Original Title: How stablecoins become money: Liquidity, sovereignty, and credit
Original Author: Sam Broner
Original Translation: Ethan, Odaily Planet Daily
Traditional finance is gradually embracing stablecoins, and their market size is continuously expanding. Stablecoins have become the optimal solution for building global fintech due to their three core advantages: high speed, near-zero cost, and high programmability. The transition between old and new technological paradigms signifies a fundamental restructuring of business operational logic; this process will also give rise to new types of risks. After all, the "self-custody model," which values digital bearer assets (rather than ledger deposits), is fundamentally different from the banking system that has existed for hundreds of years.
So, what macro structural and policy issues must entrepreneurs, regulators, and traditional financial institutions address to ensure a smooth transition? We will delve into three major challenges, providing current focus solutions for builders (whether startups or traditional institutions): the singularity of currency, the practice of dollar stablecoins in non-dollar economies, and the reinforcing effect of government bond backing on currency value.
The Challenge of Currency Singularity and Building a Unified Currency System
Currency singularity refers to the ability to freely exchange all forms of currency within an economy (regardless of the issuing entity or storage method) at face value (1:1) for payment, pricing, and contracts. Its essence is that even with multiple institutions or technologies issuing currency-like instruments, a unified currency system can still be formed. In practice, the dollars from JPMorgan Chase, Wells Fargo, Venmo account balances, and stablecoins should theoretically always maintain a strict 1:1 exchange relationship—despite differences in asset management practices among institutions and the often-overlooked importance of regulatory status. In a sense, the history of American banking is a history of continuously optimizing systems to ensure the interchangeability of the dollar.
The World Bank, central banks, economists, and regulators advocate for currency singularity because it greatly simplifies transactions, contracts, governance, planning, pricing, accounting, security, and daily payment processes. Today, businesses and individuals take currency singularity for granted.
However, current stablecoins have not yet achieved this characteristic—due to their insufficient integration with traditional financial infrastructure. If Microsoft, banks, construction companies, or homebuyers attempt to exchange $5 million in stablecoins through an automated market maker (AMM), the actual exchange amount will be less than 1:1 due to slippage caused by liquidity depth; large transactions may even trigger market volatility, resulting in users ultimately receiving less than $5 million. If stablecoins are to realize a financial revolution, this situation must change.
A unified face value exchange system is key. If stablecoins cannot operate as part of a unified currency system, their utility will be significantly diminished.
The current operational mechanism of stablecoins is as follows: issuers (such as Circle and Tether) primarily provide direct redemption services to institutional clients or users who have gone through a verification process (for example, Circle's Circle Mint supports businesses in minting and redeeming USDC; Tether allows verified users—usually with a threshold of over $100,000—to redeem directly); decentralized protocols (such as MakerDAO) achieve fixed-rate exchanges between DAI and other stablecoins (like USDC) through peg stability modules (PSM), essentially acting as verifiable redemption/conversion tools.
While these solutions are effective, their coverage is limited, and they require developers to cumbersome integrate with each issuer. If direct connections are not possible, users can only exchange between different stablecoins or exit through market execution (rather than face value settlement).
Even if businesses or applications promise extremely narrow spreads, such as strictly maintaining a 1 USDC to 1 DAI exchange (with a spread of only 1 basis point), this promise is still constrained by liquidity, balance sheet space, and operational capacity.
Central Bank Digital Currencies (CBDCs) could theoretically unify the currency system, but their associated issues—such as privacy breaches, financial surveillance, limited money supply, and slowed innovation—make existing financial system optimization models more likely to prevail.
Therefore, the core challenge for builders and traditional institutions is: how to make stablecoins (alongside bank deposits, fintech balances, and cash) truly become money. Achieving this goal will create the following opportunities for entrepreneurs:
Universal Minting and Redemption: Issuers deeply collaborate with banks, fintech, and other existing infrastructures to achieve seamless deposits and withdrawals, injecting interchangeability into stablecoins through existing systems, making them indistinguishable from traditional currencies;
Stablecoin Clearinghouse: Establish a decentralized collaborative mechanism (similar to ACH or a stablecoin version of Visa) to ensure instant, frictionless, and transparent exchanges. The current PSM is a feasible model, but expanding its functionality to achieve 1:1 settlement between participating issuers and fiat currency would be even better;
Trustworthy Neutral Collateral Layer: Migrate convertibility to widely adopted collateral layers (such as tokenized bank deposits or U.S. Treasury-backed assets), allowing issuers to flexibly explore branding, market, and incentive strategies, while users can redeem as needed;
Better Exchanges, Intent Execution, Cross-Chain Bridges, and Account Abstraction: Utilize upgraded versions of existing mature technologies to automatically match the best deposit and withdrawal paths or execute optimal rate exchanges; build multi-currency exchanges with minimal slippage while hiding complexity, ensuring users enjoy predictable rates (even with large-scale usage).
