Entrepreneurs and policymakers who understand the complexities of stablecoins will have the opportunity to shape a smarter, safer, and more efficient financial future.

Written by: Sam Broner, a16z crypto investment partner

Translated by: Luffy, Foresight News

Traditional finance is beginning to integrate stablecoins, and the trading volume of stablecoins is continuously increasing. Stablecoins have become the best way to build global fintech because they offer fast transaction speeds, are nearly free, and are easy to program. The shift from old technology to new technology means we will adopt a completely different way of doing business, and this transition will also bring new risks. After all, a self-custody model that values digital bearer assets rather than registered deposits is fundamentally different from the banking system that has evolved over centuries.

So, what broader monetary structure and policy issues do entrepreneurs, regulators, and traditional finance followers need to address to ensure a smooth transition? This article will delve into three major challenges and their possible solutions, providing both startups and traditional financial institutions with current focal points: the issue of monetary singularity, dollar stablecoins in non-dollar economies, and the deep impact of government bond-backed stablecoins on financial markets.

"Monetary Singularity" and the Challenge of Building a Unified Currency System

Monetary singularity refers to the ability for all forms of currency within an economy to be interchangeable at face value (1:1) and usable for payments, pricing, and contractual agreements. This means that even with multiple issuing entities or technological carriers, the entire monetary system must maintain unity. For example, the dollars from JPMorgan Chase, Wells Fargo, and Venmo account balances, despite differences in asset management systems and regulatory attributes, should theoretically always maintain a 1:1 exchange with stablecoins. The history of the U.S. banking industry is, to some extent, a history of creating and perfecting a system of dollar substitutability.

The World Bank, central banks, economists, and regulators all advocate for monetary singularity because it greatly simplifies transactions, contracts, governance, planning, pricing, accounting, security, and everyday payment processes. For this reason, businesses and individuals take monetary singularity for granted.

However, the operation of stablecoins today is not "singular," as stablecoins have a low level of integration with existing financial infrastructure. If Microsoft, banks, construction companies, or homebuyers attempt to exchange $5 million worth of stablecoins through an automated market maker (AMM), the user will receive an exchange rate lower than 1:1 due to slippage caused by liquidity depth. A large transaction can disrupt market volatility, leading to a depreciation of the dollar value ultimately received by the user. If stablecoins are to fundamentally change the financial system, this is unacceptable.

Achieving a face value unified exchange system for stablecoins is key to integrating them into a unified currency system. If they cannot become part of a unified currency system, the practical value of stablecoins will be significantly diminished.

Current stablecoin issuers, such as Circle and Tether, primarily provide direct redemption services for institutional clients or users who have gone through a verification process, often setting minimum transaction thresholds. For example, Circle offers USDC minting and redemption services for businesses through Circle Mint (formerly Circle Account); Tether allows verified users (usually requiring over $100,000) to redeem directly; and the decentralized protocol MakerDAO allows users to exchange DAI for other stablecoins (like USDC) at a fixed rate through its Peg Stability Module (PSM), essentially a verifiable redemption/exchange tool.

While these solutions are effective, they lack widespread adoption and require integrators to cumbersome connect with each issuer. If direct integration is not possible, users can only complete stablecoin exchanges or exits through market trading (rather than face value settlement), meaning that even if businesses or applications promise to maintain a very small exchange point spread (like exchanging 1 USDC for 1 DAI within 1 basis point), their promises are still constrained by liquidity, balance sheet space, and operational capacity.

