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First central bank and stablecoins

If you go to Google and type “what was the first central bank in the world”, the answer will come as Swedish Riskbank, established in 1668. However, according to an increasing number of academics, the first central bank in the world was the Bank of Amsterdam (1609-1820).

The Bank of Amsterdam was owned by the City of Amsterdam and was famously discussed in Adam Smith’s Wealth of Nations, becoming one of the best-known public deposits banks in Europe. As any other public deposits banks during the time, the Bank of Amsterdam started out as a “stablecoin”: it issued deposits backed by silver and gold coins, and settled payments by transfers across deposits (Jon Frost, Hyung Song, Peter Wierts, 2020).

At the beginning, the aforementioned first central bank operated as a passive or rigid stablecoin, which means that new deposits could be created only by holders surrendering gold and silver coins.

According to Schnabel and Shin (2014), Amsterdam pre-eminent financial center was key to Bank of Amsterdam success playing one of the most important roles of modern central banks: settlement liquidity. The Bank played a central role in European and global trade, channeling hundreds of tons of silver coins, mostly from Spanish colonies, to growing economies in Asia. The ability to execute payments promptly and effectively, maintaining the settlement liquidity, is one of most important characteristics of actual established central banks

In 1683 the Bank of Amsterdam found itself performing more and more the lender role, but it began to operate as an “elastic stablecoin”, where the value of its deposits was backed by the general strength of its balance sheet rather than the ability to convert it to gold and silver coins. In summary, the Bank began to resemble modern central banks, as a public institution issuing fiat money.

The Bank had a strong performance over more than a century, passing through times of turbulence, and solidifying itself as an institution. From Adam Smith:

“At Amsterdam, however, no point of faith is better established than that for every guilder, circulated as bank money, there is a correspondent guilder in gold or silver to be found in the treasure of the bank. The city is guarantee that it should be so.”

However, the Bank lacked one key part of modern central banks: it was not fully fiscal backing of the sovereign. The Bank was owned and governed by the City of Amsterdam, but the city authorities did not extend fiscal backing to the Bank to return the Bank to full solvency through fiscal transfers (Jon Frost, Hyung Song, Peter Wierts, 2020).

While it was able to survive bouts of political turmoil, the Bank saw the depleting of its stock of silver and gold coins driven by its lending to the Dutch East India Company (“DEIC”). In the Anglo-Dutch war, the Bank relied in particular on unsecured lending and on open market operations with DEIC, and with the conclusion of the war the Bank had accumulated a large credit exposure which became non-performing.

The City of Amsterdam was not able to play the role of a modern fiscal authority, which means no taxation power that governments have today. The lack of fiscal backing, combined with weak governance and economy ravage by war culminated in the Bank of Amsterdam default, closing the doors in 1820.

In light of Bank of Amsterdam's first years and 100% backed by gold and silver coins, today we have a decent number of private stablecoins initiatives, and the most well-known is Libra, by Facebook.

According to its creators, Libra would be backed by a basket of currencies, starting with US dollars, euro, British pounds, Japanese yen and Singapore dollars. It would be governed by the Diem Association, made up of various private companies who would operate “nodes” in the network, and assets would be held in the Libra Reserve.

Stuart Levey, Diem Association CEO, was not focused on the new currency side during its latest public statement, but rather in the payment system that the Facebook related association is about to launch: “The Diem project will provide a simple platform for fintech innovation to thrive and enable consumers and businesses to conduct instantaneous, low-cost, highly secure transactions. We are committed to doing so in a way that promotes financial inclusion – expanding access to those who need it most, and simultaneously protecting the integrity of the financial system by deterring and detecting illicit conduct."

Libra (LBR) started aiming to be a fiat currency, but Diem Association decided to change the project and now LBR will not be a separate digital asset from the single-currency stablecoins. According to Diem's White Paper, LBR will simply be a digital composite of some of the single-currency stablecoins available on the Libra network. It will be defined in terms of fixed nominal weights, such as the Special Drawing Rights (SDR) maintained by the International Money Fund. The new goal for Diem Association is to have LBR being used as a cross-border settlement coin as well as a neutral, low-volatility option.

Given Central Banks enforts to issue the Central Bank Digital Currency (CBDC), Diem Association new approach for Libra seems to comply with all requisites for a perfect integration, not risking to end-up like Bank of Amsterdam, using fiat currency without the fiscal backing of the government.

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