Original source: Google
Original title: (Beyond Stablecoins: The Evolution of Digital Currency)
Stablecoins experienced significant growth in 2024, with trading volume tripling the original trading volume, organic trading volume reaching $5 trillion, and total trading volume reaching $30 trillion (data source: Visa, Artemis). In contrast, PayPal's annual transaction volume is approximately $1.6 trillion, and Visa's annual transaction volume is about $13 trillion. The supply of stablecoins pegged to the US dollar has grown to over 1% of the total US dollar supply (M2) (data source: rwa.xyz). This surge clearly indicates that stablecoins have secured a place in the market.
The demand for better services is driving significant changes in a payment market valued at nearly $3 trillion. Stablecoins avoid the complexities, inefficiencies, and cost burdens of traditional payment systems, enabling seamless fund transfers between digital wallets. New solutions are also emerging in capital markets to facilitate the payment aspect of digital asset trading, enhancing transparency and efficiency while reducing costs and settlement times.
This article explores the evolving financial landscape and proposes a solution to help traditional finance and capital markets not only catch up but also lead the way.
Private Currency: Similarities Between Banknotes and Stablecoins
Stablecoins have many similarities to privately issued banknotes that were widely used in the 18th and 19th centuries. Banks issued their own banknotes, with varying degrees of reliability and regulatory oversight. These banknotes made transactions easier as they were more portable, countable, and redeemable without weighing or assessing the purity of gold. To enhance trust in this new form of currency, banknotes were backed by reserves and promised to be redeemable for real-world assets (most commonly precious metals). The number of transaction wallets and liquidity greatly increased. Most banknotes were only recognized in the local area near the issuing bank. For remote settlements, they were exchanged for precious metals or settled between banks. In exchange for these benefits, users accepted the single bank default risk and the value fluctuations based on the perceived solvency of the issuing bank.
Fractional Reserve Banking and Regulation
Subsequently, the economy experienced significant growth, accompanied by financial innovation. Economic expansion required a more flexible money supply. Banks observed that not all depositors would demand redemption simultaneously, thus realizing they could profit by lending out a portion of their reserve funds. The fractional reserve banking system emerged, in which the amount of money in circulation exceeded the reserves held by banks. Mismanagement, high-risk lending practices, fraud, and economic downturns led to bank runs, bankruptcies, crises, and losses for depositors. These failures prompted a push for stronger regulation and oversight of currency issuance. With the establishment and expansion of central bank charters, these regulations created a more centralized system, improving banking practices, instituting stricter rules, enhancing stability, and gaining public trust in the monetary system.
Today's Monetary System: Commercial Bank Money and Central Bank Money
Our current monetary system adopts a dual currency model. Commercial bank money, issued by commercial banks, is essentially a liability of a specific bank (promissory note), subject to comprehensive regulation and oversight. Commercial banks use a fractional reserve model, meaning they hold only a portion of deposits as reserves in central bank money and lend out the remainder. Central bank money is a liability of the central bank and is considered risk-free. Interbank liabilities are settled electronically in central bank money (through RTGS systems like FedWire or Target2). The public can only conduct electronic transactions using commercial bank money, while the use of cash (central bank physical money) for transactions is declining. Within a single currency, all commercial bank money is interchangeable. The focus of bank competition is on service, not on the quality of the money they provide.
Today's Financial Infrastructure: Fragmented, Complex, Expensive, and Slow
With the rise of computers and networks, currency transactions have been recorded electronically, enabling transactions without cash. Liquidity, access, and product innovation have reached new heights. Solutions vary by country/region, and cross-border transactions still face economic and technological difficulties. Correspondent banking requires keeping idle funds in partner banks, while the complexity of infrastructure forces banks to limit partnerships. Consequently, banks are withdrawing from correspondent relationships (a 25% reduction over the past decade), resulting in longer payment chains, slower payment speeds, and higher payment costs. Convenient solutions that strip away these complexities (such as global credit card networks) are costly for businesses in terms of payment fees. Furthermore, most improvements have focused on the frontend, while innovation in payment processing infrastructure has progressed slowly.
The fragmented financial system increases trade friction and slows down economic growth. The Economist estimates that by 2030, the macroeconomic impact of fragmented payment systems on the global economy will reach an astonishing $2.8 trillion loss (2.6% of global GDP), equivalent to over 130 million jobs (4.3%).
