Original title: Can Markets Trust Stablecoins?
Original author: Amit Seru, WSJ
Original translation: Golem, Odaily Planet Daily
Stablecoins: The contemporary 'narrow bank'
Washington has once again committed to reshaping currency with code, and the political headwinds behind the newly passed (Genius Act) have breathed new life into the recurring fantasy that technology can ultimately eliminate the instability at the core of finance. This promise, while enticing, is harsh in reality: we can modernize currency, but we are still delivering it through 'pipes' built in the 19th century.
This beautiful idea partly stems from the collapse of Silicon Valley Bank in 2023. This was not a new trouble caused by subprime mortgages or any strange derivatives, but a replay of the oldest pitfalls in banking: maturity mismatch. Depositors, especially those without insurance, can withdraw deposits on demand, but banks make long-term investments. When interest rates soar and trust erodes, user withdrawals follow, assets are sold at low prices, and the government has to intervene again.
'Narrow banks' were once seen as a solution, holding only cash or short-term government bonds. (Odaily Note: The concept of 'narrow banks' originated after the Great Depression in the 1930s, representing a banking model that only accepts deposits and invests these deposits almost entirely in highly liquid, ultra-low-risk assets, such as short-term government bonds or central bank reserves.)
'Narrow banks' may be very safe, but they lack vitality, unable to create credit, with no loans and no growth.
Stablecoins are a recreation of 'narrow banks' in the tech age: private digital tokens pegged to the dollar, claimed to be supported by one-to-one liquidity reserves. For example, Tether and USDC claim to offer programmable, borderless, tamper-proof deposits, shedding regulatory burdens.
But peeling away the digital veneer, the ancient vulnerabilities of finance remain, as these tokens still entirely depend on trust. However, reserves are often opaque, custodians may be offshore, audits are selective, and redemption remains merely a promise.
Therefore, when trust falters, the entire system can collapse. The stablecoin TerraUSD collapsed in 2022 because it attempted to maintain its peg to the dollar using algorithms rather than real reserves. Its value depended on another convertible token, Luna. However, when confidence shattered, investors rushed to redeem TerraUSD, flooding the market with large amounts of Luna. Without reliable collateral and as the situation escalated, both tokens collapsed within days. Aside from such extreme cases, even so-called 'fully collateralized' stablecoins today can see price fluctuations when the market questions the authenticity of their reserves.
(Genius Act) fuels the 'excess privilege' of the dollar.
(Genius Act) is the result of Washington's attempt to establish an order for stablecoins. It creates a formal category of 'payment stablecoins,' prohibits stablecoin issuers from paying interest to emphasize the practical value of stablecoins over speculation, and requires issuers to be fully collateralized with cash or government bonds. Issuers must be licensed, registered in the U.S., and accept a new certification system. Foreign participants must obtain U.S. permission and comply with U.S. rules, or they are out.
The advantages of this bill are clear: no flashy algorithms, no unregulated random factors, and no mixing of speculative functions with payment functions. It provides consumer protection, prioritizes bankruptcy redemption, and promises monthly reserve disclosures. Scholars critical of the chaos in cryptocurrency have finally seen their wishes come true.
But clarity does not mean safety. The bill officially characterizes stablecoins as 'narrow banks.' This means stablecoins will not experience maturity mismatches, but it also eliminates trust intermediaries, bypassing the core engine of finance (converting savings into investments), turning risk-averse funds into idle cash.
At the same time, the bill leaves strategic loopholes. Issuers with assets below $10 billion can opt for state-level oversight, which encourages regulatory arbitrage. In the event of a crisis, the demand to redeem stablecoins could trigger a sell-off of government bonds, disrupting the market for safe assets that support them.
Some economists warn that by anchoring stablecoins to government bonds, we are merely shifting systemic risks to a new corner, which, although politically popular, has not been tested on a large scale in operations. However, supporters are also singing praises of the geopolitical benefits. The law ensures that stablecoins are pegged to the dollar, supported by dollar reserves (such as government bonds), and settled through U.S. institutions. As non-dollar stablecoins remain stagnant, U.S.-backed digital tokens will become the default tools for global payments, savings, and cross-border transfers.
This is the intersection of the Bretton Woods system and Silicon Valley, a regulatory game aimed at extending the 'excess privilege' of the dollar into the internet age. The (Genius Act) may solidify the dollar's dominance more than any currency swap agreement or trade deal from the Federal Reserve.
Another notable benefit is that by providing regulatory clarity, the bill may help bring cryptocurrency innovation back to the U.S. In recent years, the uncertainty of U.S. law has led to a brain drain of blockchain talent and capital. Despite the numerous shortcomings of stablecoins, they could become a foothold for broader digital financial experiments to occur within U.S. institutions rather than outside.
Stablecoins have not transcended banking.
But trust cannot be outsourced to code. It is created by institutions, audits, and rules. Ironically, blockchain, a technology born from resisting financial regulation, is now trying to gain legitimacy through the disclosures and regulations it once sought to escape. The (Genius Act) provides this clarity, but the costs of the trade-offs have become fully apparent.
In the financial domain, as the fable says, great power often conceals greater vulnerability. If stablecoins become integrated into everyday transactions, then once they fail, the impact will not be limited to the crypto world; it will become a shared problem faced by households, businesses, and taxpayers.
The bill also opens the door for large tech companies or commercial giants to enter the payment space under relatively loose rules, raising concerns about privacy, competition, and market concentration in a digital dollar infrastructure dominated by scale rather than security.
Despite ongoing hype, stablecoins have not transcended banking. They merely replicate the contradictions of the banking industry in a new form. The true vision of blockchain is to end reliance on trust. Yet, we are now doubling down on trust under federal regulation.
Money remains a social contract: a promise that someone somewhere will make up for your losses. No amount of code or collateral can eliminate the need for this promise's credibility. At the same time, any action by regulators cannot abolish the fundamental trade-offs in finance: safety comes at the expense of efficiency. Forgetting this will invite the next crisis.
Stablecoins repackage old risks as innovations. The danger lies not in what they are, but in our pretense that they are not what they are.
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