By Sam Broner a16z
Compiled by | TechFlow
Traditional finance is gradually incorporating stablecoins into its system, and the transaction volume of stablecoins is also growing. Stablecoins have become the best tool for building global financial technology due to their fast, almost zero cost and programmable characteristics.
However, the transition from traditional technology to emerging technology not only means a fundamental change in business models, but also brings with it new risks. After all, the self-custody model based on digital registered assets is fundamentally different from the traditional banking system that has evolved over hundreds of years.
So, what are the broader monetary structure and policy issues that entrepreneurs, regulators, and traditional financial institutions need to address during this transition?
This article will delve into three core challenges and their possible solutions to provide direction for entrepreneurs and builders of traditional financial institutions: the issue of currency uniformity; the application of US dollar stablecoins in non-US dollar economies; and the potential impact of a better currency backed by government bonds.
1. “Currency Unity” and the Construction of a Unified Monetary System
"Monetary uniformity" refers to the fact that in an economy, all forms of money are interchangeable at a 1:1 ratio and can be used for payment, pricing, and contract performance, regardless of who issues the money or where it is stored. Monetary uniformity means that even if there are multiple institutions or technologies issuing currency-like instruments, the entire system is still a unified monetary system. In other words, whether it is a Chase deposit, a Wells Fargo deposit, a Venmo balance, or a stablecoin, they should always be exactly equivalent at a 1:1 ratio. This uniformity is maintained despite differences in how institutions manage assets and their regulatory status. The history of the U.S. banking industry is, in part, a history of creating and improving systems to ensure the fungibility of the dollar.
The global banking industry, central banks, economists and regulators all promote the uniformity of money because it greatly simplifies transactions, contracts, governance, planning, pricing, accounting, security and daily economic activities. Today, businesses and individuals have become accustomed to the uniformity of money.
However, stablecoins are not fully integrated into the existing financial infrastructure, so "monetary uniformity" cannot be achieved. For example, if Microsoft, a bank, a construction company, or a home buyer tries to exchange $5 million in stablecoins through an automated market maker (AMM), the user will not be able to complete the exchange at a 1:1 ratio due to slippage caused by insufficient liquidity depth, and the final amount will be less than $5 million. If stablecoins are to revolutionize the financial system, this situation is unacceptable.
A universal “par redemption system” could help stablecoins become part of a unified monetary system. If this goal cannot be achieved, the potential value of stablecoins will be greatly reduced.
Currently, stablecoin issuers such as Circle and Tether mainly provide direct exchange services for stablecoins (such as USDC and USDT) for institutional clients or users who have passed the verification process. These services usually have 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, and the threshold is usually above a certain amount (such as $100,000). The decentralized MakerDAO allows users to exchange DAI for other stablecoins (such as USDC) at a fixed exchange rate through the Peg Stability Module (PSM), thus acting as a verifiable redemption/exchange mechanism.
While these solutions work to some extent, they are not universally available and require aggregators to interface with each issuer individually. Without direct integration, users can only convert between stablecoins or convert stablecoins to fiat through market execution, rather than settlement at par.
Without direct integration, a business or application could commit to maintaining tight exchange spreads — for example, always exchanging 1 USDC for 1 DAI and keeping the spread to within 1 basis point — but such a commitment would still depend on liquidity, balance sheet space, and operational capabilities.
In theory, central bank digital currencies (CBDCs) could unify the monetary system, but the many problems associated with them (such as privacy concerns, financial surveillance, limited money supply, and slowed innovation) mean that better models that mimic the existing financial system will almost certainly win out.
The challenge for builders and institutional adopters, therefore, is to build systems that enable stablecoins to become “real money” like bank deposits, fintech balances, and cash, despite their heterogeneity in collateral, regulation, and user experience. The goal of bringing stablecoins into the monetary uniformity provides entrepreneurs with a huge opportunity to grow.
Wide availability of minting and redemption
Stablecoin issuers should work closely with banks, fintech companies and other existing infrastructure to enable seamless on- and off-ramps for deposits and withdrawals at par. This will provide stablecoins with par fungibility through existing systems, making them indistinguishable from traditional currencies.
Stablecoin Clearing Center
Establish a decentralized cooperative — similar to ACH or Visa for stablecoins to ensure instant, frictionless, and fee-transparent conversions. The Peg Stability Module is a promising model, but expanding the protocol to ensure par settlement between participating issuers and fiat currencies would significantly increase the functionality of stablecoins.
