Stephen Moore, a former Federal Reserve Board of Governors nominee, is planning to support a new type of stablecoin based on fractional reserve, Fortune reported on 21 October.
The stablecoin, called Frax (FRX), will be pegged to the value of the dollar, but will not be backed 1:1 by it.
The new digital currency will use a system similar to a fractional-reserve banking, which through algorithms will loan its reserves, and gain interest on it, in order to make sure the value of the currency is fixed to the dollar.
Moore has stated his belief that the new cryptocurrency can be an alternative to state-backed currency, saying:
“I’ve followed monetary policy for 30 years and always been troubled by the government monopoly on currency, which is unhealthy for markets. If I had been on the Fed, I would like to have seen encouragement for the development of cryptocurrencies like Frax. It can be a check and balance against runaway currencies.”
In September Moore’s partner Sam Kazemian, the CEO of Everpedia, explained how the Frax cryptocurrency will work.
Calling it a “algorithmic, fractional-reserve stablecoin”, Kazemian said that it will use on-chain lending to create interest cash flow, which will be used to buy back FRX if its price starts to drop.
“This is similar to how a central bank buys back currency with bonds by issuing debt.”
While Moore has expressed his belief that stablecoins can be beneficial, some financial authorities are disagreeing.
Last week the Financial Stability Board released a report, which concluded that “global stablecoins” could pose a risk to the global financial system.
The report further stated that even if all regulatory concerns could be addressed, that would not necessarily be a “guarantee of regulatory approval for a stablecoin arrangement”.