Dollar Stablecoins, Monetary Policy, and Capital Regulation
Many countries have a significant structural demand for the dollar: for residents of countries with high inflation or strict capital controls, dollar stablecoins serve as a "savings umbrella" and "global trade gateway"; for businesses, the dollar is the international accounting unit that simplifies cross-border transactions. People need a fast, widely accepted, and stable currency for income and expenditure, but current cross-border remittance costs can reach 13%, with 900 million people living in high-inflation economies without stable currencies, and 1.4 billion lacking adequate banking services. The success of dollar stablecoins not only confirms the demand for dollars but also reflects the market's desire for better currencies.
Aside from political and nationalist factors, one of the core reasons countries maintain their local currencies is to respond to local economic shocks (such as production disruptions, export declines, and confidence fluctuations) through monetary policy tools (interest rate adjustments, currency issuance).
The proliferation of dollar stablecoins may weaken the policy effectiveness of other countries—rooted in the economic concept of the Impossible Trinity: a country cannot simultaneously achieve free capital movement, a fixed/strictly managed exchange rate, and an independent domestic interest rate policy.
Decentralized peer-to-peer transfers will simultaneously impact these three policies:
Bypassing capital controls, forcing capital flow valves to fully open;
Dollarization, by anchoring the international accounting unit, undermining the effectiveness of exchange rate control or domestic interest rate policies;
Countries relying on intermediary banking systems to guide residents to use local currencies, thereby maintaining policy implementation.
However, dollar stablecoins remain attractive to other countries: lower-cost, programmable dollars can facilitate trade, investment, and remittances (the majority of global trade is priced in dollars, and dollar circulation enhances trade efficiency); governments can still tax the deposit and withdrawal processes and regulate local custodial institutions.
Yet, anti-money laundering, anti-tax evasion, and anti-fraud tools at the intermediary banking and international payment levels remain obstacles for stablecoins. Although stablecoins operate on publicly programmable ledgers, making security tools easier to develop, these tools need to be practically implemented—this presents entrepreneurs with the opportunity to integrate stablecoins into existing international payment compliance systems.
Unless sovereign nations abandon valuable policy tools for the sake of efficiency (which is highly unlikely) or give up on combating financial crime (which is even less likely), entrepreneurs need to build systems to optimize the integration of stablecoins with local economies.
The core contradiction lies in: how to embrace technology while strengthening safeguards (such as foreign exchange liquidity, anti-money laundering (AML) regulation, and macro-prudential buffers) to achieve compatibility between stablecoins and local financial systems. Specific implementation paths include:
Local Acceptance of Dollar Stablecoins: Integrate dollar stablecoins into local banks, fintech, and payment systems (supporting small, optional, and potentially taxable exchanges) to enhance local liquidity without completely disrupting local currencies;
Local Currency as a Deposit and Withdrawal Bridge: Launch local currency stablecoins with deep liquidity and deep integration into local financial infrastructure. Although a clearinghouse or neutral collateral layer is needed to initiate this (refer to the first part), once integrated, local stablecoins will become the optimal foreign exchange conversion tool and the default high-performance payment channel;
On-Chain Foreign Exchange Market: Build a matching and price aggregation system across stablecoins and fiat currencies. Market participants may need to hold interest-bearing instruments as reserves and leverage existing foreign exchange trading strategies;
Competitors to Western Union: Build a compliant offline cash deposit and withdrawal network, incentivizing agents through stablecoin settlements. Although MoneyGram has launched similar products, other institutions with established distribution networks still have room to operate;
Compliance Upgrades: Optimize existing compliance solutions to support stablecoin channels. Utilize the programmability of stablecoins to provide richer, real-time insights into cash flows.
The Impact of Government Bonds as Collateral for Stablecoins
The popularity of stablecoins stems from their near-instant, near-zero cost, and infinitely programmable characteristics, rather than government bond backing. The widespread adoption of fiat-backed stablecoins is primarily due to their easier understanding, management, and regulation. User demand is driven by practicality (24/7 settlement, combinability, global demand) and confidence, rather than collateral structure.
However, fiat-backed stablecoins may find themselves in trouble due to their success—if the issuance volume grows tenfold (for example, from the current $262 billion to $2 trillion in a few years), and regulators require them to be backed by short-term U.S. Treasury bills (T-Bills), how will this impact the collateral market and credit creation? While this scenario is not inevitable, the implications could be profound.
Surge in Short-Term Treasury Holdings
If $2 trillion in stablecoins is invested in short-term Treasuries (one of the few assets currently explicitly supported by regulators), issuers would hold about one-third of the $7.6 trillion short-term Treasury stock. This role is similar to that of current money market funds (concentrated holders of low-risk liquid assets), but the impact on the Treasury market would be more significant.
Short-term Treasuries are high-quality collateral: globally recognized low-risk, high-liquidity assets, and priced in dollars, simplifying exchange rate risk management. However, the issuance of $2 trillion in stablecoins could lead to declining Treasury yields and a contraction in the repo market's liquidity—each additional dollar of stablecoin investment represents extra bidding for Treasuries, allowing the U.S. Treasury to refinance at a lower cost or making it more difficult for other financial institutions to obtain the collateral needed for liquidity (raising their costs).
