Chess View 3 Steps: How Far Are Stablecoins from Normalization to Becoming Currency?

Original Title: How stablecoins become money: Liquidity, sovereignty, and credit

Original Author: Sam Broner

Original Compilation: Ethan, Odaily Planet Daily

Traditional finance is gradually embracing stablecoins, and their market size is continuously expanding. Stablecoins have become the optimal solution for building global fintech due to their three core advantages: high speed, near-zero cost, and high programmability. The transition between old and new technological paradigms means that the logic of business operations will undergo fundamental reconstruction; this process will also give rise to new types of risks. After all, the "self-custody model," which values digital bearer assets (rather than booked deposits), is fundamentally different from the banking system that has been in place for hundreds of years.

So, what macro structural and policy issues do entrepreneurs, regulators, and traditional financial institutions need to address to ensure a smooth transition? We will conduct an in-depth discussion around three major challenges, providing current focus solutions for builders (whether startups or traditional institutions): the singularity of currency, the practice of dollar stablecoins in non-dollar economies, and the reinforcing effect of government bond backing on currency value.

The Challenge of Currency Singularity and the Construction of a Unified Currency System

Currency singularity refers to the ability for all forms of currency within an economy (regardless of issuing entity or storage method) to be freely exchanged at face value (1:1) and used for payment, pricing, and contracts. Its essence is that even with multiple institutions or technologies issuing currency-like instruments, a unified currency system can still be formed. In practice, the US dollar from JPMorgan Chase, the US dollar from Wells Fargo, Venmo account balances, and stablecoins should theoretically always maintain a strict 1:1 exchange relationship—despite differences in asset management practices among institutions and the often-overlooked importance of regulatory status. In a sense, the history of American banking is a history of continuously optimizing systems to ensure the interchangeability of the dollar.

The reason why the World Bank, central banks, economists, and regulators advocate for currency singularity is that it can greatly simplify transactions, contracts, governance, planning, pricing, accounting, security, and daily payment processes. Nowadays, businesses and individuals have come to take currency singularity for granted.

However, current stablecoins have not yet achieved this characteristic—due to insufficient integration with traditional financial infrastructure. If Microsoft, banks, construction companies, or homebuyers attempt to exchange $5 million in stablecoins through automated market makers (AMM), the actual exchange amount will be less than 1:1 due to slippage from liquidity depth; large transactions may even trigger market volatility, resulting in users ultimately receiving less than $5 million. If stablecoins are to realize a financial revolution, this situation must change.

A unified face value exchange system is key. If stablecoins cannot operate as part of a unified currency system, their utility will be greatly diminished.

The current operational mechanism of stablecoins is as follows: issuers (such as Circle and Tether) primarily provide direct redemption services to institutional clients or users who have gone through a verification process (for example, Circle's Circle Mint (formerly Circle Account) supports businesses in minting and redeeming USDC; Tether allows verified users (typically with a threshold of over $100,000) to redeem directly); decentralized protocols (such as MakerDAO) achieve fixed exchange rates between DAI and other stablecoins (such as USDC) through peg stability modules (PSM), essentially acting as verifiable redemption/conversion tools.

These solutions, while effective, have limited coverage and require developers to cumbersome integrate with each issuer. If direct connections cannot be established, users can only exchange between different stablecoins or exit through market execution (rather than face value settlement).

Even if businesses or applications promise extremely narrow spreads, such as strictly maintaining 1 USDC to 1 DAI (with a spread of only 1 basis point), this promise is still constrained by liquidity, balance sheet space, and operational capacity.

Central bank digital currencies (CBDCs) could theoretically unify the currency system, but the accompanying issues of privacy leakage, financial surveillance, limited currency supply, and slowed innovation make existing financial system optimization models more likely to prevail.

Thus, the core challenge for builders and traditional institutions is: how to make stablecoins (alongside bank deposits, fintech balances, and cash) truly become money. Achieving this goal will create the following opportunities for entrepreneurs:

Universal Minting and Redemption: Issuers deeply collaborate with banks, fintech, and other existing infrastructures to achieve seamless deposits and withdrawals, injecting interchangeability into stablecoins through existing systems, making them indistinguishable from traditional currencies;

Stablecoin Clearinghouse: Establish a decentralized collaborative mechanism (similar to ACH or a stablecoin version of Visa) to ensure instant, frictionless, and transparent exchanges. Current PSM is a feasible model, but expanding its functionality to achieve 1:1 settlement between participating issuers and fiat currency would be even better;

Trustworthy Neutral Collateral Layer: Migrate convertibility to widely adopted collateral layers (such as tokenized bank deposits or US Treasury-backed assets), allowing issuers to flexibly explore branding, markets, and incentive strategies, while users can unpack and redeem as needed;

Better Exchanges, Intent Execution, Cross-Chain Bridges, and Account Abstraction: Utilize upgraded versions of existing mature technologies to automatically match the best deposit and withdrawal paths or execute optimal exchange rates; build multi-currency exchanges with minimal slippage while hiding complexity, ensuring users enjoy predictable rates (even with large-scale use).

