Original Source: Google
Original Title: "Beyond Stablecoins: The Evolution of Digital Currency"Editor's Note: Internet giant Google has officially announced its own native blockchain network, GCUL (Google Cloud Universal Ledger). From the introduction, we can roughly see Google's thinking: due to the explosion of stablecoins and the potential trillion-dollar prospects, Google does not want to miss the wave of the next generation of Fintech, thus creating GCUL, a network more like a stablecoin consortium chain. Rich Widmann, head of Google's web3, stated that this is the result of years of research and development, providing financial institutions with a high-performance, trusted, neutral network that supports Python-based smart contracts. Google has also written an article to explain its thoughts on GCUL, as follows:
Stablecoins experienced significant growth in 2024, with trading volume three times the original volume, organic trading volume reaching $5 trillion, and total trading volume reaching $30 trillion (data source: Visa, Artemis). In comparison, PayPal's annual transaction volume is about $1.6 trillion, and Visa's annual transaction volume is about $13 trillion. The supply of stablecoins pegged to the US dollar has grown to over 1% of the total US dollar supply (M2) (data source: rwa.xyz). This surge clearly indicates that stablecoins have carved out a place in the market.
The demand for better services is driving a significant transformation in the nearly $3 trillion payments market. Stablecoins eliminate the complexities, inefficiencies, and cost burdens of traditional payment systems, enabling seamless fund transfers between digital wallets. New solutions have also emerged in the capital markets to facilitate the payment aspects of digital asset trading, enhancing transparency and efficiency while reducing costs and settlement times.
This article explores the evolving financial landscape and proposes a solution to help traditional finance and capital markets not only catch up but also lead the trend.
Private Currency: Similarities Between Banknotes and Stablecoins
Stablecoins share many similarities with privately issued banknotes that were widely used in the 18th and 19th centuries. Banks issued their own banknotes, with varying degrees of reliability and regulation. These banknotes made transactions easier as they were more portable, easier to count, and redeemable without weighing or assessing the purity of gold. To increase trust in this new form of currency, banknotes were backed by reserve funds and promised to be redeemable for real-world assets (most commonly precious metals). The number and liquidity of transaction wallets significantly increased. Most banknotes were only recognized in the local area near the issuing bank. For remote settlements, they were exchanged for precious metals or settled between banks. In exchange for these benefits, users accepted the default risk of a single bank and the value fluctuations based on the perceived solvency of the issuing bank.
Fractional Reserve Banking and Regulation
Subsequently, the economy experienced significant growth, accompanied by financial innovation. Economic expansion required a more flexible money supply. Banks observed that not all depositors would demand redemption simultaneously, realizing they could profit by lending out a portion of their reserves. The fractional reserve banking system emerged, in which the amount of currency in circulation exceeded the reserves held by banks. Mismanagement, high-risk lending practices, fraud, and economic downturns led to bank runs, bankruptcies, crises, and depositor losses. These failures prompted increased regulation and oversight of currency issuance. With the establishment and expansion of central bank charters, these regulations created a more centralized system, improved banking practices, established stricter rules, enhanced stability, and gained public trust in the monetary system.
Today's Monetary System: Commercial Bank and Central Bank Currency
Our current monetary system adopts a dual currency model. The commercial bank money issued by commercial banks is essentially a liability (promissory note) of a specific bank, subject to comprehensive regulation and oversight. Commercial banks operate on a fractional reserve basis, meaning they only keep a portion of deposits as reserves in central bank currency and lend out the remainder. Central bank currency is a liability of the central bank and is considered risk-free. Liabilities between banks are settled electronically in central bank currency (through RTGS systems like FedWire or Target2). The public can only conduct electronic transactions using commercial bank money, while the use of cash (physical currency from the central bank) is decreasing. Within a single currency, all commercial bank money is interchangeable. The focus of bank competition is on services rather than the quality of the money they provide.
Today's Financial Infrastructure: Fragmented, Complex, Expensive, and Slow
With the rise of computers and networks, currency transactions are recorded electronically, eliminating the need for cash. Liquidity, accessibility, and product innovation have reached new heights. Solutions vary by country/region, and cross-border transactions still face economic and technical challenges. Correspondent banking requires idle funds to be left in partner banks, while the complexity of infrastructure forces banks to limit partnerships. As a result, banks are withdrawing from correspondent relationships (a 25% reduction over the past decade), leading to longer payment chains, slower payment speeds, and higher payment costs. Convenient solutions that strip away these complexities (such as global credit card networks) are costly for businesses facing payment fees. Moreover, most improvements are concentrated at the front end, with slow progress in innovating payment processing infrastructure.
