How Stablecoins Become Currency: Liquidity, Sovereignty, and Credit

Author: Sam Broner, investment partner of a16z crypto; translation: Golden Finance xiaozou

The traditional financial system is beginning to accept stablecoins, and the transaction volume of stablecoins continues to grow. Stablecoins have become the best tool for building global fintechs – they are fast, near-free and highly programmable. The transformation from old technology to new technology means that we need to fundamentally change the way business operates, and this transformation will also create new risks. After all, the self-custodial model denominated on digital bearer bearer assets (rather than registered deposits) is fundamentally separated from the banking system that has lasted for hundreds of years.

So what more macro monetary structure and policy considerations do entrepreneurs, regulators and traditional financial institutions need to deal with in order to successfully survive this transformation? We will explore in- depth three challenges and potential solutions (whether startups or builders of traditional financial institutions should pay attention to): currency singleness, dollar stablecoins in non-dollar economy, and the impact of high- quality treasury bond-secured currencies.

1. " Money Uniformity " **and the Construction of a

Unified Monetary System**

Monetary currency is that all forms of currency in an economy (regardless of the issuer or storage method) can be exchanged at face value ( 1:1 ) and can be used for payment, pricing and contracting. This concept shows that even if multiple institutions or technologies issue monetary tools, there is still a unified monetary system. In practice, your dollar, Wells Fargo dollar, and Venmo balance should be exactly equal to the stablecoin (always 1:1). Although there are differences in asset management methods of these institutions and the regulatory status is also important but often overlooked, this principle remains true. The history of the development of the US banking industry is to some extent the history of establishing and improving the history of ensuring the convertibility of the US dollar.

The World Bank, central banks, economists and regulators advocate monetary uniformity because it greatly simplifies transactions, contracts, governance, planning, pricing, accounting, security and daily payments. To this day, businesses and individuals have taken currency singularity for granted.

However, the current operating mechanism of stablecoins does not comply with the principle of "singleness" because they are extremely low in integration with existing infrastructure. Suppose Microsoft, a bank, construction company or home buyer tries to exchange $5 million of stablecoins through automatic market makers (AMMs), the actual exchange ratio that users get will be less than 1:1 due to slippage caused by the depth of liquidity. Large-scale transactions will impact market prices, resulting in the final amount of users receiving less than US$5 million. If stablecoins want to truly subvert the financial system, this status quo is unacceptable.

Only by establishing a general parity exchange system can stablecoins become an integral part of the unified monetary system. If it cannot be used as a constituent element of a unified monetary system, the effectiveness of stablecoins will be greatly reduced.

The current operating mode of stablecoins is as follows: Issuers such as Circle and Tether mainly provide direct redemption services for institutional customers or users who pass the verification process (USDC and USDT respectively), and usually have a minimum transaction threshold. For example, Circle provides enterprise users with Circle Mint (formerly Circle Account) for USDC minting and redemption; Tether allows verified users to redeem directly, which usually requires a specific amount threshold (such as 100,000 US dollars); decentralized MakerDAO uses the anchor stability module (PSM), allowing users to exchange DAI for other stablecoins (such as USDC) at a fixed exchange rate, which essentially acts as a verifiable redemption/redeem facility.

Although these solutions are effective, they have not yet been universally available, and the integrators require cumbersome connections to each issuing agency. If you cannot directly access these systems, users can only exchange or cash out between different stablecoins through market execution (rather than parity settlement).

In the absence of direct integration channels, enterprises or applications may promise to maintain extremely narrow spreads (for example, always guaranteeing the spread of 1 USDC to 1 DAI is controlled within 1 basis point), but this commitment still depends on liquidity conditions, balance sheet space and operational capabilities.

Central Bank digital currency (CBDC) can theoretically unify the monetary system, but the many problems it accompanies - privacy concerns, financial monitoring, limited money supply, and slow innovation - make models that better simulate the existing financial system almost doomed to win.

For builders and institutional adopters, the challenge is to design a system that enables stablecoins to be “just currency” as bank deposits, fintech account balances and cash, despite differences in collateral, regulation and user experience. Integrating stablecoins into currency singleness provides entrepreneurs with the following construction opportunities:

The widespread popularity of minting and redemption : Issuers work closely with banks, fintech companies and other existing infrastructure to achieve seamless parity and cash out channels, so that stablecoins can achieve parity convertibility through existing systems, thus no different from traditional currencies.

