Original text: The Rollup
Translation: Yuliya, PANews
In the rapidly developing era of cryptocurrency and blockchain technology, Sam Kazemian, founder of Frax Finance, and Stani Kulechov, founder of Aave, are undoubtedly two leading figures in the stablecoin field. In a latest special conversation with The Rollup, they shared insights on the rapid growth of the stablecoin industry, the innovative journey of their projects, and their views on the impending regulatory changes, particularly how stablecoins have become the focus of the industry following the volatility in the crypto market in 2022.
Today, their focus is on the GENIUS Act, a milestone legislation that could elevate stablecoins to legal tender, fundamentally changing the global landscape of the dollar. This article will delve into Sam's and Stani's insights on the stablecoin market, their expectations for the legislation, and how stablecoins will shape the future financial ecosystem. PANews has translated this dialogue.
The Stablecoin Boom and Legislative Winds
Host: The stablecoin industry is indeed gaining momentum, with several versions of legislation advancing in the House and Senate. Although the market share is currently only 1.1% of the dollar M1 supply, it seems the entire industry believes 'this is just the beginning.' As core players in the industry, how do you view this timing?
Sam Kazemian:
Frankly, I find it hard to contain my excitement. Every day I read investment reports and ETF briefs, which invariably list 'AI' and 'stablecoins' as the two hottest fields in today's world, with no other industry coming close. As a founder of a stablecoin protocol, to see this industry finally understood and accepted by the world is an amazing feeling.
We spent years researching and building Frax, starting as an experimental 'hybrid model', and now transforming into a 'legally compliant digital dollar' route that policymakers are willing to legislate in support of; this leap is enormous.
Stani Kulechov:
I completely understand Sam's feelings. Stablecoins themselves are very intuitive tools, especially in regions experiencing financial turmoil and currency depreciation — such as Argentina, African countries, and certain areas in the Middle East — the financial stability provided by stablecoins is far more attractive than their local currencies.
But even in Western countries, the value of stablecoins lies not only in their 'stability' but in their ability to make the yield of DeFi accessible and understandable for mainstream users. This is a natural evolution of fintech from 'paper currency → digital currency → on-chain assets.' It truly opens up a new paradigm for cross-border value transfer.
Do stablecoins threaten the dollar?
Host: You mentioned the value of stablecoins expanding into markets where good currency is hard to obtain, such as Argentina, African countries, and some regions in the Middle East and Asia. Regarding how stablecoins affect the status of the dollar in the global monetary system, some believe stablecoins threaten the dollar's dominance, while another view holds that stablecoins actually expand the global influence of the dollar. How do you see this issue?
Sam Kazemian:
I believe this completely misunderstands the role of stablecoins. The opposite is true: stablecoins are an 'extension' of the dollar, a global extension of its influence.
We can look at stablecoins from two historical phases:
The first phase is the ideal of 'decentralized algorithmic stablecoins' — relying purely on market mechanisms for stability, ultimately ending in collapse;
The second phase is the realistic stage we are now entering: If you anchor to the USD, then the 'most perfect' stablecoin design is actually to gain recognition from the US government — to have it directly acknowledge that your token is 'dollars'.
This is the revolutionary aspect of the GENIUS Act. It allows stablecoins to have 'legal tender qualification' for the first time, meaning when the US Treasury says 'this compliant token equals dollars', it can truly be accepted by all banks that receive dollars globally — it is no longer just an 'on-chain digital asset', but legally recognized 'dollars'.
Stani Kulechov:
The dollar is a simple and effective tool for transaction settlement, and the spread of the internet has actually expanded global dollar trade. It is expected that stablecoins will also experience a similar phenomenon in the future as internet coverage becomes broader. Achieving a more decentralized system requires time and widespread adoption; this is a long-term process. Currently, the scale of technology is reflected in expanding existing value.
In the next 2-3 years, stablecoins will become the largest asset class on-chain, and in 5-7 years, security tokens will surpass the total of stablecoins and native crypto assets. Traditional assets on-chain bring benefits to RWA (real world assets), most of which are dollar-denominated, reinforcing the concept of dollar-denominated settlement transactions but not necessarily being the final form of the future financial system. The next 10-15 years will witness a shift in transaction mediums towards new mediums with unique security and interoperability that will enhance liquidity and create more ecosystem interest, establishing new ways for future stablecoins and trading values.
Are security tokens the ultimate form of on-chain assets?
Host: Stani, you just mentioned that in the long term, stablecoins are merely transitional, and security tokens will become the largest asset class on-chain, possibly surpassing stablecoins and native crypto assets. Which specific assets do you refer to? What logic is behind this judgment?
Stani Kulechov:
This is a broad concept; what we commonly refer to as RWA (Real World Assets) actually includes security tokens. The range can cover publicly traded stocks, private equity, debt instruments (like treasury bonds, corporate bonds), to potentially structured financial products in the future.
Currently, many stablecoin reserves are supported by short-term US Treasury bonds, and these assets are already functioning on-chain. However, as on-chain interest rate tools mature, we will see higher yields and more complex risk tiers of traditional assets being brought on-chain — which is the backbone of the financial system.
In the past, many high-quality assets had poor liquidity, not because they were unattractive, but due to high entry barriers and limited distribution channels. DeFi provides a globally accessible liquidity network that can liberate these assets from a 'closed' financial structure, allowing them to be priced and traded directly on-chain. This will reshape the entire capital market structure.
The core impact of the GENIUS Act: Who can 'print dollars'?
Host: Sam, you mentioned your conversations with Senator Hagerty and other legislators. Can you talk about what new opportunities may arise once the GENIUS Act takes effect?