The fragmented financial system increases trade friction and slows economic growth. The Economist estimates that by 2030, the macroeconomic impact of fragmented payment systems on the global economy will reach an astonishing $2.8 trillion loss (2.6% of global GDP), equivalent to over 130 million jobs (4.3%).
Fragmentation and complexity also harm financial institutions. In 2022, the annual maintenance cost of outdated payment systems was $37 billion, expected to rise to $57 billion by 2028 (IDC Financial Data Insights). Additionally, the inability to provide real-time payments, inefficiencies, security risks, and extremely high compliance costs exacerbate direct revenue losses (75% of banks struggle to implement new payment services in outdated systems, with 47% of new accounts at fintech companies and neobanks).
High payment fees hinder the international business growth of companies, affecting profitability and valuation. Companies processing large volumes of payments are highly motivated to reduce their payment processing costs. For example, if Walmart could reduce its annual payment processing costs of about $10 billion (assuming an average payment processing fee rate of 1.5% on $700 billion in revenue) to $2 billion, it could increase earnings per share and stock price by over 40%.
New Infrastructure, New Possibilities
Experiments in the Web3 space have given rise to promising technologies such as Distributed Ledger Technology (DLT). These technologies provide a new way for financial system transactions by offering a globally available, always-on infrastructure, with advantages including: support for multiple currencies/assets, atomic settlement, and programmability. The financial industry's model has begun to shift from isolated databases and complex messaging to transparent, immutable shared ledgers. These modern networks simplify interactions and workflows, eliminate independent, costly, and slow reconciliation processes, and remove technological complexities that hinder speed and innovation.
Disruptors: Stablecoins
Stablecoins operate on decentralized ledgers, enabling near-instant, low-cost global transactions, unrestricted by the limitations of traditional banking (time, geography). This freedom and efficiency have driven their explosive growth. High interest rates also make them very profitable. Profits, growth, and increasing confidence in the underlying technology are attracting investments from venture capital and payment processing companies. Stripe acquired Bridge, allowing online merchants to accept stablecoin payments. Additionally, Visa has provided functionalities for partner payments and settlements using stablecoins. Retailers (such as Whole Foods) are accepting and even encouraging stablecoin payments to reduce transaction fees and receive payments instantly (Federal Reserve Bank of Atlanta article). Consumers can obtain stablecoins in seconds (Coinbase integrated with ApplePay).
Stablecoins face many challenges.
Regulation: Unlike traditional currencies, stablecoins lack comprehensive regulation and oversight. The U.S. is tightening regulatory measures, and the EU is applying electronic money rules to electronic money tokens through MICAR. Deposit protection measures do not apply to stablecoins.
Compliance: Ensuring compliance with anti-money laundering and sanctions laws is a challenging task when anonymous accounts transact on public blockchains (in 2024, 63% of the $51.3 billion in illegal transactions on public blockchains involved stablecoins).
Fragmentation: The variety of stablecoins operating on different blockchains requires complex bridging and conversion. This fragmentation leads to reliance on automated bots for arbitrage and liquidity management, with bot accounts accounting for nearly 85% of total trading volume (organic trading volume is $5 trillion, while total trading volume is $30 trillion).
Infrastructure Scalability: To achieve widespread use, the underlying technology must handle a large volume of transactions. In 2024, there were approximately 6 billion stablecoin transactions, while ACH transactions were about an order of magnitude higher, and card transactions were two orders of magnitude higher.
Economics/Capital Efficiency: Currently, banks expand the money supply by lending out multiples of their reserves, driving economic growth. The widespread use of stablecoins would shift reserves from banks, significantly reducing their lending capacity and directly impacting profitability.
The direct challenges faced by stablecoins (issuer credibility, regulatory ambiguity, compliance/fraud, and fragmentation) are similar to those of early privately issued banknotes.
The large-scale adoption of fully reserved stablecoins would not only disrupt the banking and financial sectors but also the current economic system. Commercial banks provide credit, money, and liquidity to support economic growth; central banks monitor and influence this process through monetary policy to directly manage inflation and indirectly pursue other policy goals such as employment, economic growth, and welfare. The significant transfer of reserve funds from banks to stablecoin issuers could reduce credit supply and increase credit costs. This would suppress economic activity, potentially lead to deflationary pressures, and challenge the effectiveness of monetary policy implementation.