Trusted and neutral collateral layer
Move the fungibility of stablecoins to a widely adopted collateral layer (such as tokenized bank deposits or wrapped treasuries). This way, stablecoin issuers can innovate in branding, market strategies, and incentives, while users can unwrap and convert stablecoins as needed.
Better exchanges, intent matching, cross-chain bridges, and account abstraction
Automatically find and execute deposits, withdrawals, or exchanges at the best exchange rate using improved versions of existing or known technologies. Build multi-currency exchanges to minimize slippage while hiding complexity so that stablecoin users can enjoy predictable fees even at scale.
US dollar stablecoin: a double-edged sword of monetary policy and capital regulation
2. Global Demand for USD Stablecoins
In many countries, the structural demand for the U.S. dollar is enormous. For citizens living with high inflation or tight capital controls, a U.S. dollar stablecoin is a lifeline — protecting savings while providing direct access to global business networks. For businesses, the dollar, as an international unit of account, simplifies and increases the value and efficiency of international transactions. However, the reality is that cross-border remittance fees are as high as 13%, 900 million people around the world live in high-inflation economies without access to stable currencies, and 1.4 billion people are underbanked. The success of a U.S. dollar stablecoin reflects not only the demand for the dollar, but also the desire for a “better money.”
For reasons ranging from politics to nationalism, countries often maintain their own monetary systems because it gives policymakers the ability to adjust their economies to local realities. When disasters hit production, key exports fall or consumer confidence falters, central banks can adjust interest rates or issue currency to cushion the shock, boost competitiveness or stimulate consumption.
However, widespread adoption of USD stablecoins could weaken the ability of local policymakers to regulate their local economies. This impact can be traced back to the “impossible triangle” theory in economics, which states that a country can only choose two of the following three economic policies at any time:
1. Free capital flow;
2. Fixed or strictly managed exchange rates;
3. Independent monetary policy (autonomy in setting domestic interest rates).
Decentralized peer-to-peer transactions will have an impact on all three policies of the "Impossible Trinity": transactions bypass capital controls, leaving the levers of capital flows fully open; "dollarization" may weaken the policy effects of managing exchange rates or domestic interest rates by anchoring citizens' economic activities to the international unit of account (the US dollar).
Decentralized peer-to-peer transfers have implications for all the policies in the Impossible Triangle. Such transfers bypass capital controls, forcing the levers of capital flows to open wide. Dollarization can weaken the impact of managed exchange rate or domestic interest rate policies by pegging citizens to an international unit of account. Countries rely on the narrow channel of the agency banking system to channel citizens into local currencies to implement these policies.
Although a USD stablecoin may pose a challenge to local monetary policy, it is still attractive in many countries. The reason is that a low-cost and programmable dollar brings more trade, investment, and remittance opportunities. Most international commerce is denominated in US dollars, and access to the US dollar can make international trade faster, more convenient, and therefore more frequent. In addition, governments can still impose taxes on deposit and withdrawal channels and supervise local custodians.
Currently, various regulations, systems and tools have been implemented at the correspondent banking system and international payment level to prevent money laundering, tax evasion and fraud. While stablecoins rely on open, transparent and programmable ledgers, which facilitates the construction of security tools, these tools need to be truly developed. This provides entrepreneurs with an opportunity to connect stablecoins to the existing international payment compliance infrastructure to maintain and enforce relevant policies.
Unless we assume that sovereigns will give up valuable policy tools for the sake of efficiency (highly unlikely) and completely ignore fraud and other financial crime (almost impossible), there is still an opportunity for entrepreneurs to develop systems that improve how stablecoins are integrated into local economies.
In order for stablecoins to be smoothly integrated into the local financial system, it is key to embrace better technology while improving safeguards such as foreign exchange liquidity, anti-money laundering (AML) supervision and other macroprudential buffers. Here are some potential technical solutions:
Local Acceptance of USD Stablecoins
Integrating USD stablecoins into local banks, fintechs, and payment systems, and supporting small, optional, and potentially taxable exchanges, would improve local liquidity without completely undermining the local currency.
Local stablecoin as a deposit and withdrawal channel
Launch local currency stablecoins with deep liquidity and deep integration with local financial infrastructure. When launching broad integration, clearinghouses or neutral collateral layers may be required (see Part 1 above). Once local stablecoins are integrated, they will become the best choice for foreign exchange transactions and the default option for high-performance payment networks.
