Stablecoins: Contemporary 'Narrow Banks'
Washington has once again pledged to reshape currency with code, and the political headwinds behind the newly passed (GENIUS Act) have revived the recurring fantasy that technology can ultimately eliminate the instability at the core of finance. This promise, while enticing, is harshly contrasted by reality: we can modernize currency, but we are still delivering it through 'pipelines' built in the 19th century.
This noble idea partly stems from the collapse of Silicon Valley Bank in 2023. This was not a new trouble caused by subprime mortgages or any exotic derivatives, but a replay of the oldest perils in the banking industry: maturity mismatch. Depositors, especially those without insurance, can withdraw deposits on demand, but banks must make long-term investments. When interest rates soar but trust collapses, user withdrawals follow, assets are sold off at low prices, and the government has to intervene once again.
'Narrow banks' were once seen as a solution, institutions that hold only cash or short-term government bonds. (Odaily Note: The concept of 'narrow banks' originated in the aftermath of the Great Depression in the 1930s in the U.S. It is a banking model that accepts deposits and invests those deposits entirely or almost entirely in highly liquid, ultra-low-risk assets such as short-term government bonds or central bank reserves.)
'Narrow banks' may be highly secure, but they lack vitality, cannot create credit, have no loans, and do not grow.
Stablecoins are a recreation of 'narrow banks' in the tech era: private digital tokens pegged to the dollar and claimed to be supported by one-to-one liquidity reserves. For instance, Tether and USDC claim to provide programmable, borderless, and tamper-proof deposits, eliminating regulatory burdens.
But beneath the glamorous veneer of digital currency, the ancient vulnerabilities of finance still exist, namely that these tokens still rely entirely on trust. Yet reserves are often opaque, custodians may have gone offshore, audits are optional, and redemptions remain merely a promise.
Thus, when trust falters, the entire system collapses. 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 redeemable token, Luna. However, when confidence shattered, investors rushed to redeem TerraUSD, flooding the market with Luna. With no reliable collateral and escalating issues, both tokens collapsed within days. Aside from such extreme cases, even so-called 'fully collateralized' stablecoins today can experience price volatility 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 created a formal category for 'payment stablecoins,' prohibits stablecoin issuers from paying interest to emphasize the practical value of stablecoins rather than speculation, and requires issuers to be fully collateralized with cash or government bonds. Issuers must be licensed, registered in the U.S., and comply with a new certification system. Foreign participants need to obtain U.S. permission and must adhere to U.S. rules or be shut out.
The advantages of the bill are clear: no flashy algorithms, no unregulated random factors, and no mixing of speculative and payment functions. It fulfills many of their wishes. It provides consumer protection, prioritizes redemptions in bankruptcy, and commits to monthly reserve disclosures. Scholars critical of the chaos in crypto have finally seen their wishes realized.
But clarity does not mean safety. The bill formally qualifies stablecoins as 'narrow banks.' This means stablecoins will not experience maturity mismatches, but it also eliminates trusted intermediaries, bypassing the core engine of finance (converting savings into investments), turning risk-hedging funds into idle capital.
At the same time, the bill also 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 for redeeming stablecoins could trigger a sell-off of government bonds, disrupting the markets for the safe assets that support them.
Some economists warn that by anchoring stablecoins to government bonds, we are merely shifting systemic risk to a new corner, which is politically popular but has not yet been tested on a large scale operationally. However, supporters are also singing the praises of 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 Federal Reserve currency swap agreement or trade deal.
Another noteworthy benefit is that by providing regulatory clarity, the bill could help bring cryptocurrency innovation back to U.S. shores. In recent years, uncertainty in U.S. law has led to a brain drain of blockchain talent and capital. Despite the many shortcomings of stablecoins, they could serve as a foothold for broader digital financial experiments to take place within U.S. institutions rather than outside.
Stablecoins have not surpassed the banking industry.
But trust cannot be outsourced to code. It is created by institutions, audits, and rules. Ironically, blockchain, a technology born out of resistance to financial regulation, is now seeking legitimacy through the same disclosure and regulation it once sought to evade. The (Genius Act) provides this clarity, but the costs of the trade-offs have already manifested.
In the financial industry, as the fable goes, great power often conceals greater vulnerability. If stablecoins are integrated into everyday transactions, then once they fail, the impact will not be limited to the crypto world; it will become a common issue faced by households, businesses, and taxpayers.
The bill also opens the door for large tech companies or business giants to enter the payment industry under relatively loose rules, raising concerns about privacy, competition, and market concentration in a digital dollar infrastructure dominated by scale rather than safety.
Despite ongoing hype, stablecoins have not surpassed the banking industry. 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 will compensate for your losses somewhere. No amount of code or collateral can eliminate the need for credibility in that promise. At the same time, any regulatory action cannot abolish the fundamental trade-offs in finance: safety comes at the cost of efficiency. Forgetting this will invite the next crisis.
Stablecoins repackage old risks as innovation. The danger lies not in what they are, but in what we pretend they are not.
This article is republished with permission from: (Deep Tide TechFlow)
Original title: (Can Markets Trust Stablecoins?)
Original author: Amit Seru
Translation: Golem, Odaily Planet Daily
WSJ Review of Stablecoins: Is This Innovation or a Modern Version of 20th Century 'Narrow Banks'?
