Stablecoins represent a new type of currency war; for those countries with weak industries and weaker national currency anchors, this will form a new round of currency vampirism and dimensionality reduction, which will inevitably trigger a larger trend of more countries implementing capital controls and stricter crypto policies.
Table of Contents
1. 'Monetary singularity' and the labor of a unified monetary system
2. Dollar stablecoins, monetary policy, and capital regulations
3. Consider the impact of national bonds as collateral for stablecoins
Traditional finance is beginning to integrate stablecoins, and the trading volume of stablecoins is continuously growing. Stablecoins have become the best way to build global fintech because they are fast, nearly free, and easy to program. The transition from old technology to new technology means we will adopt entirely different operational methods — and this transition will also bring new risks. After all, a self-custody model priced in 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 current stakeholders need to address to successfully complete the transition? This article will delve into three major challenges and potential solutions that builders, whether in startups or traditional finance (TradFi), can focus on: the singularity of money; dollar stablecoins in non-dollar economies; and the impact of higher quality currencies backed by national bonds.
1. 'Monetary singularity' and the labor of a unified monetary system
The singularity of money refers to the idea that all forms of money within an economy — regardless of who issues it or where it is held — can be exchanged at face value (1:1) and used for payments, pricing, and contracts. The singularity of money indicates the existence of a unified monetary system, even when multiple institutions or technologies issue similar monetary instruments. In reality, your JPMorgan dollar equals your Wells Fargo dollar, equals your Venmo balance, and should equal your stablecoin — always maintaining an exact one-to-one correspondence. Although these institutions have fundamental differences in asset management and significant but often overlooked differences in regulatory status, this still holds true. The history of the U.S. banking system, to some extent, is the history of creating and improving systems that ensure the interchangeability of the dollar.
The World Bank, central banks, economists, and regulators all advocate for the singularity of money because it greatly simplifies transactions, contracts, governance, planning, pricing, accounting, security, and everyday transactions. It is precisely at this point that businesses and individuals take the singularity of money for granted.
But 'singleness' is not how stablecoins work today because stablecoins are poorly integrated into existing infrastructure. If Microsoft, a bank, a construction company, or a home purchaser tried to exchange, say, $5M in stablecoins on an automated market maker (AMM), that user would receive less than a 1:1 conversion due to slippage from liquidity depth. A large transaction would move the market, and the user would get less than $5M after conversion. If stablecoins are to revolutionize finance, this is unacceptable.
A universal at-par conversion system would help stablecoins function as part of a unified monetary system. And if they don’t function as components of a unified monetary system, stablecoins will not be nearly as useful as they could be.
Here’s how stablecoins work today. Issuers like Circle and Tether provide direct redemption services for their stablecoins (USDC and USDT, respectively) primarily for institutional clients or those who go through a verification process. These often involve minimum transaction sizes. For example, Circle offers Circle Mint (formerly Circle Account) for businesses to mint and redeem USDC. Tether allows direct redemption for verified users, typically above a certain threshold (e.g., $100,000). MakerDAO, being decentralized, has the Peg Stability Module (PSM), which allows users to swap DAI for other stablecoins (like USDC) at a fixed rate, effectively serving as a verifiable redemption/conversion facility.
These solutions work, but they’re not universally accessible, and they require integrators to tediously connect to each issuer. Without access to a direct integration, users are stuck converting between stablecoins or off-ramping stablecoins with market execution instead of settlement at par.
Without direct integrations, a business or application might claim they’ll maintain extremely tight bands — say, always redeeming 1 USDC for 1 DAI within a 1 basis point spread — but that promise is still conditional on liquidity, balance sheet space, and operational capacity.
Central bank digital currencies (CBDCs) could, in principle, unify the monetary system, but they come with so many other issues — privacy concerns, financial surveillance, constrained money supply, slower innovation — that better models that mimic today’s financial system will almost certainly win.
The challenge for builders and institutional adopters, then, is to build systems that make stablecoins 'just money,' alongside bank deposits, fintech balances, and cash, despite collateral, regulatory, and UX heterogeneity. Aiming to have stablecoins join the singleness of money presents entrepreneurs with opportunities to build:
Widespread availability of minting and redemption: Issuers partner closely with banks, fintechs, and other existing infrastructure to enable seamless and at-par on/off ramps, allowing stablecoins to bootstrap at-par fungibility via existing systems, making stablecoins indistinguishable from traditional money.