On-chain foreign exchange market
Create a matching and price aggregation system across stablecoins and fiat currencies. Market participants may need to support existing foreign exchange trading models by holding reserves of yield instruments and adopting high leverage strategies.
Challenging MoneyGram's Competitors
Build a compliant, physical retail cash deposit/withdrawal network and encourage agents to settle in stablecoins through an incentive mechanism. Although MoneyGram recently announced a similar product, there are still a lot of opportunities for other players with mature distribution networks.
Improved compliance
Upgrade existing compliance solutions to support stablecoin payment networks. Leverage the programmability of stablecoins to provide richer and faster insights into fund flows.
Through these two-way improvements in technology and regulation, the US dollar stablecoin can not only meet the needs of the global market, but also achieve deep integration with the existing financial system during the localization process while ensuring compliance and economic stability.
3. Potential Impact of Treasury Bonds as Stablecoin Collateral
Stablecoins are popular not because they are backed by government bonds, but because they offer an almost instant, almost free transaction experience and unlimited programmability. Fiat-backed stablecoins were the first to be widely adopted because they are the easiest to understand, manage, and regulate. The core drivers of user demand are the utility and trust of stablecoins (such as 24/7 settlement, composability, global demand), not the nature of their collateral assets.
However, fiat-backed stablecoins may face challenges as a result of their success: What would happen if stablecoin issuance grew tenfold in the coming years — from $262 billion today to $2 trillion — and regulators required that stablecoins be backed by short-term U.S. Treasuries (T-bills)? This scenario is not impossible, and the implications for collateral markets and credit creation could be profound.
T-bills held
If $2 trillion in stablecoins were backed by short-term U.S. Treasuries — which are now widely recognized as a compliant asset by regulators — this would mean that stablecoin issuers would hold a third of the roughly $7.6 trillion short-term Treasury market. This shift would be similar to the role of money market funds in the current financial system — concentrating on liquid, low-risk assets, but its impact on the Treasury market could be even greater.
T-bills are considered one of the safest and most liquid assets in the world, and they are denominated in U.S. dollars, which simplifies exchange rate risk management. However, if stablecoin issuance reaches $2 trillion, this could lead to lower Treasury yields and reduce active liquidity in the repo market. Each additional stablecoin is actually equivalent to additional demand for T-bills. This will enable the U.S. Treasury to refinance at a lower cost, but it may also cause T-bills to become more scarce and expensive for other financial institutions. This will not only squeeze the revenue of stablecoin issuers, but also make it more difficult for other financial institutions to obtain collateral for managing liquidity.
One possible solution is for the U.S. Treasury to issue more short-term debt, such as expanding the market size of short-term Treasury bills from $7 trillion to $14 trillion. However, even so, the continued growth of the stablecoin industry will still reshape the supply and demand dynamics.
The rise of stablecoins and their profound impact on the treasury bond market reveal the complex interaction between financial innovation and traditional assets. In the future, how to balance the growth of stablecoins with the stability of the financial market will become a key issue that regulators and market participants will face together.
Narrow banking model
Fundamentally, fiat-backed stablecoins are similar to narrow banking: they hold 100% of their reserves in cash equivalents and do not make loans. This model is inherently less risky and is one of the reasons why fiat-backed stablecoins have been able to gain early regulatory acceptance. Narrow banking is a trusted and easily verifiable system that provides a clear value proposition to token holders while avoiding the full regulatory burden of traditional fractional reserve banking. However, if stablecoins grow 10x to $2 trillion, the fact that these funds are fully backed by reserves and short-term Treasuries will have a profound impact on credit creation.
Economists are concerned about the narrow banking model because it limits the ability of capital to be used to provide credit to the economy. Traditional banks (i.e. fractional reserve banking) typically keep only a small amount of customer deposits as cash or cash equivalents, and the rest of the deposits are used to make loans to businesses, homebuyers and entrepreneurs. Under the supervision of regulators, banks ensure that depositors can withdraw cash when needed by managing credit risks and loan maturities.
However, regulators do not want narrow banks to absorb deposit funding because funding under the narrow banking model has a lower money multiplier effect (i.e., a single dollar supports a lower number of credit extensions). Ultimately, the economy relies on credit to function: regulators, businesses, and everyday consumers all benefit from a more active and interdependent economy. If even a small portion of the US $17 trillion deposit base migrated to fiat-backed stablecoins, banks could lose their cheapest source of funding. This would force banks to face two unfavorable choices: either reduce credit creation (such as reducing mortgages, auto loans, and small business credit lines) or make up for deposit losses through wholesale funding (such as short-term loans from the Federal Home Loan Banks), which is not only more expensive but also has shorter maturities.