Central Bank Digital Currencies (CBDCs) could, in principle, unify the currency system, but they also face many other issues: privacy concerns, financial regulation, limited money supply, and slowed innovation, making it almost certain that a better model mimicking today’s financial system will prevail. Therefore, the challenge for builders and institutional adopters is to create a system where stablecoins can function as "pure currency," like bank deposits, fintech balances, and cash, unaffected by collateral, regulatory, and user experience differences. Entrepreneurs can attempt breakthroughs in the following directions:

• Widespread Minting and Redemption Channels: Issuers closely collaborate with banks, fintech companies, and other existing infrastructures to achieve seamless and fair entry and exit, leveraging existing systems to achieve face value substitutability, making stablecoins indistinguishable from traditional currencies.
• Stablecoin Clearinghouses: Create decentralized cooperative entities, similar to ACH or Visa in the stablecoin space, to ensure instant, frictionless, and transparently priced exchanges. MakerDAO's Peg Stability Module is a promising model, but expanding it into a face value settlement protocol across issuers and fiat currencies would significantly enhance its effectiveness.
• Developing Trusted Neutral Collateral Layers: Shift substitutability to widely adopted collateral layers (like tokenized bank deposits or packaged government bonds), allowing stablecoin issuers to innovate in branding, market strategy, and incentive mechanisms while users can unpack and redeem as needed.
• Optimizing Exchanges, Intent, Bridging, and Account Abstraction: Utilize existing or cutting-edge technology to automatically find and execute the optimal entry and exit or exchange paths, building low-slippage multi-currency exchanges while hiding complexity, ensuring stablecoin users can enjoy predictable fees even under large-scale transactions.

Dollar Stablecoins, Monetary Policy, and Capital Regulation

Many countries have a significant structural demand for dollars. For citizens living under high inflation or strict capital controls, dollar stablecoins are a lifeline, a way to protect savings and directly participate in global trade. For businesses, the dollar serves as an international unit of account, simplifying international transactions. People need a fast, widely accepted, and stable currency for consumption and savings, but today, the cost of cross-border wire transfers can reach 13%, with 900 million people living in high-inflation economies unable to access stable currency, and 1.4 billion lacking banking services. The success of dollar stablecoins not only proves the demand for dollars but also the demand for better currencies.

Apart from political and nationalist reasons, countries maintain their own currencies because it allows policymakers to adjust the economy based on local realities. When disasters impact production, key exports decline, or consumer confidence wavers, central banks can adjust interest rates or issue currency to mitigate shocks, enhance competitiveness, or stimulate consumption.

The widespread adoption of dollar stablecoins may weaken local policy autonomy. This is due to what economists call the "impossible trinity," which states that a country can only choose two out of the following three economic policies at any given time: (1) free capital movement, (2) strict foreign exchange controls, and (3) an independent monetary policy.

Decentralized peer-to-peer transfers affect all three policies in the impossible trinity. Transfers bypass capital controls, forcing capital movement levers wide open. Dollarization, by anchoring the international unit of account, weakens the effectiveness of policies managing exchange rates or domestic interest rates. Countries rely on the agent banking system to guide citizens to use their local currency, thereby enforcing the aforementioned policies.

However, dollar stablecoins remain attractive to foreigners because cheaper, programmable dollars can attract trade, investment, and remittances. Most international business is priced in dollars, so obtaining dollars can make international trade faster and more convenient. Governments can still tax import and export channels and regulate local custodians.

Yet, various regulations, systems, and tools implemented at the agent banking and international payment levels can prevent money laundering, tax evasion, and fraud. While stablecoins exist on publicly available and programmable ledgers, making it easier to build security tools, these tools must be actually constructed, providing entrepreneurs with the opportunity to connect stablecoins with existing international payment compliance infrastructure.

Unless sovereign nations are willing to give up valuable policy tools for efficiency (unlikely) and no longer care about fraud and other financial crimes (also unlikely), entrepreneurs have the opportunity to build systems that improve the integration of stablecoins with local economies.