Dollar Stablecoins, Monetary Policy, and Capital Regulation

Many countries have a significant structural demand for the dollar: for residents of countries with high inflation or strict capital controls, dollar stablecoins serve as a "savings umbrella" and "global trade entry point"; for businesses, the dollar is the international accounting unit that simplifies cross-border transactions. People need a fast, widely accepted, and stable currency for income and expenditure, but current cross-border remittance costs can reach 13%, with 900 million people living in high-inflation economies without stable currencies, and 1.4 billion people lacking adequate banking services. The success of dollar stablecoins not only confirms the demand for dollars but also reflects the market's desire for better currencies.

Aside from political and nationalist factors, one of the core reasons countries maintain their local currencies is to respond to local economic shocks (such as production disruptions, export declines, and confidence fluctuations) through monetary policy tools (interest rate adjustments, currency issuance).

The proliferation of dollar stablecoins may weaken the policy effectiveness of other countries—rooted in the economic concept of the Impossible Trinity: a country cannot simultaneously achieve free capital movement, a fixed/strictly managed exchange rate, and an independent domestic interest rate policy.

Decentralized peer-to-peer transfers will simultaneously impact these three policies:

• Bypassing capital controls, forcing capital flow valves to fully open;

• Dollarization, by anchoring the international accounting unit, undermines the effectiveness of exchange rate control or domestic interest rate policies;

• Countries rely on intermediary banking systems to guide residents to use local currencies, thereby maintaining policy implementation.

However, dollar stablecoins still hold appeal for other countries: lower-cost, programmable dollars can facilitate trade, investment, and remittances (the majority of global trade is priced in dollars, and dollar circulation enhances trade efficiency); governments can still tax the deposit and withdrawal processes and regulate local custodians.

Yet, anti-money laundering, anti-tax evasion, and anti-fraud tools at the intermediary banking and international payment levels remain obstacles for stablecoins. Although stablecoins operate on publicly programmable ledgers, security tools are easier to develop, but these tools need to be practically implemented—this presents an opportunity for entrepreneurs to integrate stablecoins into existing international payment compliance systems.

Unless sovereign nations abandon valuable policy tools in pursuit of efficiency (which is highly unlikely) or give up on combating financial crime (which is even less likely), entrepreneurs need to build systems to optimize the integration of stablecoins with local economies.

The core contradiction lies in: how to embrace technology while strengthening safeguards (such as foreign exchange liquidity, anti-money laundering (AML) regulation, and macro-prudential buffers), achieving compatibility between stablecoins and local financial systems. Specific implementation paths include:

• Local Acceptance of Dollar Stablecoins: Integrate dollar stablecoins into local banks, fintech, and payment systems (supporting small, optional, and potentially taxable exchanges), enhancing local liquidity without completely disrupting local currency;

• Local Currency as a Deposit and Withdrawal Bridge: Launch local currency stablecoins with deep liquidity and deep integration into local financial infrastructure. Although a clearinghouse or neutral collateral layer is needed to initiate (refer to the first part), once integrated, local stablecoins will become the optimal foreign exchange conversion tool and default high-performance payment channel;

• On-Chain Foreign Exchange Market: Build a matching and price aggregation system across stablecoins and fiat currencies. Market participants may need to hold interest-bearing instruments as reserves and leverage existing foreign exchange trading strategies;

• Competitors to Western Union: Create a compliant offline cash deposit and withdrawal network, incentivizing agents through stablecoin settlements. Although MoneyGram has launched similar products, other institutions with established distribution networks still have room to grow;

• Compliance Upgrades: Optimize existing compliance solutions to support stablecoin pathways. Utilize the programmability of stablecoins to provide richer, real-time insights into fund flows.

The Impact of Government Bonds as Collateral for Stablecoins

The proliferation of stablecoins stems from their near-instant, near-zero cost, and infinitely programmable characteristics, rather than government bond backing. The reason fiat-backed stablecoins were widely adopted first is simply that they are easier to understand, manage, and regulate. User demand is driven by practicality (24/7 settlement, combinability, global demand) and confidence, rather than collateral structure.

However, fiat-backed stablecoins may find themselves in trouble due to their success—if the issuance volume grows tenfold (from the current $262 billion to $2 trillion in a few years), and regulators require them to be backed by short-term US Treasury bills (T-Bills), how will this impact the collateral market and credit creation? While this scenario is not inevitable, the implications could be profound.

Surge in Short-Term Treasury Holdings

If $2 trillion in stablecoins were invested in short-term Treasuries (one of the few assets currently explicitly supported by regulators), issuers would hold about one-third of the $7.6 trillion short-term Treasury stock. This role is similar to that of current money market funds (concentrated holders of low-risk liquid assets), but the impact on the Treasury market would be more significant.