Stablecoin clearinghouses: Create decentralized cooperatives — think ACH or Visa for stablecoins — to guarantee instant, frictionless, and fee-transparent conversions. The Peg Stability Module is a promising model, but a protocol that expands upon it to guarantee at par settlement between participating issuers and fiat dollars would be dramatically better.
Develop a credibly neutral collateral layer: Shift fungibility to a widely adopted collateral layer — possibly tokenized bank deposits or wrapped treasuries — so that stablecoin issuers can experiment with brand, go to market, and incentives while users can unwrap and convert as needed.
Better exchanges, intents, bridges, and account abstraction: Use better versions of existing or understood technologies to automatically find and execute the best on- and off-ramping or exchange at the best rates. Build multi-currency exchanges with minimal slippage. At the same time, hide this complexity so that stablecoin users have predictable fees, even at scale.
2. Dollar stablecoins, monetary policy, and capital regulations
Enormous structural demand for the U.S. dollar exists in many countries. For citizens
1️⃣ The threat of stablecoins to 'monetary singularity'
• If stablecoins increasingly tie to specific assets (like national bonds), they will no longer be a universal 'neutral currency';
• Once multiple stablecoins circulate on different platforms and in different countries, the phenomenon of 'monetary non-unity' could emerge, such as:
USDC-on-Ethereum ≠ USDT-on-Tron ≠ RealUSD-on-BinanceChain;
• Each has different clearing paths, credit guarantees, and compliance levels;
• From a macro perspective, this represents a form of 'monetary fragmentation' that undermines the dominance of national sovereign currencies.
2️⃣ Localized monetary policies constrained by inputs from dollar stablecoins
• If a country widely uses dollar stablecoins (especially in emerging markets), its central bank:
1. Unable to control the broad money supply.
2. Loss of independence in controlling interest rates and exchange rates.
3. The policy transmission chain is interrupted by the dollar peg.
The result is stronger capital controls and crypto regulations, a trend that will become increasingly significant in the coming years.
3️⃣ The 'monetization' effect of stablecoins on national bonds
• The reserves of current mainstream stablecoins are mostly U.S. Treasury bonds or repurchase agreements;
• This means: National bonds → Stablecoins → Global payment circulation;
• National bonds are gradually being 'monetized', becoming assets that support quasi-central bank currencies;
• In the long run, it may lead to:
• Strengthening the global dominance of the dollar ('digital dollarization'), but it may also lead to a global 'dollar liquidity drain' during crises, acting as a double-edged sword.
This also contains some issues, particularly regarding the impact on traditional finance, as this impact can compress credit demand and reduce expansion and consumption by businesses and individuals. As banks cannot obtain better low-cost deposit sources, this will inevitably lead to a significant rise in credit costs. Here are three points of risk consideration:
1️⃣ Stablecoins as a form of narrow banking
• If stablecoin issuers (like Tether, USDC) hold all their reserves in risk-free assets like national bonds, they are essentially 'narrow banks':
• Not lending, only holding safe liquid assets;
• For users, stablecoins are like digital cash or 'currency backed by national bonds' that can be redeemed at any time.
2️⃣ Narrow banks vs traditional bank liquidity mechanisms
• Traditional banks earn interest rate spreads by absorbing deposits and issuing loans, while relying on reserves to meet withdrawal demands;
• Stablecoin-type narrow banks completely abandon lending functions and rely on interest income or service fees to maintain operations;
• This undermines banks' ability to 'create credit' — having a significant negative impact on money supply and economic growth.
3️⃣ Risk transfer and regulatory challenges
• Stablecoins may appear 'safer' on the surface, but their operational logic may transfer liquidity risk to other financial institutions, for example:
• This could create a run-like impact on the short-term Treasury bond market (like the repo market crisis in March 2020);
• This could lead to fragmentation of the monetary market, making it more difficult for central banks to manage monetary policy uniformly.