The challenge lies in how to embrace more advanced technologies while enhancing safeguards, such as foreign exchange liquidity and anti-money laundering (AML) regulations, allowing stablecoins to integrate into local financial systems. These technological solutions will achieve:

• Promoting Local Acceptance of Dollar Stablecoins: Integrate dollar stablecoins into local banks, fintech, and payment systems, enhancing local liquidity through small, optional, and potentially taxable exchanges while avoiding complete disruption of the local currency.
• Developing Local Stablecoins as Entry and Exit Channels: Launch local currency stablecoins with deep liquidity and deep integration with local financial infrastructure. While clearinghouses or neutral collateral layers may be needed to drive widespread integration (see the first section), once integrated into financial infrastructure, local stablecoins will become the best foreign exchange tools and high-performance payment channels.
• Building On-Chain Foreign Exchange Markets: Create matching and price aggregation systems across stablecoins and fiat currencies. Market participants may need to hold reserves in interest-bearing instruments and support existing foreign exchange trading strategies through significant leverage.
• Competitors to Western Union: Establish a compliant entity retail cash access network that incentivizes agents to settle in stablecoins. While Western Union has launched similar products, there are still many opportunities for other companies with established distribution channels.
• Enhancing Compliance: Upgrade existing compliance solutions to support stablecoins. Utilize the enhanced programmability of stablecoins to provide richer and faster insights into fund flows.

The Deep Impact of Government Bonds as Collateral for Stablecoins

The adoption rate of stablecoins is continuously increasing because they are almost instant, free, and infinitely programmable currencies, rather than because they are backed by the treasury. The widespread adoption of fiat-backed stablecoins is primarily because they are the easiest to understand, manage, and regulate. User demand is driven by utility and confidence (around-the-clock settlement, composability, global demand), rather than necessarily by the collateral itself.

However, fiat-backed stablecoins may become victims of their own success: if the issuance of stablecoins grows tenfold, say from the current $262 billion to $2 trillion in a few years, and regulators require stablecoins to be backed by short-term U.S. Treasury bonds, what will happen?

Ownership of Treasury Bills

If $2 trillion of stablecoins are issued in the form of short-term Treasury bonds (one of the only assets currently recognized by regulators), the issuers will hold about one-third of the $7.6 trillion circulating U.S. Treasury bond supply. This shift would echo the role that money market funds currently play, concentrating the holding of highly liquid, low-risk assets, but with a greater impact on the Treasury bond market.

Treasury bonds are highly attractive collateral: they are widely regarded as one of the lowest-risk, most liquid assets in the world; and they are denominated in dollars, simplifying currency risk management. However, the issuance of $2 trillion in stablecoins could lower Treasury yields and reduce the active liquidity in the repurchase market. Each additional stablecoin issued means an extra bid for Treasury bonds, allowing the U.S. Treasury to refinance at a lower cost, making Treasury bonds scarcer and more expensive for the entire financial system. This could reduce the income of stablecoin issuers while making it more difficult for other financial institutions to obtain the collateral needed to manage liquidity.

One solution is for the Treasury to issue more short-term debt, such as expanding the Treasury bill supply from $7 trillion to $14 trillion, but even so, the continuously growing stablecoin industry will reshape supply and demand dynamics.

More fundamentally, fiat-backed stablecoins are similar to narrow banks. They hold 100% cash-equivalent reserves and do not provide loans. This model is inherently lower risk, which is one reason why fiat-backed stablecoins gained regulatory approval early on. Narrow banks are a trustworthy and easily verifiable system that gives token holders a clear value proposition while avoiding the full regulatory burden faced by fractional reserve banks. However, the tenfold growth of stablecoins means that $2 trillion will be entirely supported by reserves and notes, which will have a ripple effect on credit creation.

Economists are concerned that narrow banks limit the ability of capital to provide credit to the economy. Traditional banking, also known as fractional reserve banking, holds a small portion of customer deposits in cash or cash equivalents but lends out the majority of deposits to businesses, homebuyers, and entrepreneurs. Regulated banks then manage credit risk and loan terms to ensure that depositors can withdraw cash when needed. This is precisely why regulators do not want narrow banks to absorb deposits: the monetary multiplier of narrow banks (the scale of credit supported by a single dollar) is lower.