Stablecoins offer clear benefits to users, especially in cross-border transactions. Competition will drive innovation, expand use cases, and stimulate growth. Increased transaction volume and higher adoption rates of stablecoin wallets may lead to reduced deposits, decreased lending, and lower profitability for traditional banks. As regulation matures, we may see the emergence of partially reserved stablecoin models that blur the lines between them and commercial bank money, further intensifying competition in the payments space.
The Innovator's Dilemma
Now, institutions and individuals can choose traditional payment systems, which, while familiar and lower risk, are slow and costly; or they can opt for modern systems, which are fast, cheap, convenient, and rapidly improving, but come with new risks. They are increasingly choosing modern systems.
Payment service providers also have the right to choose. They can view these innovations as niche markets that will not affect their core traditional financial customer base and focus on incremental improvements to existing products and systems. Alternatively, they can leverage their brand, regulatory experience, customer base, and networks to dominate in the new payment era. By adopting new technologies and forming strategic partnerships, they can meet evolving customer expectations and drive business growth.
Achieving Better Payments Through Evolution (Not Revolution)
We can achieve a new generation of payments—global, always-on, multi-currency, and programmable—without reinventing money, simply by reimagining the infrastructure. Commercial bank money and robust traditional financial regulation address the issues of stability, regulatory clarity, and capital efficiency in the existing financial system. Google Cloud can provide the necessary infrastructure upgrades.
Google Cloud Universal Ledger (GCUL) is a brand-new platform for creating innovative payment services and financial market products. It simplifies the management of commercial bank money accounts and facilitates transfers through distributed ledgers, enabling financial institutions and intermediaries to meet the demands of the most discerning customers and effectively compete.
GCUL is designed to provide a simple, flexible, and secure experience. Let’s break it down:
- Simple: GCUL is offered as a service, accessible via a single API, simplifying the integration of multiple currencies and assets. There is no need to build and maintain infrastructure. Transaction fees are stable and transparent, billed monthly (unlike the highly volatile prepaid cryptocurrency transaction fees).
- Flexible: GCUL offers unparalleled performance and can scale according to any application scenario. It is programmable, supporting payment automation and digital asset management. It integrates with the wallet of your choice.
- Secure: GCUL is designed with compliance in mind (e.g., accounts that pass KYC verification, transaction fees that comply with outsourcing regulations). It operates as a private, permissioned system (which may become more open as regulations evolve), leveraging Google’s secure, reliable, durable, and privacy-focused technology.
GCUL offers significant advantages for customers and financial institutions. Customers can enjoy near-instant transactions (especially for cross-border payments) while benefiting from low fees, 24/7 availability, and payment automation. On the other hand, financial institutions can benefit by reducing infrastructure and operational costs through the elimination of reconciliation, minimizing errors, simplifying compliance processes, and reducing fraud. This frees up resources for developing modern products. Financial institutions leverage their existing advantages (such as customer networks, licenses, and regulatory processes) to maintain comprehensive control over customer relationships.
Payments as a Catalyst for Capital Markets
The situation in capital markets is similar to that in payments, having undergone significant transformation through the adoption of electronic systems. Electronic trading was initially resisted but ultimately transformed the entire industry. Real-time price information and broader access channels improved liquidity, accelerating execution speed, narrowing spreads, and lowering per-transaction costs. This, in turn, stimulated further growth in market participants (especially individual investors), product and strategy innovation, and overall market size. Despite the much lower price per transaction, the entire industry has seen significant expansion, with advancements in electronic and algorithmic trading, market making, risk management, data analysis, and more.
However, challenges remain in payments. Due to the limitations of traditional payment systems, settlement cycles can take days, necessitating working capital and collateral for risk management. The inherent friction in connecting traditional infrastructure with new infrastructure hampers the digital assets and new market structures supported by distributed ledger technology. The existence of independent asset systems and payment systems has long perpetuated fragmentation and complexity, hindering the industry from fully benefiting from innovation.
Google Cloud Universal Ledger (GCUL) addresses these challenges by providing a simplified and secure platform to manage the entire digital asset lifecycle (e.g., bonds, funds, collateral). GCUL enables seamless and efficient issuance, management, and settlement of digital assets. Its atomic settlement feature minimizes risk and enhances liquidity, unlocking new opportunities in capital markets. We are exploring how to leverage secure exchange mediums backed by bankruptcy-protected assets provided by regulators (such as central bank deposits or money market funds) to transfer value. These initiatives help achieve true 24/7 capital flow and drive the next wave of financial innovation.
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