How Stablecoins Become Money: Liquidity, Sovereignty, and Credit

Author: Sam Broner, a16z crypto investment partner; Translation: Jinse Finance xiaozou

The traditional financial system is beginning to accept stablecoins, and stablecoin trading volume continues to grow. Stablecoins have become the best tool for building global financial technology - they are fast, nearly free and highly programmable. The transition from old technology to new technology means that we need to fundamentally change the way business operates, and this transition will also give rise to new risks. After all, the self-custodial model denominated in digital bearer bearer assets (rather than registered deposits) is fundamentally broken with the banking system that has lasted for hundreds of years.

So what are the larger monetary structure and policy considerations that entrepreneurs, regulators and traditional financial institutions need to deal with in order to successfully navigate this transition? We will delve into three major challenges and potential solutions that should be of concern to both startups and builders of traditional financial institutions: currency singularity, US dollar stablecoins in non-US dollar economies, and the impact of high-quality currencies backed by Treasury bonds.

1."Currency Unity"and the Construction of a Unified Monetary System

Currency Unity means that all forms of money in an economy (regardless of issuer or storage method) can be exchanged at par (1:1) and can be used for payment, pricing, and contracting. This concept implies that even if monetary instruments are issued by multiple institutions or technologies, there is still a unified monetary system. In practice, your dollar balance at JPMorgan Chase, Wells Fargo, and Venmo should be exactly equivalent to a stablecoin (always 1:1). This principle still holds despite differences in the way these institutions manage their assets and important but often overlooked differences in their regulatory status. The history of the development of the US banking industry is, to some extent, the history of building and improving systems to ensure the convertibility of the dollar.

The World Bank, central banks, economists and regulators advocate for a single currency because it greatly simplifies transactions, contracts, governance, planning, pricing, accounting, security and daily payments. Today, businesses and individuals take it for granted.

However, the current operating mechanism of stablecoins does not meet the principle of "single currency" because it is poorly integrated with existing infrastructure. Suppose Microsoft, a bank, a construction company or a home buyer tries to exchange $5 million in stablecoins through an automated market maker (AMM). Due to slippage caused by the depth of liquidity, the actual exchange rate received by the user will be less than 1:1. Large transactions will impact market prices, resulting in users receiving less than $5 million in the final amount. This status quo is unacceptable if stablecoins are to truly disrupt the financial system.

Only by establishing a universal parity exchange system can stablecoins become part of a unified monetary system. If they cannot serve as a component of a unified monetary system, the utility of stablecoins will be greatly reduced.

The current operation mode of stablecoins is as follows: Issuers such as Circle and Tether mainly provide direct redemption services for their stablecoins (USDC and USDT respectively) for institutional clients or users who have passed the verification process, usually with a minimum transaction threshold. For example, Circle provides Circle Mint (formerly Circle Account) for corporate users to mint and redeem USDC; Tether allows verified users to redeem directly, usually requiring a specific amount threshold (such as $100,000); decentralized MakerDAO uses the anchored stability module (PSM) to enable users to exchange DAI for other stablecoins (such as USDC) at a fixed exchange rate, essentially acting as a verifiable redemption/exchange facility.

Although these solutions are effective, they have not yet been universally adopted, and require the integrator to cumbersomely connect to each issuer. Without direct access to these systems, users can only exchange or cash out between different stablecoins through market execution (rather than parity settlement).

In the absence of direct integration channels, companies or applications may promise to maintain extremely narrow spreads (for example, always guaranteeing that the spread of 1 USDC to 1 DAI is controlled within 1 basis point), but such commitments still depend on liquidity conditions, balance sheet space and operational capabilities.

Central bank digital currencies (CBDCs) can theoretically unify the monetary system, but the many problems associated with them - privacy concerns, financial surveillance, limited money supply, and slow innovation - make those models that can better simulate the existing financial system almost certain to win.

For builders and institutional adopters, the challenge is to design a system that enables stablecoins to be "just money" like bank deposits, fintech account balances, and cash, despite their differences in collateral, regulation, and user experience. Integrating stablecoins into the currency monolith provides entrepreneurs with the following building opportunities:

Widely accessible minting and redemption:Issuers work closely with banks, fintechs, and other existing infrastructure to achieve seamless and par access to stablecoins, making stablecoins convertible at par through existing systems, just like traditional currencies.