Ultimately, the economy runs on credit. Regulators, businesses, and everyday consumers all benefit from a more active, interdependent economy. If a small portion of the $17 trillion deposit base in the U.S. migrates to fiat-backed stablecoins, banks may lose their cheapest source of funding, leading to two dilemmas: a reduction in credit creation (decreasing mortgages, auto loans, and credit lines for small businesses) or replacing lost deposits with more expensive, short-term funding like advances from the Federal Home Loan Banks.

However, stablecoins as "better money" can support a higher velocity of currency circulation. A single stablecoin can be sent, spent, lent, or borrowed multiple times per minute, controlled by humans or software, operating around the clock.

Stablecoins do not necessarily need to be backed by government bonds; tokenized deposits are another solution. This allows stablecoin claims to remain on the bank's balance sheet while flowing through the economy at the speed of modern blockchain. In this model, deposits will remain within the fractional reserve banking system, and each stable value token will effectively continue to support the issuer's loan book. The multiplier effect is achieved not through velocity but through traditional credit creation, while users can still enjoy around-the-clock settlement, composability, and on-chain programmability.

When designing stablecoins, the following points should be considered:

• Retain deposits within the fractional reserve system through a tokenized deposit model;
• Expand collateral from short-term government bonds to other high-quality, highly liquid assets;
• Embed automatic liquidity pipelines (on-chain repurchase, third-party facilities, collateral debt position pools) to reinject idle reserves back into the credit market.

This is not a compromise with banks but a choice to maintain economic vitality. Remember, the goal is to sustain an interdependent, growing economy that allows businesses to easily access loans.

Innovative stablecoin designs can achieve this by supporting traditional credit creation while enhancing the velocity of currency circulation, collateralized decentralized lending, and direct private lending.

Although the regulatory environment has made tokenized deposits difficult to realize, the increased regulatory clarity around fiat-backed stablecoins has opened the door for stablecoins backed by bank deposits.

Deposit-backed stablecoins will allow banks to continue providing credit to existing customers while improving capital efficiency and offering the programmability, cost, and speed advantages of stablecoins. Deposit-backed stablecoins can be a straightforward issuance method: when users choose to mint deposit-backed stablecoins, the bank deducts the balance from the user's deposit account and transfers the deposit obligation to a consolidated stablecoin account. Stablecoins representing bearer claims on these assets, priced in dollars, can be sent to a public address of the user's choice.

In addition to deposit-backed stablecoins, other solutions will also enhance capital efficiency, reduce friction in the Treasury market, and increase the velocity of currency circulation.

• Encouraging Banks to Accept Stablecoins: By adopting or even issuing stablecoins, banks can retain the earnings from underlying assets and customer relationships when users withdraw deposits, enhancing net interest margins while avoiding the need for intermediaries in payment transactions.
• Facilitating Access to DeFi for Individuals and Businesses: As more users directly custody wealth through stablecoins and tokenized assets, entrepreneurs should help these users quickly and securely access funds.
• Expanding and Tokenizing Collateral Types: Extend acceptable collateral assets from government bonds to municipal bonds, high-rated corporate notes, mortgage-backed securities, or secured real assets, reducing reliance on a single market and providing credit to borrowers outside the U.S. government while ensuring that collateral is high-quality and liquid enough to maintain stablecoin value and user confidence.
• Moving Collateral On-Chain to Enhance Liquidity: Tokenize collateral such as real estate, commodities, stocks, and government bonds to build a richer collateral ecosystem.
• Adopting Collateralized Debt Position Models: Like MakerDAO's DAI, utilize diversified on-chain assets as collateral to spread risk and replicate the monetary expansion provided by banks on-chain, while requiring such stablecoins to undergo rigorous third-party audits and transparent disclosures to verify the stability of the collateral model.

Conclusion

The rise of stablecoins presents significant challenges, but behind each challenge lies an opportunity for innovation. Entrepreneurs and policymakers who understand the complexities of stablecoins will have the opportunity to shape a smarter, safer, and more efficient financial future.

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