prove reliability, but also lets them bet the market will remain shallow—because the easiest crowd to get money from are the always-skeptical yet never-verifying.

One rogue bank claimed its bills were backed by silver in its vault; in reality, that vault was often just a barrel of nails, hidden in the woods, untouched by inspectors. Stablecoins claim to be backed by US Treasuries, publishing monthly receipts. In terms of collateral, there’s a major difference—stablecoins are better in this aspect.

Leaving collateral aside, the next question arises. A dollar is worth a dollar because everyone simultaneously believes three things: issuers are confident in their money; the reserves are real and available; and if things get out of hand, someone will intervene. If all three hold, a dollar is a dollar, and you don’t think twice.

When any side wavers, currency is priced individually like in 1840. That’s how money works.

The same logic applies to checking accounts. The government backs all three steps, so you don't notice. With stablecoins, it’s different—you can see the mechanism working clearly.

Tether is the world’s biggest USDC issuer and the least transparent. Its reserve reports have been questioned for years. In 2021, Tether settled with the New York Attorney General, admitting its reserves weren't always as adequate as claimed. It lent billions in reserves to affiliates. Circle is seen as the "good guy," favored by regulators, audited monthly, and going public from 2025. However, what happened in March 2023? When Silicon Valley Bank (SVB) collapsed, Circle had $3.3 billion of USDC reserves at SVB. USDC dropped to 87 cents over the weekend, until the government backstopped SVB deposits. The reserves were solid—yet within 60 hours, a dollar was worth only 87 cents because people stopped believing USDC was redeemable.

Now, every payment company wants its own dollar. PayPal has PYUSD, Ripple offers RLUSD, there’s USDG from an alliance, and a series of bank tokens from JPMorgan and Western Union. In December 2025, the Office of the Comptroller of the Currency (OCC) granted trust bank charters to Circle, Paxos, and three other crypto companies, with more seeking the same. Shut out, Tether attempted a comeback by issuing an independent US token called USAT.

But always read the fine print. These are "trust bank" charters, not insured bank charters. The Fed gives them very limited account features—no overdraft, no emergency lending window—the true backstop when a bank run happens.

And the ones you pay to buy a ticket? Those are their record labels.

Paxos—the issuer behind PYUSD and six other branded tokens—was ordered by New York regulators to stop minting Binance’s stablecoin as early as 2023. Some new tokens have no cash backing at all. Ethena’s USDe uses derivatives trading strategies to maintain its peg.

The bill bans these issuers from paying you interest, so they look for workarounds. Coinbase pays “rewards” on USDC; PayPal offers a 3.7% yield on PYUSD. These tempting returns lure your money away, yet—unlike ordinary accounts, insured by the FDIC—these funds have no safety net at all.

Because stablecoin tokens are backed by US Treasuries, the money supply is still controlled by Washington. The interest from those Treasuries ends up with the issuers. Tether, with about 100 employees, is expected to earn around $10 billion in profit by 2025 and holds more Treasuries than Germany.

But if all fails, you take the hit. A bank run is everyone rushing the door at once, but the door was meant for a trickle. Stablecoin redemption channels are very narrow. Most people can’t even redeem Tether directly—they sell it to a handful of arbitrageurs. Tether averages just six such redeemers a month, with a $100,000 minimum redemption size.

If Tether collapsed tomorrow, $100 billion worth of tokens would drop to zero. Tether holds so many Treasuries that a panic sale would rattle the Treasury market itself.

The reason Washington steps in is that the alternative is a coordinated freeze in credit and liquidity.

The government doesn’t even need a global economic crash to act. In 1971, it broke a deadlock by bailing out Lockheed with a $250 million loan guarantee, saving 60,000 jobs and the Pentagon’s top supplier. As one navy admiral called it, it was “a new concept—privatize profit, socialize loss.”

In 1970, when the nation’s largest railroad, the Penn Central Railroad, failed, the government let it go bankrupt—then used public money to build Conrail to take over its tracks, because the trains had to keep running.

A dollar token used by 250 million people easily meets this threshold. For years, the government has refused to guarantee private risk—until private risk threatens public infrastructure stability.

There are many ways to address this. What if, instead of using a bank like SVB that can fail, issuers held their reserves directly at the Federal Reserve? Then the risk of a run drops; the Fed doesn’t fail like regional banks. Or require issuers to buy real deposit insurance, so the fee is paid before a crisis arises.

The government might tax Treasury yields and return proceeds to the public bearing the risk.

But we don’t really want any of that, right? Fed reserves mean the Fed is now the final backstop. Insurance means a government agency is underwriting the risk, just like the FDIC leans on the Treasury during emergencies. Taxing yields means treating these companies as public utilities. We don’t want the government back in the money business. That’s why CBDCs were banned in the first place.

Let’s rewind further in history. Around 375 BC, at the Athenian marketplace, the city employed a slave to sit by the banker’s table, examining the authenticity of silver. He would cut gold-plated fakes in half and return the genuine coins to customers. If the silver was pure, he’d even let foreign imitations bearing the Athenian owl mark pass. There was a law mandating all merchants accept silver vetted by him.

Two thousand four hundred years have passed—have we made it? Thankfully, great innovations always come with loopholes that get patched over time. Maybe in another decade, reserves will be robust and the rules more effective.

But you need to watch for the trade-offs involved.

Think of what you’re giving up. Currently, your dollars are backed by FDIC insurance, and the Fed can print new money in a panic. It’s slower, but one of the safest assets you can own. Banks lend your money the same day you deposit it. In 2020, the Fed cut reserve requirements to zero, so your bank legally doesn’t have to hold a cent of your deposit. What really supports you is FDIC insurance—a fund with about $154 billion backing all insured deposits nationwide. In simple terms, there’s about 1.5 cents in reserve for each insured dollar. Even so, it cannot withstand simultaneous system-wide panic. If depleted, the FDIC would need to draw on its backup with the Treasury or coordinate with the Fed to print new money for emergency liquidity.

In a single month in 2023, three of the largest bank failures in U.S. history hit one after another: Silicon Valley Bank, Signature Bank, and First Republic. To prevent a run, regulators scrapped the $250,000 insurance cap, paying out all uninsured deposits—a move eerily similar to emergency measures later used for stablecoins. This cost the fund about $2 billion.

Stablecoins are cheap and fast. They’re available 24/7, with reserves visible on-chain, and the best issuers publish monthly receipts—much more than banks ever disclose about your deposits.

Would you swap one for the other?

I’d do it in a heartbeat. Maybe you would too. You’re reading this; you’re already in the system. You know what depegging means, and where to find the next one. But the real test is for everyday people. The person accepting USDC does so because it’s the easiest way for them to hold dollars. The shop takes PYUSD because fees are lower. Most people never learn the risks behind these seemingly simple systems.

After all, convenience spreads a lot faster than understanding does.

The value of your money depends on the credibility of the issuer—and the credibility of the nation guaranteeing them.