Short-term Treasuries are high-quality collateral: globally recognized as low-risk, highly liquid assets, and denominated in dollars, simplifying exchange rate risk management. However, the issuance of $2 trillion in stablecoins could lead to a decline in Treasury yields and a contraction in the repo market's liquidity—each additional dollar of stablecoin investment represents extra bidding for Treasuries, allowing the US Treasury to refinance at lower costs or making it harder for other financial institutions to obtain the collateral they need for liquidity (raising their costs).

A potential solution is for the Treasury to expand short-term debt issuance (for example, increasing the short-term Treasury stock from $7 trillion to $14 trillion), but the continued growth of the stablecoin industry will still reshape the supply-demand landscape.

Concerns of a Narrow Banking Model

A deeper contradiction lies in the fact that fiat-backed stablecoins are highly similar to "narrow banks": 100% reserves (cash equivalents) and no lending. This model is inherently low-risk (which is also why it received regulatory approval early on), but a tenfold growth in stablecoin scale (with $2 trillion in full reserves) will impact credit creation.

Traditional banks (some of which are fractional reserve banks) only keep a small portion of deposits as cash reserves, using the rest to lend to businesses, homebuyers, and entrepreneurs. Under regulation, banks manage credit risk and loan durations to ensure depositors can withdraw cash at any time.

The core reason regulators oppose narrow banks from accepting deposits is that their money multiplier is lower (the credit scale supported by a single dollar is smaller).

The economy relies on credit to function—regulators, businesses, and individuals all benefit from a more active and interconnected economic ecosystem. If only a small portion of the $17 trillion deposit base in the US migrates to fiat-backed stablecoins, the low-cost funding sources for banks will shrink. Banks face a dilemma: shrink credit (reducing mortgage, auto loan, and small business credit limits) or replace lost deposits through wholesale financing (such as advances from the Federal Home Loan Bank) (but at higher costs and shorter terms).

However, stablecoins are a superior currency, with a velocity far exceeding that of traditional currencies—each stablecoin can be sent, spent, and borrowed by humans or software around the clock, enabling high-frequency use.

Stablecoins also do not need to rely on government bond backing: tokenized deposits represent another pathway—stablecoin debt remains on the bank's balance sheet but circulates in the economy at the speed of modern blockchain. In this model, deposits remain within a fractional reserve banking system, with each stable value token continuously supporting the lending operations of the issuing institution. The money multiplier effect will return through traditional credit creation (rather than circulation velocity), while users can still enjoy 24/7 settlement, combinability, and on-chain programmability.

When designing stablecoins, achieving the following three points will better support economic vitality:

1. Retain deposits within the fractional reserve system through a tokenized deposit model;

2. Diversify collateral (beyond short-term Treasuries, include municipal bonds, high-rated corporate notes, mortgage-backed securities (MBS), and real-world assets (RWAs));

3. Build in automatic liquidity pipelines (on-chain repos, third-party facilities, CDP pools) to reinject idle reserves into the credit market.

This is not a compromise with banks but an option to maintain economic vitality.

Remember: our goal is to build an interdependent, continuously growing economic system that makes loans for reasonable business needs easier to obtain. Innovative stablecoin designs can achieve this by supporting traditional credit creation, enhancing circulation velocity, developing collateralized decentralized lending, and direct private lending.

Although the current regulatory environment limits tokenized deposits, the clarification of the regulatory framework for fiat-backed stablecoins opens the door for stablecoins to be collateralized similarly to bank deposits.

Deposit-backed stablecoins allow banks to enhance capital efficiency while maintaining existing customer credit and enjoying the programmability, cost, and speed advantages of stablecoins. Their operational model can be simplified as follows: when users choose to mint deposit-backed stablecoins, banks deduct the balance from users' deposit accounts, transferring liabilities to the stablecoin total account; stablecoins representing bearer debt denominated in dollars can be sent to the user's designated address.

In addition to deposit-backed stablecoins, other solutions can also enhance capital efficiency, reduce friction in the Treasury market, and improve circulation velocity:

• Facilitate Banks' Acceptance of Stablecoins: Banks can issue or accept stablecoins, retaining underlying asset returns and customer relationships when users withdraw deposits while expanding payment services (without intermediaries);

• Encourage Individual and Business Participation in DeFi: As more users directly custody stablecoins and tokenized assets, entrepreneurs need to help them access funds safely and quickly;

• Expand and Tokenize Collateral Types: Broaden the range of acceptable collateral (municipal bonds, high-rated corporate notes, MBS, real-world assets), reducing reliance on a single market, providing credit to borrowers outside the US government while ensuring collateral quality and liquidity;

• Tokenizing Collateral to Enhance Liquidity: Tokenize collateral such as real estate, commodities, stocks, and Treasuries to build a richer collateral ecosystem;

• Collateralized Debt Positions (CDP): Adopt a MakerDAO DAI model (using diversified on-chain assets as collateral) to diversify risk while replicating the monetary expansion of banks on-chain. Such stablecoins must undergo strict third-party audits and transparent disclosures to verify the stability of the collateral model.

Conclusion

The challenges are great, but the opportunities are even greater. Entrepreneurs and policymakers who understand the nuances of stablecoins will shape a smarter, safer, and superior financial future.