Stablecoin Clearing House : Establish a decentralized collaboration mechanism (similar to ACH or Visa's stablecoin version) to ensure instant, frictionless and transparent exchange. The Anchor Stability Module (PSM) is a promising model, but if the protocol can be expanded on this basis to ensure parity settlement between the participating issuer and the fiat dollar, the effect will be greatly improved.

Develop a trusted and neutral collateral layer : transfer convertibility to a widely adopted collateral layer (probably tokenized bank deposits or encapsulated Treasury bonds), allowing stablecoin issuers to try branding, marketing and incentive mechanisms while users can unpack and redeem as needed.

Better exchanges, intent execution, cross-chain bridges and account abstractions : use optimized versions of existing or known technologies to automatically find and execute the optimal deposit and exit or exchange paths to build a multi-currency exchange with the smallest slippage. At the same time, hiding complexity allows stablecoin users to obtain predictable fees even when trading at large scale.

2. US dollar stablecoins, monetary policy and capital regulation

Many countries have huge structural demand for the US dollar. For people living in an environment of high inflation or strict capital controls, the dollar stablecoin is the lifeblood of maintaining their livelihood - both a means to protect savings and a direct channel to global trade. For enterprises, the US dollar, as an international account unit, can simplify cross-border transactions and clarify valuations. People need a fast, widely recognized and stable currency for consumption and savings, but the current situation is: cross-border wire transfer costs may be as high as 13%, 900 million people live in high-inflation economies that do not have stable currency, and 1.4 billion people do not have access to adequate banking services. The success of the US dollar stablecoin not only confirms the market demand for the US dollar, but also reflects the desire for high-quality currencies.

In addition to political and nationalist factors, the core reason why countries maintain their currencies is that this gives policymakers the ability to regulate their economy based on local facts. When natural disasters impact production, key exports shrink or consumer confidence shake, central banks can buffer impacts, enhance competitiveness or stimulate consumption by adjusting interest rates or issuing additional currencies.

The widespread adoption of dollar stablecoins may weaken local policymakers’ ability to regulate the economy. The root of this lies in what economists call the "tripleural paradox" - any country can only choose two of the following three economic policies at the same time: (1) free flow of capital, (2) fixed or strictly controlled exchange rates, and (3) monetary policies independently formulated according to domestic situations.

Decentralized peer-to-peer transfers will simultaneously impact all policy dimensions in the Triple Paradox. This type of transfer bypasses capital controls, which is equivalent to forcibly opening the capital flow gate; dollarization will weaken the policy effectiveness of exchange rate control or domestic interest rates by anchoring people's assets on international accounting units. At present, countries mainly rely on narrow channels in the agency banking system to guide the public to use their local currency to maintain the implementation of these policies.

Yet the dollar stablecoins remain attractive to other countries because cheaper, programmable dollars can boost trade, investment and remittances. Since most international business activities are denominated in US dollars, obtaining US dollars can make international trade faster and more convenient, thus becoming more popular. The government can still impose taxes on the deposit and withdrawal links and supervise local trusteeship agencies.

However, various regulations, systems and tools currently implemented at the agency banking and international payment levels are effectively preventing money laundering, tax evasion and fraud. While stablecoins exist on publicly programmable ledgers (which makes security tools easier to develop), these tools still need to be actually built – creating opportunities for entrepreneurs to connect stablecoins with existing international payment compliance infrastructures that are used to maintain and implement the policies mentioned above.

Unless we expect sovereign states to abandon valuable policy tools in pursuit of efficiency improvements (which is unlikely) or to stop focusing on financial crimes such as fraud (which is also unlikely), entrepreneurs have the opportunity to build systems that improve the way stablecoins integrate with local economies.

The real challenge is to embrace more advanced technologies, improve safeguards such as foreign exchange liquidity, anti-money laundering (AML) supervision and other macro-prudential buffering mechanisms - so that stablecoins can be integrated with the local financial system. These technical solutions will implement:

Localized acceptance of US dollar stablecoins : Through a small, optional and possible taxable exchange mechanism, US dollar stablecoins are integrated into local banks, fintech companies and payment systems - while improving local liquidity, it does not completely destroy the local currency system.