Sam Kazemian:
The dollar has multiple definitions in the financial system, and the Federal Reserve distinguishes different types of dollar assets through classifications like M1, M2, and M3. M1 currency refers to money that is immediately usable in the economy, including bank deposits, demand deposits, and money market funds that can be quickly converted to cash. M2 currency forms are riskier, such as dollar-denominated bank debts not insured by the FDIC (Federal Deposit Insurance Corporation); these assets resemble dollar-denominated investments rather than traditional forms of currency.
Since the 19th century, the issuance rights of M1 currency have been an exclusive privilege of federally chartered banks. They can create 'immediately available' currency, such as demand deposits and money market funds. Now, the GENIUS Act grants this ability to stablecoin issuers, allowing some entities that are not chartered banks to flexibly and innovatively issue M1 currency. This is why some banks seem poised to support this bill now after being very opposed in the past, as they prefer to maintain a monopoly on issuing M1 currency.
The GENIUS Act and payment stablecoins hold historical significance because it is the first time non-chartered banks are allowed to issue M1 currency under strict regulations. These regulations require that stablecoins must be backed by high-security assets such as money market fund securities, treasury bills, Federal Reserve reverse repos, and FDIC-insured deposits. Currently, FRXUSD is striving to become the first payment stablecoin chartered entity. This development has not yet been fully priced by the market; it may gradually gain recognition in the coming months as more news about banks issuing legal stablecoins emerges.
Stani Kulechov:
Although it seems reasonable to intuitively regulate areas like stablecoins, the key lies in the restrictions these regulations might impose, particularly on innovation. Before entering DeFi, I also worked in fintech, where at first, P2P lending and crowdfunding platforms were very active, but later regulatory frameworks forced many small startups to exit as they couldn't bear the high compliance costs.
Therefore, the key is — the GENIUS Act must set clear yet inclusive rules. It cannot push innovators out due to excessive caution. Fortunately, there is now a group of very professional legislative representatives in the crypto industry working hard to push this process forward.
Can multiple entities issue dollars and compete with each other?
Host: Traditional banks like JP Morgan and Citibank plan to issue their own stablecoins. Will there be competition among stablecoins in the future, even leading to 'dollar inflation' issues?
Stani Kulechov:
In fact, we do not see this as 'competition'. In our view, stablecoins are more like 'payment channels' or 'tracks' — each user selects the most suitable track based on the scenario, such as USDC, GHO, frxUSD, etc. In the Aave ecosystem, many users hold stablecoins for over 6 months, indicating that they are not just circulating mediums but also long-term store of value.
In Aave V4, we have also designed the 'GSM' (GHO Stable Module: an important functional module aimed at ensuring that Aave's native stablecoin GHO maintains a 1:1 convertibility with other assets.) to accept these stablecoins as underlying collateral, such as USDC and USDT, which have now been integrated. In the future, Frax can also be included through the governance process, enhancing the overall flexibility and risk resistance of the protocol.
Sam Kazemian:
I completely agree. Digital dollars are a zero-sum game. The global M1 market size is $20 trillion, while the total market cap of on-chain stablecoins currently accounts for only 1%. This means that the penetration rate of the entire industry is still extremely low.
frxUSD was launched only three months ago and is currently applying for integration into the Aave ecosystem. I believe more and more compliant stablecoins will join DeFi in the future, making the entire digital dollar system more diverse and robust. Frax's goal is to become the 'base digital dollar' in this system.
New Landscape of Digital Dollars: Frax and Aave
Host: Sam, you recently transitioned Frax from L2 to L1 and even restructured the original governance token FXS. Is this a proactive move for 'stablecoin compliance'?
Sam Kazemian:
Absolutely correct. Our overall architecture has shifted from an 'algorithmic stablecoin protocol' to a 'digital dollar issuance + settlement network.' The former Frax Share (FXS) has been renamed to Frax, becoming the gas and governance token; while frxUSD is a brand new, legally compliant payment stablecoin.
We are willing to call it 'the correct version of the Libra blueprint.' Libra initially attempted to build a globally universal digital currency but failed due to political resistance. Now, with timing and policy support in place, we aim to achieve 'compliant issuance of dollars' on the high-performance EVM chain Fraxtal for stablecoin issuance, cross-chain settlement, and value transfer.
Host: Stani, instead of choosing L1 or L2, Aave built a 'unified liquidity architecture' for V4. Why did you choose this path?
Stani Kulechov:
Although V4 has not yet been launched, related proposals were passed last year, and development is nearing completion. We believe that the types of assets on-chain in the future will be extremely diverse, and the risk curve will also be elongated. Therefore, V4 introduces the design of 'liquidity hubs + risk spokes'. Different asset classes (such as RWA, high-risk DeFi assets, etc.) can be allocated to different 'spoke markets' but still be managed centrally through 'hubs' for liquidity.
This way, the user experience becomes simpler, fund utilization becomes more efficient, and systemic risks are effectively isolated. We have also introduced a 'risk premium mechanism' whereby higher-risk collateral will pay higher interest rates, optimizing the overall borrowing cost structure.
Frax and Aave Co-Creation Concept: Allowing 'digital dollars' to directly participate in DeFi yields.
Sam Kazemian:
Then I will make a 'public proposal' once. We plan to launch the FraxNet rewards program in the Frax fintech app, allowing users holding frxUSD to earn risk-free yields comparable to US Treasury bonds in non-custodial wallets.
But I want to take it a step further — to allow frxUSD holders to deposit assets directly into Aave and earn yields through the real lending market. This would turn the combination of 'digital dollars + on-chain yields' into reality and make Aave the first DeFi yield platform linked to legal dollars.
Stani Kulechov:
This idea is excellent and showcases the modularity and composability of Aave V4. We look forward to Frax's assets joining the governance proposal process and are willing to provide relevant support to make this 'on-chain dollar yield' a reality.