Stablecoin clearinghouse:Establish a decentralized collaborative mechanism (similar to ACH or Visa’s stablecoin version) to ensure instant, frictionless, and transparent exchange. The Pegged Stability Module (PSM) is a promising model, but it would be much more effective if the protocol could be expanded on this basis to ensure par settlement between participating issuers and fiat USD.

Develop a trusted and neutral collateral layer:Transfer convertibility to a widely adopted collateral layer (perhaps tokenized bank deposits or wrapped treasury bonds), allowing stablecoin issuers to experiment with branding, marketing, and incentives, while users can unwrap and redeem on demand.

Better exchanges, intent execution, cross-chain bridges, and account abstraction:Use optimized versions of existing or known technologies to automatically find and execute optimal deposit and withdrawal or exchange paths to build multi-currency exchanges with minimal slippage. At the same time, hide complexity so that stablecoin users can get predictable fees even when trading at scale.

2. US dollar stablecoins, monetary policy, and capital regulation

Many countries have huge structural demand for the US dollar. For people living in an environment of high inflation or strict capital controls, dollar stablecoins are a lifeline to maintain their livelihoods - a means of protecting savings and a direct channel to global trade. For businesses, the dollar, as an international unit of account, can simplify cross-border transactions and clarify valuations. People need a fast, widely recognized and stable currency for consumption and savings, but the current situation is: cross-border wire transfer costs can be as high as 13%, 900 million people live in high-inflation economies without access to stable currencies, and 1.4 billion people do not have access to adequate banking services. The success of dollar stablecoins not only confirms the market's demand for dollars, but also reflects the desire for high-quality currencies.

In addition to political and nationalistic factors, the core reason why countries maintain their own currencies is that it gives policymakers the ability to regulate the economy according to local conditions. When natural disasters hit production, key exports shrink, or consumer confidence is shaken, central banks can adjust interest rates or issue more money to cushion the impact, improve competitiveness, or stimulate consumption.

The widespread adoption of dollar stablecoins may weaken the ability of local policymakers to regulate the economy. The root cause is what economists call the "impossible trinity" - any country can choose only two of the following three economic policies at the same time: (1) free capital flows, (2) fixed or tightly controlled exchange rates, and (3) monetary policy that is determined by domestic conditions.

Decentralized peer-to-peer transfers will hit all policy dimensions of the impossibility trinity at the same time. Such transfers bypass capital controls, which is equivalent to forcibly opening the floodgates of capital flows; dollarization will weaken the policy effectiveness of exchange rate controls or domestic interest rates by anchoring people's assets to international accounting units. Currently, countries mainly rely on the narrow channel of the agency banking system to guide people to use their own currencies to maintain the implementation of these policies.

However, US dollar stablecoins are still attractive to other countries because cheaper, programmable dollars can promote trade, investment, and remittances. Since most international business activities are denominated in US dollars, access to US dollars can make international trade faster, more convenient, and therefore more popular. Governments can still tax deposits and withdrawals and regulate local custodians.

But the various regulations, systems, and tools currently in place at the correspondent banking and international payments levels are providing effective protection against money laundering, tax evasion, and fraud. While stablecoins exist on a public, programmable ledger (which makes security tools easier to develop), those tools still need to be built—creating an opportunity for entrepreneurs to connect stablecoins to the existing international payments compliance infrastructure that is used to maintain and enforce those policies.

Unless we expect sovereigns to abandon valuable policy tools in pursuit of efficiency gains (unlikely) or stop focusing on financial crimes such as fraud (also unlikely), entrepreneurs have an opportunity to build systems that improve how stablecoins integrate with local economies.

The real challenge is to both embrace more advanced technology and improve safeguards such as foreign exchange liquidity, anti-money laundering (AML) supervision, and other macroprudential buffers—so that stablecoins can integrate with local financial systems. These technical solutions will enable:

Local Adoption of USD Stablecoins:Integrate USD stablecoins into local banks, fintechs, and payment systems through small, optional, and potentially taxable exchange mechanisms - improving local liquidity without completely disrupting the local currency system.