Local currency stablecoins are used as local deposit and exit channels : issue local currency stablecoins with deep liquidity and deep local financial infrastructure integration capabilities. While clearing houses or neutral collateral may be required for extensive integration, once local currency stablecoins are integrated into the financial infrastructure, they will become the best avenue for Forex trading and become the default high- performance payment track.

On-chain foreign exchange market: Establish a matching and price aggregation system across stablecoins and fiat currencies. Market participants may need to hold interest-generating tools as reserves and use high leverage to support existing Forex trading strategies.

Competitors such as MoneyGram : Build a compliant physical retail cash deposit and withdrawal network and reward agents that use stablecoin settlement. Although MoneyGram has recently launched similar products, there are still a large number of market opportunities for other competitors with mature distribution channels.

Compliance upgrade: Improve existing compliance solutions to support stablecoin channels. Leverage the stronger programmability of stablecoins to provide richer and faster insights into capital flows.

**3. Consideration of the impact of Treasury bonds as stablecoin

collateral**

The adoption rate of stablecoins continues to rise, thanks to its nearly instant, nearly free and infinitely programmable currency characteristics—not the endorsement of Treasury mortgages. Fiat currency reserve stablecoins are the first to be widely adopted because they are the easiest to understand, manage and regulate. User needs come from practicality and credibility (7×24-hour settlement, composability, global demand), and may not depend on the collateral asset structure.

But fiat-based reserve stablecoins may fall into the dilemma of "successfully being mistaken": what will happen if the issuance of stablecoins grows tenfold (such as from the current US$262 billion to US$2 trillion in a few years), and regulators require that they must be fully collateralized by short-term US bonds, what consequences will this cause? This scenario is at least within the scope of reasonable deduction, and its impact on the collateral market and credit creation may be extremely far-reaching.

(1) Short-term Treasury bond holding pattern

If the $2 trillion stablecoin is allocated to short-term Treasury bonds (one of the few assets currently recognized by regulators), the issuer will hold about one-third of the total outstanding $7.6 trillion of short-term Treasury bonds. This shift will amplify the existing role of money market funds - concentrated holdings of high-liquid and low-risk assets - but will have a more profound impact on the Treasury bond market.

Short-term Treasury bonds are dual attractive as collateral: they are generally regarded as one of the world's lowest risk and most liquid assets; they are also denominated in US dollars, which can simplify exchange rate risk management. But the issuance of $2 trillion stablecoins may lower Treasury yields and reduce active liquidity in the repurchase market. Each new stablecoin is an additional bid for Treasury bonds, which not only allows the US Treasury Department to refinance at a lower cost, but also leads to the difficulty and cost of other entities in the financial system to obtain short- term Treasury bonds - which may compress the income of stablecoin issuers and at the same time exacerbate the difficulty of other financial institutions to obtain collateral required for liquidity management.

One of the potential solutions is the Ministry of Finance to issue additional short-term debt (such as expanding the scale of outstanding short-term government bonds from 7 trillion to 14 trillion US dollars), but even so, the continued expansion of the stablecoin industry will still reshape the supply and demand pattern.

(2) Narrow banking model

Fundamentally speaking, fiat currency reserve stablecoins are similar to "narrow bank": they hold 100% cash equivalent reserves and do not engage in lending. This model naturally has low risk characteristics - part of the reason it has gained early regulatory approval. The narrow banking system is both credible and easy to verify, giving token holders a clear right to claim value, while avoiding the comprehensive regulatory burden faced by some reserve banks. But a tenfold increase in the size of stablecoins means $2 trillion will be completely endorsed by cash and Treasury bonds - a ripple effect on credit creation.

Economists’ concerns about the narrow banking model are that it limits capital’s ability to provide credit to the real economy. The traditional banking industry (i.e., partial reserve banking system) retains only a small amount of customer deposits in the form of cash or cash equivalents, and lends most of the deposits to businesses, home buyers and entrepreneurs. Under the supervision of regulators, banks ensure depositors withdraw cash at any time by managing credit risks and loan term.