Fragmentation and complexity also harm financial institutions. In 2022, outdated payment systems incurred annual maintenance costs of $37 billion, expected to rise to $57 billion by 2028 (IDC Financial Data Insights). Additionally, the inability to provide real-time payments exacerbates inefficiency, security risks, and extremely high compliance costs, leading to direct revenue losses (75% of banks struggle to implement new payment services in outdated systems, and 47% of new accounts are at fintech companies and new banks).
High payment costs can hinder the international business growth of companies, affecting profitability and valuations. Companies processing large volumes of payments are highly motivated to reduce their payment processing fees. For instance, if Walmart reduces its annual payment processing fees of approximately $10 billion (assuming an average payment processing fee of 1.5% on $700 billion revenue) to $2 billion, it could increase earnings per share and stock prices by over 40%.
New Infrastructure, New Possibilities
Experiments in the Web3 space have birthed promising technologies like distributed ledger technology (DLT). These technologies offer a new way for financial system transactions through globally available, always-on infrastructure, with advantages including support for multiple currencies/assets, atomic settlement, and programmability. The financial industry is beginning to transition from isolated databases and complex messaging to transparent, immutable shared ledgers. These modern networks simplify interactions and workflows, eliminating independent, costly, and slow reconciliation processes, and removing the technological complexities that hinder speed and innovation.
Disruptor: Stablecoins
Stablecoins operate on decentralized ledgers, enabling near-instant, low-cost global transactions without the limitations of traditional banking (time, geography). This freedom and efficiency have driven their explosive growth. High interest rates also make them very profitable. Profits, growth, and increasing confidence in the underlying technology are attracting investments from venture capital and payment processing firms. Stripe acquired Bridge to enable online merchants to accept stablecoin payments. Additionally, Visa offers functionality for partner payments and settlements using stablecoins. Retailers (e.g., Whole Foods) are accepting and even encouraging stablecoin payments to reduce transaction fees and receive payments instantly (Federal Reserve Bank of Atlanta article). Consumers can obtain stablecoins within seconds (Coinbase has integrated ApplePay).
Stablecoins face many challenges.
Regulation: Unlike traditional currencies, stablecoins lack comprehensive regulation and oversight. The United States is strengthening regulatory measures, while the European Union applies electronic money rules to electronic money tokens through MICAR. Depositor protection measures do not apply to stablecoins.
Compliance: Ensuring compliance with anti-money laundering and sanctions laws is a challenging task when anonymous accounts transact on public blockchains (in 2024, 63% of the $51.3 billion in illegal transactions on public blockchains involved stablecoins).
Fragmentation: A wide variety of stablecoins operate on different blockchains, requiring complex bridging and conversions. This fragmentation leads to reliance on automated bots for arbitrage and liquidity management, with bot accounts accounting for nearly 85% of total trading volume (with organic trading volume at $5 trillion and total trading volume at $30 trillion).
Infrastructure Scalability: To achieve widespread use, the underlying technology must be capable of handling a large volume of transactions. In 2024, there are approximately 6 billion stablecoin transactions, with ACH transactions approximately an order of magnitude higher, and card transactions two orders of magnitude higher.
Economics/Capital Efficiency: Currently, banks expand the money supply by lending out multiple times their reserves, driving economic growth. The widespread use of stablecoins will shift banks' reserve funds, significantly reducing their lending capacity and directly impacting profitability.
The direct challenges faced by stablecoins (issuer credibility, regulatory ambiguity, compliance/fraud risk, and fragmentation) are similar to those of early privately issued banknotes.
The widespread adoption of fully reserved stablecoins would not only disrupt the banking and financial industry but also the current economic system. Commercial banks issue credit, money, and liquidity to support economic growth; central banks monitor and influence this process through monetary policy to directly manage inflation and indirectly pursue other policy objectives, such as employment, economic growth, and welfare. A significant shift of reserve funds from banks to stablecoin issuers could reduce credit supply and increase credit costs. This may suppress economic activity, potentially leading to deflationary pressures and challenging the effectiveness of monetary policy implementation.
