Former Fed Nominee Stephen Moore Backs Fractional Reserve Stablecoin

Stephen Moore, who backed out from a nomination to the Federal Reserve Board of Governors, is now trying to upend central banks.

On Monday, the economist announced his involvement with Frax, a stablecoin backed by a fractional reserve.

Coming via a partnership with Sam Kazemian, CEO of Wikipedia rival Everpedia, the stablecoin would be pegged to the value of the dollar but not necessarily backed one-for-one with greenbacks.

How? Kazemian explained in an interview with Crowdfund Insider last month that Frax will be managed in a system similar to what traditional economists understand as fractional-reserve banking.

In this system, only a fraction of bank deposits is backed with real cash-on-hand which is available for withdrawal at any time. This is done to free up the amount of capital on hand by the banking institution for other profitable endeavors.

Tying this back to Frax, Kazemian said the stablecoin will be an “algorithmic, fractional-reserve stablecoin.” This suggests part of the value backing Frax will be deployed in profit-earning endeavors to ultimately increase the wealth of the system.

“Frax uses on-chain lending (similar to compound.finance) to create interest cash flow that is used to buy back FRX stablecoins if the price drops,” said Kazemian, adding:

“This is similar to how a central bank buys back currency with bonds by issuing debt.”

How these complex dynamics for lending and borrowing will ultimately work has yet to be revealed by Kazemian and his team in detail. He did say that the team could be releasing a minimum viable product of Frax by year’s end.

Most other stablecoins use one-to-one fiat reserves to retain their value and stability. Tether USDT$1.0001 is probably the most well-known example of this kind of coin.

In a post on an ethereum research forum, an account linked to Kazemian described the project as follows:

“The central aim of the Frax protocol is to use the interest earned on defi money markets as an algorithmic layer of stability, essentially another layer of monetary policy over Dai/Tether (whatever is used as collateral).”

Backing a stablecoin with a fractional reserve has been done before, including with Saga (SGA), a non-anonymous stablecoin tied to International Monetary fund assets and governed by a board of economic notables.

Moore called his cryptocurrency project a “check and balance against runaway currencies” in an interview with Fortune.

Fed up with the Fed

Frax is a bet on the power of privately-held alternative currencies, and, so too, a belief that central banks are behind the times, Moore said in a statement:

“The days of government monopoly of currencies by central bankers is coming to a screeching halt.”

Moore’s almost-colleagues at the Federal Reserve have not been as crypto-bullish. Though the central bank has been engaging in an internal debate over the merits of issuing a digital dollar, many high-level officials have publicly met competing cryptocurrencies with open disdain.

Fed governor Lael Brainard, speaking about Facebook’s Libra and other “global stablecoins,” last week called a successful stablecoin a worldwide threat to monetary stability:

“If a large share of domestic households and businesses come to rely on a global stablecoin not only as a means of payment but also as a store of value, this could shrink demand for physical cash and affect the size of the central bank's balance sheet.”

In May, Moore, a former Wall Street Journal editorial board member and chief economist at the Heritage Foundation, withdrew from the Fed confirmation process, citing the intrusions on his family and personal life.

Stephen Moore image by Gage Skidmore via Flickr