Written by: Bridget, Addison
Translated by: Luffy, Foresight News
Addison and I have been discussing the trend and core use cases of traditional finance and cryptocurrency integration. In this article, we will engage in a series of dialogues around the US financial system and explore how cryptocurrencies can be integrated from first principles.
There is currently a view that tokenization will solve many problems in the financial field, which may be correct or may not be.
Similar to banks, stablecoins involve new money issuance. The current development trajectory of stablecoins has raised many significant questions, such as how they integrate with the traditional fractional reserve banking system. In this system, banks only retain a small portion of deposits as reserves, with the remainder used for lending, which effectively creates new money.
I. Tokenization Boom
The mainstream voice is "tokenize everything", from publicly traded stocks to private market shares, and even US Treasury bonds. This is generally beneficial for the crypto field and the entire world. Thinking about the tokenization market dynamics from first principles, the following points are crucial:
How the current asset ownership system operates;
How tokenization will change this system;
Why the initial tokenization scenarios are necessary;
What "real dollars" are and how new money is created.
[The rest of the translation continues in the same professional and accurate manner, maintaining the original text's structure and meaning.]
The Federal Reserve considers two core principles when assessing master account eligibility: 1) Granting a master account to an institution must not introduce inappropriate network risks; 2) It must not interfere with the implementation of monetary policy. Based on these reasons, stablecoin issuers are unlikely to obtain master accounts, at least for now.
Stablecoin issuers can only potentially gain master account access by "becoming" a bank. The GENIUS Act will establish bank-like regulatory requirements for issuers with a market cap exceeding $10 billion. Essentially, the argument is that since they will be subject to bank-like regulation anyway, they can operate more like banks in the long term. However, under the GENIUS Act, stablecoin issuers still cannot operate like fractional reserve banks due to 1:1 reserve requirements.
So far, stablecoins have not disappeared due to regulation because most stablecoins are issued by Tether overseas. The Federal Reserve is pleased to see the dollar dominate globally in this way, as it reinforces the dollar's status as a reserve currency. However, if entities like Circle (or even Narrow Bank) significantly expand in scale and are widely used for deposit-type accounts in the US, the Federal Reserve and Treasury might become concerned. This would cause funds to flow out of banks operating on a fractional reserve model, through which the Federal Reserve implements monetary policy.
This is essentially the problem stablecoin banks will face: to issue loans, they need a banking license. But if stablecoins are not backed by real dollars, they are no longer true stablecoins and would defeat their original purpose. This is where the fractional reserve model "fails". However, theoretically, stablecoins could be created and issued by a chartered bank with a master account operating on a fractional reserve model.
III. Banks, Private Credit, and Stablecoins
The only benefit of becoming a bank is obtaining a Federal Reserve master account and FDIC insurance. These two characteristics allow banks to assure depositors that their deposits are safe "real dollars" (backed by the US government), even though these deposits have actually been lent out.
Issuing loans does not necessarily require becoming a bank, as private credit companies have always done this. However, the difference between banks and private credit is that banks issue a "receipt" considered actual dollars, which is interchangeable with receipts issued by all other banks. The backing assets of bank receipts lack liquidity; however, the receipts themselves are fully liquid. This perception of converting deposits into illiquid assets (loans) while maintaining deposit value is the core of money creation.
In private credit, your receipt's value is tied to the underlying loan. Therefore, no new money is created; you cannot actually use your private credit receipt for spending.
Let's use Aave as an example to explain concepts similar to banks and private credit in the crypto realm. Private credit: In the real world, you deposit USDC into Aave and receive aUSDC. aUSDC is not always fully backed by USDC because part of the deposit has been lent out as collateral. Just as merchants won't accept private credit receipts, you cannot spend aUSDC.
However, if economic participants are willing to accept aUSDC in exactly the same way as USDC, then Aave is functionally equivalent to a bank, where aUSDC tells depositors about their dollars, while all backing assets (USDC) have been lent out.
IV. Do Stablecoins Create New Money?
If we apply the above arguments to stablecoins, they do functionally create "new money". To further illustrate this:
Suppose you buy a $100 Treasury bond from the US government. Now you have a bond that cannot be used as currency, but you can sell it at the fluctuating market price. In the backend, the government is using this money, and the bond is essentially a loan.
Now suppose you send $100 to Circle, and Circle uses this money to buy a Treasury bond. The government is using these $100 - and so are you. You receive 100 USDC, which can be used anywhere.
In the first scenario, you have a bond that cannot be directly used. In the second scenario, Circle has created a representative form of the bond that can be used like dollars.
The "monetary issuance" of stablecoins is relatively small per dollar of deposit because most stablecoin backing assets are short-term Treasury bonds with low interest rate fluctuations. Banks have a much higher monetary issuance per dollar because their liability terms are longer and loan risks are higher. When you redeem a bond, the money you get from the government comes from selling another Treasury bond, and so on.
Ironically, in the cypherpunk values of cryptocurrency, each stablecoin issuance only makes government borrowing and inflation costs lower: increasing demand for Treasury bonds, which are essentially government spending.
If stablecoin scale becomes large enough (for example, if Circle's size reaches about 30% of M2, currently stablecoins are 1% of M2), they could pose a threat to the US economy. This is because every dollar transferred from the banking system to stablecoins reduces net money supply (since banks "create" more money than stablecoin issuance), and money supply was previously exclusively the Federal Reserve's domain of regulation. Stablecoins would also weaken the Federal Reserve's ability to implement monetary policy through the fractional reserve banking system. That said, the global benefits of stablecoins are undeniable: they expand dollar dominance, reinforce the dollar's narrative as a reserve currency, make cross-border payments more efficient, and greatly help people outside the US who need stable currency.
When stablecoin supply reaches trillions of dollars, stablecoin issuers like Circle might be integrated into the US economic system, and regulators will find ways to coordinate monetary policy needs with programmable currency needs. This enters the realm of Central Bank Digital Currencies (CBDC), which we will discuss later.
