Author: Sam Broner
Translated by: TechFlow
Traditional finance is gradually incorporating stablecoins into its system, and the trading volume of stablecoins continues to grow. Stablecoins have become the best tool for building global financial technology due to their fast, almost zero-cost, and easily programmable characteristics. The transition from traditional to new technology means we will adopt fundamentally different business models—but this transformation will also bring entirely new risks. After all, a self-custodial model based on digital assets is a disruptive change to the banking system that has existed for hundreds of years.
[The rest of the translation follows the same professional and accurate approach, maintaining the original structure and meaning while translating to English.]The widespread adoption of US dollar stablecoins may weaken local policymakers' ability to regulate the economy. The root of this issue lies in the "Blockchain Trilemma" principle in economics, where a country can only choose two of the following three economic policies at any given time:
Free capital flow;
Fixed or strictly managed exchange rates;
Independent monetary policy (freely setting domestic interest rates).
Decentralized peer-to-peer transfers impact all policies within the Blockchain Trilemma. Such transfers bypass capital controls, forcing capital flows to be completely open. Dollarization weakens the policy influence of managing exchange rates or domestic interest rates by anchoring citizens to international pricing units. Countries guide citizens to local currencies through narrow banking system channels to implement these policies.
Nevertheless, US dollar stablecoins remain attractive to foreign countries because cheaper, programmable dollars can attract trade, investment, and remittances. Most international business is priced in dollars, so the easier it is to obtain dollars, the faster, simpler, and more prevalent international trade becomes. Additionally, governments can still tax entry and exit channels and monitor local custodial institutions.
At the banking and international payment levels, a series of regulations, systems, and tools already exist to prevent money laundering, tax evasion, and fraud. Although stablecoins operate on open and programmable ledgers, making security tool construction simpler, these tools still need actual development. This provides an opportunity for entrepreneurs to connect stablecoins with existing international payment compliance infrastructure, thereby supporting and enforcing relevant policies.
Unless we assume sovereign nations would abandon valuable policy tools for efficiency (extremely unlikely) and ignore fraud and other financial crimes (equally improbable), entrepreneurs will have the opportunity to build systems that help stablecoins better integrate into local economies.
While embracing superior technology, existing safeguards must be improved, such as foreign exchange liquidity, anti-money laundering (AML) regulations, and other macroprudential buffer mechanisms, to enable stablecoins to smoothly integrate into local financial systems. These technological solutions can achieve the following goals:
Localized acceptance of US dollar stablecoins
Integrating US dollar stablecoins into local banks, fintech companies, and payment systems, supporting small, optional, and potentially taxable conversions. This approach enhances local liquidity while not completely undermining local currency status.
Local stablecoins as fund entry and exit channels
Issuing stablecoins pegged to local currencies and deeply integrated with local financial infrastructure. Such stablecoins can serve as efficient foreign exchange trading tools and become default high-performance payment channels. To achieve widespread integration, establishing clearing centers or neutral collateral layers may be necessary.
On-chain foreign exchange markets
Developing matching and price aggregation systems spanning stablecoins and fiat currencies. Market participants might need to support existing foreign exchange trading strategies by holding yield-generating reserve assets and utilizing high leverage.
Competitors challenging MoneyGram
Constructing a compliant, retail-based cash deposit and withdrawal network that rewards agents with stablecoin settlements. Although MoneyGram recently announced a similar product, significant opportunities remain for other enterprises with mature distribution networks.
Improving compliance
Upgrading existing compliance solutions to support stablecoin payment networks. Leveraging stablecoins' stronger programmability to provide richer, faster insights into fund flows, further enhancing transparency and security.
3. Considering the Impact of Government Bonds as Stablecoin Collateral
Stablecoin popularity is not due to government bond backing, but rather their near-instant, nearly free transaction characteristics and unlimited programmability. Fiat-reserve stablecoins were initially widely adopted because they are easy to understand, manage, and regulate. However, the core driver of user demand lies in utility and trust (such as 24/7 settlement, composability, and global demand), not the specific form of collateral.
