The Stablecoin Paradox: Why Stablecoins May Hinder Their Own Adoption in the U.S.

Author: DeFi Cheetah Source: X, @DeFi_Cheetah Translation: Shan Ouba, Golden Finance

The rise of blockchain finance is stimulating debates about the future of money, covering topics that were previously limited to academia and central bank policy circles. Stablecoins - digital assets designed to be equivalent to fiat currencies - have become the main bridge between traditional finance and decentralized finance. Although many are optimistic about the widespread adoption of stablecoins, promoting stablecoins may not be the best option from the US perspective because it has the potential to disrupt the dollar's money creation mechanism.

1. Key points

Stablecoins are actually competing with the total amount of deposits in the US banking system. As a result, the ability to create money based on the fractional reserve model is undermined, and the effectiveness of the Federal Reserve's regulation of money supply through means such as open market operations will also be discounted - because the total deposits in the banking system have decreased.

Specifically, the money creation effect of stablecoins is marginal because most stablecoins are backed by reserves of shorter-term U.S. Treasuries (i.e., less sensitive to interest rate changes). In contrast, banks have far greater money creation capacity because their liabilities are typically made up of longer-term debt instruments. Therefore, the popularity of stablecoins within the United States may undermine the transmission mechanism of monetary policy.

This problem still exists even if stablecoins do increase demand for Treasuries, thereby reducing the refinancing costs of the U.S. government.

Unless the U.S. dollar collateral assets of stablecoins flow back into the banking system through bank deposits, the money creation capacity will not remain unchanged - but from the perspective of stablecoin issuers, this approach is not cost-effective because it means giving up risk-free Treasury bond returns.

Banks also cannot use stablecoins as a substitute for fiat currency deposits because stablecoins are issued by private institutions, which increases counterparty risk.

The US government will also not take the initiative to return the funds flowing into the stablecoin system to the banking system, because this money is obtained by issuing treasury bonds at different interest rates. The government needs to pay the interest rate difference between the treasury bond coupon and the bank deposit rate, which will undoubtedly increase the burden of fiscal expenditure.

The most critical thing is that the self-custody feature of stablecoins determines that it is incompatible with bank deposits: the custody rights of all digital assets do not belong to banks, and only on-chain assets can achieve self-custody. Therefore, the greater the influence of stablecoins in the United States, the greater the interference with the traditional money creation system.

The only way to make stablecoins compatible with money creation is to allow the issuer of stablecoins to operate as a bank. But this is undoubtedly a very challenging issue, involving the game between regulatory compliance and the vested interests of giants.

Of course, from the perspective of the US government, it is beneficial to promote the development of stablecoins on a global scale: It helps spread the dominance of the US dollar, strengthen the narrative of the US dollar as a reserve currency, improve the efficiency of cross-border payments, and provide assistance to overseas users who need stable currencies. However, it will be more difficult to promote stablecoins in the United States without damaging the mechanism of money creation.

To analyze this issue more thoroughly, this article will dismantle the internal logic of stablecoins from multiple angles:

2. Fractional Reserve Bank vs Full Reserve Stablecoin

2.1 Classic Money Multiplier Model

In mainstream monetary theory, money creation relies heavily on the fractional reserve system. A simplified model shows how commercial banks can amplify base money (M0) to broader monetary concepts such as M1 and M2. If R is the reserve requirement ratio, then the money multiplier m ≈ 1/R.

For example, if banks must hold 10% of deposits as reserves, the multiplier m can be 10. This means that $1 injected into the system (e.g., through open market operations) may eventually result in $10 in new deposits.

• M0: Base money (cash in circulation + reserves held at the central bank)

• M1: Cash + demand deposits + checkable deposits

• M2: M1 + time deposits, money market accounts, etc.

In the United States, M1 is about 6 times M0. This expansion mechanism underpins modern credit creation and is the basis for productive capital financing such as mortgages and corporate loans.

2.2 Stablecoins as “Narrow Banks”

Stablecoins issued on public chains (such as USDC, USDT) usually promise to be backed by fiat currencies, government bonds, or other quasi-cash assets at a 1:1 ratio. Therefore, these issuers (officials) do not make loans to customers’ deposits like commercial banks do. Instead, they provide liquidity by issuing fully redeemable “real dollar” tokens on the chain. From an economic structural point of view, these stablecoins are more like “narrow banks”: that is, they use 100% of highly liquid assets to support their deposit-like liabilities.

From a purely theoretical perspective, the money multiplier of such stablecoins is close to 1: unlike commercial banks, when a stablecoin issuer accepts $100 million in deposits and holds $100 million in government bonds, it does not create additional money. However, if stablecoins are widely accepted, they can play a similar function to money. As we will discuss later, stablecoins may release underlying funds (such as those obtained from Treasury auctions), thereby indirectly expanding the money supply.