This is precisely why regulators are reluctant to allow narrow-minded banks to absorb deposits - the money multiplier of the narrow-minded banking system is lower. Ultimately, economic operations depend on credit: regulators, businesses and ordinary consumers can all benefit from more active, interdependent economic activities. If even a small part of the US $17 trillion U.S. deposit base turns to fiat currency reserve stablecoins, banks may face the dilemma of shrinking the cheapest sources of funds. These banks will face a dilemma: either shrink credit creation (reduce mortgages, car loans and SME lines of credit), or replace lost deposits through wholesale financing such as federal housing loan bank advances — but the latter is more costly and has a shorter term.

But as a better currency, stablecoins can support higher currency circulation speed. A single stablecoin can be transferred, paid, lent or borrowed every minute by humans or software to multiple times - achieving 7×24-hour uninterrupted circulation.

Stablecoins may not necessarily require endorsement of treasury bonds: tokenized deposits are another solution, which can not only retain stablecoin debt claims on the bank balance sheet, but also circulate in the economy at the speed of modern blockchain. Under this model, deposits remain in part of the reserve banking system, and each stable value token essentially continues to support the issuing agency's loan books. The currency multiplier effect is thus regressed - not through circulation speed, but through traditional credit creation - while users can still enjoy 7×24-hour settlement, composability and on-chain programmability.

By designing stablecoins, it can: (1) retain deposits within the partial reserve banking system using tokenized deposit models; (2) expand collateral from short-term Treasury bonds to other high-quality current assets; (3) built-in automatic liquidity pipelines (on-chain repurchase agreements, tripartite facilities, mortgaged debt position pools) revolve idle reserves back to the credit market—which is not so much a compromise with banks as an optional option to maintain economic vitality.

It should be clear that our goal is to maintain an interdependent and sustained growth economy so that reasonable business needs can easily obtain loans. Innovative stablecoin design can achieve this by supporting traditional credit creation while increasing the speed of currency circulation, collateralized decentralized lending and direct private lending.

Although the current regulatory environment makes tokenized deposits unfeasible, with the increasingly clear regulatory framework for fiat currency reserved stablecoins, it has become possible to adopt a stablecoin model with the same collateral as bank deposits.

Deposit-secured stablecoins will enable banks to improve capital efficiency while continuing to provide credit to existing customers and give stablecoins programmability, cost advantages and speed improvements. This type of stablecoins can adopt a simple issuance mechanism - when a user chooses to mint a deposit mortgage stablecoin, the bank deducts the corresponding amount from its deposit balance and transfers its deposit obligations to the collective stablecoin account. Stable coins representing the dollar- denominated holder's interests in these assets can be sent to the public address specified by the user.

In addition to deposit-collateralized stablecoins, other solutions will also improve capital efficiency, reduce friction in the treasury bond market and accelerate currency circulation.

Help banks accept stablecoins: By adopting and even issuing stablecoins, banks can allow users to withdraw deposit funds while retaining underlying asset returns and customer relationships, thereby increasing the net interest margin (NIM). Stablecoins also provide banks with the opportunity to directly participate in the payment system without an intermediary.

Empowering enterprises and individuals to embrace DeFi : As more users directly custodialize capital wealth through stablecoins and tokenized assets, entrepreneurs should help these users achieve fast and secure capital calls.

Expand the types of collateral assets and realize tokenization: expand qualified collateral from short-term Treasury bonds to municipal bonds, high- rated commercial paper, mortgage-backed securities (MBS) or physical assets (RWA) guaranteed varieties—not only reduce dependence on a single market, but also provide credit support for borrowers outside the U.S. government, while ensuring access collateral has high liquidity and high-quality characteristics to maintain stablecoin value anchorage.

Promote collateral to enhance liquidity: tokenize assets such as real estate, commodities, stocks and treasury bonds, and build a richer collateral ecosystem.

Collateralized debt position (CDP) model: adopts CDP-based stablecoin solutions such as DAI, similar to MakerDAO, and use diversified on- chain assets as collateral, which not only diversifies risks but also reproduces the monetary expansion effect of the banking system on-chain. This type of stablecoins is also required to undergo strict third-party audits and maintain transparency to verify the robustness of the collateral model.