A potential solution is for the Treasury to expand short-term debt issuance (for example, increasing the short-term Treasury stock from $7 trillion to $14 trillion), but the continued growth of the stablecoin industry will still reshape the supply-demand landscape.
Concerns of a Narrow Banking Model
A deeper contradiction lies in the high similarity between fiat-backed stablecoins and "narrow banks": 100% reserves (cash equivalents) and no lending. This model is inherently low-risk (which is also why it gained regulatory approval early on), but a tenfold growth in stablecoin scale (with $2 trillion in full reserves) will impact credit creation.
Traditional banks (fractional reserve banks) only keep a small portion of deposits as cash reserves, using the rest to lend to businesses, homebuyers, and entrepreneurs. Under regulation, banks manage credit risk and loan terms to ensure that depositors can withdraw cash at any time.
The core reason regulators oppose narrow banks accepting deposits is that their money multiplier is lower (a single dollar supports a smaller scale of credit).
The economy relies on credit to function—regulators, businesses, and individuals all benefit from a more active and interconnected economic ecosystem. If only a small portion of the $17 trillion deposit base in the U.S. migrates to fiat-backed stablecoins, the low-cost funding sources for banks will shrink. Banks face a dilemma: shrink credit (reducing mortgage, auto loan, and small business credit limits) or replace lost deposits through wholesale financing (such as Federal Home Loan Bank advances) (but at a higher cost and shorter terms).
However, stablecoins are a superior currency, with a velocity far exceeding that of traditional money—each stablecoin can be sent, spent, or lent around the clock by humans or software, enabling high-frequency usage.
Stablecoins also do not need to rely on government bond backing: tokenized deposits represent another pathway—stablecoin claims remain on the bank's balance sheet but circulate in the economy at the speed of modern blockchain. In this model, deposits still reside within the fractional reserve banking system, with each stable value token continuously supporting the lending operations of the issuing institution. The money multiplier effect will return through traditional credit creation (rather than velocity), while users can still enjoy 24/7 settlement, combinability, and on-chain programmability.
When designing stablecoins, achieving the following three points will be more beneficial for economic vitality:
Retain deposits within the fractional reserve system through a tokenized deposit model;
Diversify collateral (including municipal bonds, high-rated corporate notes, mortgage-backed securities (MBS), and real-world assets (RWAs) in addition to short-term government bonds);
Incorporate built-in automatic liquidity pipelines (on-chain repurchase, third-party facilities, CDP pools) to reinject idle reserves into the credit market.
This is not a compromise with banks but an option to maintain economic vitality.
Remember: our goal is to build an interdependent, continuously growing economic system that makes loans for reasonable business needs more accessible. Innovative stablecoin designs can achieve this by supporting traditional credit creation, enhancing velocity, developing collateralized decentralized lending, and facilitating direct private lending.
Although the current regulatory environment limits tokenized deposits, the clarification of the regulatory framework for fiat-backed stablecoins opens the door for stablecoins that use bank deposits as collateral.
Deposit-backed stablecoins allow banks to enhance capital efficiency while maintaining existing customer credit and enjoying the programmability, cost, and speed advantages of stablecoins. Their operational model can be simplified as follows: when users choose to mint deposit-backed stablecoins, banks deduct the balance from the user's deposit account, transferring the liability to the stablecoin total account; stablecoins representing bearer claims priced in dollars can be sent to the user's designated address.
In addition to deposit-backed stablecoins, other solutions can also enhance capital efficiency, reduce friction in the government bond market, and increase velocity:
Facilitate banks' acceptance of stablecoins: Banks can issue or accept stablecoins, retaining the underlying asset returns and customer relationships when users withdraw deposits, while expanding payment services (without intermediaries);
Encourage individual and business participation in DeFi: As more users directly custody stablecoins and tokenized assets, entrepreneurs need to help them secure funding safely and quickly;
Expand and tokenize collateral types: Broaden the range of acceptable collateral (municipal bonds, high-rated corporate notes, MBS, real-world assets), reducing reliance on a single market, providing credit to borrowers outside the U.S. government, while ensuring collateral quality and liquidity;
Tokenize collateral to enhance liquidity: Tokenize collateral such as real estate, commodities, stocks, and government bonds to build a richer collateral ecosystem;
Collateralized Debt Positions (CDP): Adopt the MakerDAO DAI model (using diversified on-chain assets as collateral) to diversify risk while replicating the bank's monetary expansion on-chain. Such stablecoins must undergo rigorous third-party audits and transparent disclosures to verify the stability of the collateral model.
Conclusion
The challenges are great, but the opportunities are even greater. Entrepreneurs and policymakers who understand the nuances of stablecoins will shape a smarter, safer, and superior financial future.
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