Despite the aforementioned problems with the narrow banking model, stablecoins offer higher monetary liquidity. A stablecoin can be sent, spent, borrowed, or pledged — and can be used multiple times per minute, controlled by humans or software, 24/7. This efficient liquidity makes stablecoins a superior form of money.
Furthermore, stablecoins do not have to be backed by national debt. One alternative is tokenized deposits, which allow the value proposition of stablecoins to be directly reflected on bank balance sheets while circulating in the economy at the speed of modern blockchains. In this model, deposits remain within the fractional reserve banking system, and each stable value token actually continues to support the issuing institution’s lending business. In this model, the money multiplier effect is restored — not only through the velocity of money, but also through traditional credit creation; while users still enjoy 24/7 settlement, composability, and on-chain programmability.
The rise of stablecoins offers new possibilities for the financial system, but it also raises the difficult question of balancing credit creation with system stability. Future solutions will need to find the best combination between economic efficiency and traditional financial functions.
In order to allow stablecoins to retain the advantages of the fractional reserve banking system while promoting economic dynamism, design improvements can be made in the following three aspects:
Tokenized Deposit Model: Deposits are kept in a fractional reserve system through tokenized deposits.
Collateral diversification: Expanding collateral from short-term Treasury bills (T-bills) to other high-quality, liquid assets.
Embedding automated liquidity mechanisms: Reintroducing idle reserves into credit markets through on-chain repo, tri-party facilities, CDP pools, etc.
The goal is to maintain an interdependent, growing economic environment where reasonable business loans are more accessible. Innovative stablecoin designs can achieve this goal by supporting traditional credit creation while also increasing monetary liquidity, decentralized mortgages, and direct private lending.
While the current regulatory environment makes tokenized deposits not yet feasible, regulatory clarity around fiat-backed stablecoins is opening the door to stablecoins collateralized by bank deposits.
Deposit-backed stablecoins allow banks to continue to provide credit to existing customers while improving capital efficiency and bringing the programmability, low cost and high transaction speed advantages of stablecoins. The operation of this type of stablecoin is very simple: when a user chooses to mint a deposit-backed stablecoin, the bank will deduct the corresponding amount from the user's deposit balance and transfer the deposit obligation to an integrated stablecoin account. These stablecoins can then be sent to a public address specified by the user as a token of asset ownership denominated in US dollars.
In addition to deposit-backed stablecoins, other solutions can also improve capital efficiency, reduce friction in Treasury markets, and increase monetary liquidity.
1. Help banks embrace stablecoins
Banks can improve their net interest margin (NIM) by adopting or even issuing stablecoins. Users can withdraw funds from their deposits while banks still retain the income of the underlying assets and the relationship with their customers. In addition, stablecoins provide banks with a payment opportunity without the involvement of intermediaries.
2. Help individuals and businesses embrace DeFi
As more and more users manage their money and wealth directly through stablecoins and tokenized assets, entrepreneurs should help these users access funds quickly and securely.
3. Expanding and tokenizing collateral types
Expand the range of acceptable collateral assets beyond short-term Treasury bonds, such as municipal bonds, high-grade corporate bonds, mortgage-backed securities (MBS), or other collateralized real assets (RWAs). This not only reduces dependence on a single market, but also provides credit to borrowers outside the U.S. government while ensuring the high quality and liquidity of collateral to maintain the stability of stablecoins and user trust.
4. Put collateral on-chain to improve liquidity
Tokenizing these collaterals, including real estate, commodities, stocks, and treasuries, creates a richer collateral ecosystem.
5. Adopting the Collateralized Debt Position (CDPs) model
Drawing on CDP-based stablecoins such as MakerDAO’s DAI, this type of stablecoin uses a variety of on-chain assets as collateral, which not only disperses risks but also reproduces the monetary expansion function provided by banks on the chain. At the same time, these stablecoins are required to undergo strict third-party audits and transparent disclosures to verify the stability of their collateral models.
While the challenges are enormous, with each comes great opportunities. Entrepreneurs and policymakers who can understand the nuances of stablecoins will have the opportunity to shape a smarter, safer, and superior financial future.