Stablecoins offer clear benefits to users, especially in cross-border transactions. Competition will drive innovation, expand use cases, and stimulate growth. An increase in transaction volume and stablecoin wallet adoption may lead to a reduction in deposits, loans, and profitability for traditional banks. As regulation matures, we may see the emergence of stablecoin models with fractional reserves, blurring the lines between them and commercial bank money and further intensifying competition in the payments space.
The Innovator's Dilemma
Now, institutions and individuals can choose traditional payment systems, which, while familiar and low-risk, are slow and expensive; or modern systems, which are fast, cheap, convenient, and rapidly improving but come with new risks. They are increasingly opting for modern systems.
Payment service providers also have choices. They can view these innovations as niche markets that will not affect their core traditional financial customer base and focus on incremental improvements to existing products and systems. Alternatively, they can leverage their brand, regulatory experience, customer base, and networks to dominate in the new payment era. By adopting new technologies and establishing strategic partnerships, they can meet changing customer expectations and drive business growth.
Achieving better payments through evolution (rather than revolution)
We can achieve a new generation of payments that is global, round-the-clock, multi-currency, and programmable without reinventing money, but by reimagining the infrastructure. Commercial bank money and robust traditional financial regulation address the issues of stability, regulatory clarity, and capital efficiency in the existing financial system. Google Cloud can provide the necessary infrastructure upgrades.
Google Cloud Universal Ledger (GCUL) is a brand new platform for creating innovative payment services and financial market products. It simplifies the management of commercial bank money accounts and facilitates transfers through distributed ledgers, enabling financial institutions and intermediaries to meet the needs of the most discerning customers and effectively compete.
GCUL aims to provide a simple, flexible, and secure experience. Let's break it down:
Simplicity: GCUL is offered as a service accessible through a single API, simplifying the integration of multiple currencies and assets. There is no need to build and maintain infrastructure. Transaction fees are stable and transparent, billed monthly (unlike the volatile prepaid cryptocurrency transaction fees). Flexibility: GCUL offers unparalleled performance and can scale up or down according to any application scenario. It is programmable, supporting payment automation and digital asset management. It will integrate with the wallet of your choice. Security: GCUL is designed with compliance in mind (e.g., accounts that pass KYC verification, transaction fees compliant with outsourcing regulations). It operates as a private, licensed system (which may become more open as regulations evolve), leveraging Google's secure, reliable, durable, and privacy-focused technology.
GCUL can bring significant advantages to customers and financial institutions. Customers can enjoy nearly instant transactions (especially in cross-border payments), along with benefits such as low fees, round-the-clock availability, and payment automation. On the other hand, financial institutions can benefit by reducing infrastructure and operational costs through eliminating reconciliation, minimizing errors, simplifying compliance processes, and reducing fraud. This frees up resources for developing modern products. Financial institutions leverage their existing strengths (such as customer networks, licenses, and regulatory processes) to maintain full control over customer relationships.
Payments as a Catalyst for Capital Markets
The situation in capital markets is similar to payments, with significant changes occurring through the adoption of electronic systems. Electronic trading initially faced resistance but ultimately transformed the entire industry. Real-time price information and broader access channels improved liquidity, speeding up execution, narrowing spreads, and reducing transaction costs. This, in turn, stimulated further growth in market participants (especially individual investors), product and strategy innovation, and overall market scale. While the price per transaction is much lower, the entire industry has experienced significant expansion, with advancements in electronic and algorithmic trading, market making, risk management, data analysis, and more.
However, challenges remain in payments. Due to the constraints of traditional payment systems, settlement cycles can take several days, necessitating working capital and collateral for risk management. Digital assets and new market structures supported by distributed ledger technology are hindered by the inherent friction of connecting traditional infrastructure with new infrastructure. Independent asset and payment systems have led to long-standing fragmentation and complexity, preventing the industry from fully benefiting from innovation.
Google Cloud Universal Ledger (GCUL) addresses these challenges by providing a simplified and secure platform to manage the entire digital asset lifecycle (e.g., bonds, funds, collateral). GCUL enables seamless and efficient digital asset issuance, management, and settlement. Its atomic settlement functionality minimizes risk and enhances liquidity, unlocking new opportunities in capital markets. We are exploring how to utilize secure exchange mediums supported by bankruptcy-protected assets provided by regulators (such as central bank deposits or money market funds) to transfer value. These initiatives help achieve true round-the-clock capital mobility and drive the next wave of financial innovation.