Local Stablecoins as Local On-Ramps:Issue local stablecoins with deep liquidity and deep local financial infrastructure integration. While clearing houses or neutral collateral layers may be needed to achieve widespread integration, once local stablecoins are integrated into financial infrastructure, they will become the best way to trade FX and become the default high-performance payment rail.

On-chain FX Markets:Establish matching and price aggregation systems across stablecoins and fiat currencies. Market participants may need to hold interest-bearing instruments as reserves and use high leverage to support existing FX trading strategies.

MoneyGramand other competitors:Build a compliant physical retail cash deposit and withdrawal network and reward agents that use stablecoins for settlement. Although MoneyGram has recently launched similar products, there are still a lot of market opportunities for other competitors with mature distribution channels.

Compliance upgrade:Improve existing compliance solutions to support stablecoin channels. Leverage the greater programmability of stablecoins to provide richer and faster insights into fund flows.

3. Considerations on the impact of government bonds as stablecoin collateral

The adoption rate of stablecoins continues to rise, relying on their nearly instant, nearly free and infinitely programmable monetary characteristics - not the endorsement of government bonds. Fiat reserve stablecoins have only been widely adopted first because they are the easiest to understand, manage and regulate. User demand stems from practicality and credibility (settlement 24/7, composability, global demand), and does not necessarily depend on the collateral asset structure.

However, fiat currency reserve stablecoins may fall into the dilemma of "success is the result of success": if the issuance of stablecoins increases tenfold (for example, from the current $262 billion to $2 trillion in a few years), and regulators require that they must be fully collateralized by short-term U.S. Treasuries, what consequences will this cause? This scenario is at least within the scope of reasonable deduction, and its impact on the collateral market and credit creation may be extremely far-reaching.

(1) Short-term Treasury bond holdings

If the $2 trillion stablecoin is fully allocated to short-term Treasury bonds (one of the few assets currently recognized by regulators), the issuer will hold about one-third of the total outstanding short-term Treasury bonds of $7.6 trillion. This shift will amplify the existing role of money market funds - concentrated holdings of highly liquid, low-risk assets - but the impact on the Treasury bond market will be even more far-reaching.

Treasuries have a dual appeal as collateral: they are widely viewed as one of the lowest-risk and most liquid assets in the world; and they are denominated in U.S. dollars, which simplifies exchange rate risk management. But the issuance of $2 trillion in stablecoins could depress Treasury yields and reduce active liquidity in the repo market. Each additional stablecoin is an additional bid for Treasury bonds, which allows the U.S. Treasury to refinance at a lower cost, but also makes it more difficult and expensive for other entities in the financial system to obtain short-term Treasury bonds - which may compress the returns of stablecoin issuers while making it more difficult for other financial institutions to obtain collateral for liquidity management.

One ​​potential solution is for the Treasury to issue more short-term debt (for example, expanding the outstanding short-term Treasury bills from $7 trillion to $14 trillion), but even so, the continued expansion of the stablecoin industry will still reshape the supply and demand pattern.

(2)Narrow Banking Model

Fundamentally, a fiat-backed stablecoin is similar to a "narrow bank": it holds 100% of its reserves in cash equivalents and does not engage in lending. This model is inherently low-risk - which is part of the reason why it received early regulatory approval. The narrow banking system is both credible and easy to verify, giving token holders a clear claim to value while avoiding the full regulatory burden faced by fractional reserve banks. But a tenfold increase in the size of stablecoins means that $2 trillion will be entirely backed by cash and Treasury bonds - which will have a knock-on effect on credit creation.

Economists' concern about the narrow banking model is that it will limit the ability of capital to provide credit to the real economy. Traditional banking (i.e., the fractional reserve banking system) only retains a small amount of customer deposits in the form of cash or cash equivalents, while lending most of the deposits to businesses, homebuyers, and entrepreneurs. Under the watchful eye of regulators, banks manage credit risk and loan maturities to ensure that depositors have ready access to cash.