3. Impact of Monetary Policy

3.1 Central Bank Master Account and Systemic Risk

Access to the Fed’s master account is a key step for stablecoin issuers, as financial institutions with such accounts enjoy several advantages:

• Direct access to central bank money: Master account balances are the safest form of liquidity (forming part of M0).

• Access to the Fedwire system: Large transactions can achieve near-instant settlement.

• Use of the Fed’s standing tools: Potential liquidity support mechanisms including the discount window or interest on excess reserves (IOER).

However, giving stablecoin issuers direct access to these facilities raises two main “excuses” or concerns:

• Operational risk: Integrating a live blockchain ledger with the Federal Reserve’s infrastructure could introduce entirely new system vulnerabilities.

• Monetary policy control ability: If large amounts of funds were to shift to 100%-reserve stablecoins, it would irreversibly change the Federal Reserve’s ability to regulate credit conditions through the fractional reserve system.

Therefore, traditional central banks may resist placing stablecoin companies on an equal footing with commercial banks, fearing that this would undermine their ability to regulate credit and liquidity in times of crisis.

3.2 "Net New Money" Caused by Stablecoins

When the issuer of a stablecoin holds a large amount of U.S. Treasury bonds or other government debt, a subtle but important effect will occur: the double payment effect - that is, the U.S. government can use the public's funds for refinancing expenditures, while these stablecoins are still circulating in the market and used like money.

Therefore, even if it does not have a high multiplier effect like the fractional reserve system, stablecoins can at most double the actual circulation of disposable dollars to a certain extent. From a macro perspective, this means that stablecoins inject government debt into the daily transaction system, opening up another transmission channel.

4. Fractional reserves, hybrid models and the future of stablecoins

4.1 Will stablecoin issuers imitate fractional reserve banks?

There is speculation that in the future, stablecoin issuers may be allowed to use part of their reserve funds for lending, thereby creating money like commercial banks. This will require a strong regulatory framework, including banking licenses, FDIC insurance, and capital adequacy standards (such as the Basel Accord). Although there have been some legislative proposals (such as the "GENIUS Act") to provide a path for stablecoin issuers to become quasi-bank institutions, these proposals generally emphasize 1:1 reserve requirements, which means that there will be no shift to a partial reserve model in the short term.

4.2 Central Bank Digital Currency (CBDC)

A more radical alternative is to develop a central bank digital currency (CBDC), that is, a central bank issues digital liabilities directly to consumers and businesses. CBDC has the potential to combine the programmability of stablecoins with the trustworthiness of sovereign currencies. However, for commercial banks, the risk of disintermediation cannot be ignored: if the public can open digital accounts directly at the central bank, it may lead to a large loss of deposits in the banking system, limiting its lending capacity.

4.3 Potential impact on the global liquidity cycle

In the current context, the top stablecoin issuers (such as Circle and Tether) hold tens of billions of dollars in short-term U.S. Treasuries, and the fluctuations in stablecoin demand may have an impact on the U.S. money market that cannot be ignored. For example, a round of stablecoin "redemption tide" may force issuers to sell large amounts of Treasury bonds, pushing up yields and potentially disrupting short-term financing markets. Conversely, a surge in the issuance of stablecoins may also depress T-Bill yields. This mutual influence suggests that if stablecoins reach a scale comparable to that of large money market funds, they may "penetrate" into the pipelines of the traditional monetary system.

5. Conclusion

Stablecoins are at the intersection of technological innovation, regulatory scrutiny, and traditional monetary theory. They give "money" programmability and universal accessibility, establishing a new paradigm for payment and settlement. However, these advantages also leverage critical balances in the existing financial system - especially the fractional reserve lending mechanism and the central bank's monetary control capabilities.

In short, stablecoins may not replace commercial banks, but they will continue to put pressure on the traditional banking industry to accelerate innovation. As their scale grows, central banks and financial regulators face complex challenges such as how to balance global liquidity management, regulatory responsibilities, and the economic multiplier effect of relying on fractional reserves. The future direction of stablecoins - whether it is stricter regulation, fractional reserve systems, or inclusion in the larger framework of CBDCs - will determine the future of digital payments and may also change the evolution of global monetary policy.

Ultimately, stablecoins highlight a fundamental contradiction: the tug-of-war between the efficiency gains of a more direct, fully-reserved system and the economic growth momentum of a partial-reserve model. To walk steadily on this new frontier, we still need to rely on rigorous economic analysis to find the best balance between transaction efficiency and money creation.