This is precisely why regulators are reluctant to allow narrow banks to absorb deposits—the money multiplier (the ratio of one dollar to multiple credit) is lower in a narrow banking system. After all, the economy runs on credit: regulators, businesses, and ordinary consumers all benefit from more active and interdependent economic activity. If even a small portion of the $17 trillion U.S. deposit base shifts to fiat-backed stablecoins, banks could face the dilemma of shrinking their cheapest source of funding. These banks will face a dilemma: either shrink credit creation (reducing mortgages, auto loans, and small business credit lines) or replace lost deposits with wholesale funding such as Federal Home Loan Bank advances—but the latter is more expensive and has shorter maturities.

But stablecoins, as better-quality money, can support higher money circulation speed. A single stablecoin can be transferred, paid, lent or borrowed multiple times per minute by humans or software - achieving uninterrupted circulation 24/7.

Stablecoins do not necessarily have to be backed by government bonds: tokenized deposits are another solution that can keep stablecoin claims on bank balance sheets while circulating in the economy at the speed of modern blockchains. In this model, deposits remain in the fractional reserve banking system, and each stable value token essentially continues to support the loan book of the issuing institution. The money multiplier effect is thus restored - not through circulation speed, but through traditional credit creation - while users still enjoy 24/7 settlement, composability and on-chain programmability.

By designing stablecoins so that they can: (1) retain deposits within the fractional reserve banking system using a tokenized deposit model; (2) expand collateral from short-term Treasury bonds to other high-quality liquid assets; and (3) have built-in automatic liquidity channels (on-chain repurchase agreements, tri-party facilities, collateralized debt position pools) to recycle idle reserves back to the credit market - this is not so much a compromise with banks as it is an alternative to maintain economic vitality.

It should be clear that our goal is to maintain an interdependent and growing economy where reasonable business needs can easily obtain loans. Innovative stablecoin designs can achieve this goal by supporting traditional credit creation while increasing money circulation speed, collateralized decentralized lending, and direct private lending.

Although the current regulatory environment makes tokenized deposits not feasible, as the regulatory framework for fiat-reserve stablecoins becomes clearer, the stablecoin model that uses the same collateral as bank deposits has become possible.

Deposit-collateralized stablecoins will allow banks to improve capital efficiency while continuing to provide credit to existing customers, and give the programmability, cost advantages and speed of stablecoins. Such stablecoins can use a simple issuance mechanism - when a user chooses to mint a deposit-collateralized stablecoin, the bank deducts the corresponding amount from their deposit balance and transfers the deposit obligation to the pooled stablecoin account. Stablecoins representing the dollar-denominated holder's rights to these assets can be sent to a public address specified by the user.

In addition to deposit-collateralized stablecoins, other solutions will also improve capital efficiency, reduce friction in the Treasury market, and accelerate the circulation of money.

Enabling Banks to Adopt Stablecoins:By adopting or even issuing stablecoins, banks can allow users to withdraw deposit funds while retaining the underlying asset returns and customer relationships, thereby improving net interest margins (NIM). Stablecoins also provide banks with the opportunity to participate directly in the payment system without intermediaries.

Empowering enterprises and individuals to embrace DeFi:As more users directly trust their wealth through stablecoins and tokenized assets, entrepreneurs should help these users to quickly and securely access funds.

Expanding the types of collateral assets and tokenizing them:Expanding eligible collateral from short-term Treasury bonds to municipal bonds, high-rated commercial paper, mortgage-backed securities (MBS) or products backed by real assets (RWA) - both reducing dependence on a single market and providing credit support to borrowers outside the U.S. government, while ensuring that the access collateral has high liquidity and high-quality characteristics to maintain the value anchor of stablecoins.

Promoting collateral on the chain to enhance liquidity:Tokenize assets such as real estate, commodities, stocks and Treasury bonds to build a richer collateral ecosystem.

Collateralized Debt Position(CDP)Model:Using CDP-based stablecoin solutions such as MakerDAO's DAI, and using diversified on-chain assets as collateral, it can both disperse risks and reproduce the monetary expansion effect of the banking system on the chain. At the same time, such stablecoins are required to undergo strict third-party audits and maintain transparency to verify the robustness of the collateral model.