Fiat-reserve stablecoins may face challenges due to their success: what if stablecoin issuance grows from the current $262 billion to $2 trillion in a few years, and regulators require stablecoins to be backed by short-term US Treasury bills? This scenario is not impossible, and its impact on the collateral market and credit creation could be enormous.
[The translation continues in the same manner for the rest of the text.]Facing deposit outflows, banks will face two less-than-ideal choices: either reduce credit creation (such as reducing mortgage loans, car loans, and small and medium-sized enterprise credit lines) or replace lost deposits through wholesale financing (such as advances from Federal Home Loan Banks), which are more expensive and have shorter terms.
However, stablecoins, as "better money", support higher monetary velocity. A single stablecoin can be sent, spent, lent, or borrowed within a minute - meaning it can be frequently used! All of this can be controlled by humans or software, 24/7 non-stop.
Stablecoins do not necessarily need to be backed by government bonds. Tokenized Deposits are another solution that allows the value proposition of stablecoins to remain on the bank's balance sheet while circulating in the economy at blockchain speed.
In this model, deposits will continue to remain in the fractional reserve banking system, with each stable-value token still effectively supporting the issuing institution's lending activities.
The money multiplier effect is restored - not just through velocity, but through traditional credit creation - while users can still enjoy 24/7 settlement, composability, and on-chain programmability.
When designing stablecoins, economic and innovation balance can be achieved through:
Tokenized Deposits Model: Retaining deposits in the fractional reserve system;
Diversified Collateral: Expanding beyond short-term government bonds to other high-quality, liquid assets;
Embedded Automatic Liquidity Pipelines: Using on-chain repurchases, tri-party facilities, CDP pools, and other mechanisms to reinject idle reserves into the credit market.
These designs are not compromises to traditional banking, but provide more options to maintain economic vitality.
The ultimate goal is to maintain an interdependent and growing economy, making reasonable commercial loans easily accessible. Innovative stablecoin design can achieve this by supporting traditional credit creation while increasing monetary velocity, decentralized collateralized lending, and direct private lending.
Although the current regulatory environment makes Tokenized Deposits not yet feasible, regulations around fiat reserve stablecoins are gradually becoming clearer, opening the door for stablecoins backed by bank deposits.
Deposit-backed Stablecoins can help banks improve capital efficiency while providing credit services, bringing stablecoins' programmability, cost advantages, and rapid transaction characteristics. When users choose to mint deposit-backed stablecoins, banks will deduct the corresponding amount from the user's deposit balance and transfer deposit obligations to a comprehensive stablecoin account. These stablecoins will represent dollar-denominated holding rights to these assets, which users can send to their chosen public address.
In addition to deposit-backed stablecoins, the following innovations will help improve capital efficiency, reduce friction in the government bond market, and accelerate monetary circulation:
Help Banks Embrace Stablecoins
By adopting or even issuing stablecoins, banks can allow users to withdraw funds from deposits while retaining the underlying asset's yield and maintaining customer relationships. Stablecoins also provide banks with payment opportunities without intermediaries.
Help Individuals and Enterprises Embrace DeFi
As more users directly manage their funds and wealth through stablecoins and tokenized assets, entrepreneurs should help these users quickly and safely access funds.
Expand Collateral Types and Tokenize
Extend the range of acceptable collateral assets beyond short-term government bonds (T-bills), such as municipal bonds, high-rated corporate notes, mortgage-backed securities (MBS), or secured real-world assets (RWAs). This not only reduces dependence on a single market but also provides credit for borrowers outside the US government while ensuring high-quality and liquid collateral assets to maintain stablecoin stability and user confidence.
Tokenize Collateral to Enhance Liquidity
Tokenize these collateral assets (such as real estate, commodities, stocks, and government bonds) to create a richer collateral ecosystem.
Adopt CDP Model
Reference CDP-based stablecoins like DAI from MakerDAO, which use diversified on-chain assets as collateral, spreading risk while reproducing the monetary expansion function provided by banks. Additionally, these stablecoins should be subject to strict third-party audits and transparent disclosure to verify the stability of their collateral model.
The stablecoin field faces enormous challenges, but each challenge also brings tremendous opportunities. Entrepreneurs and policymakers who can deeply understand the complexity of stablecoins have the chance to shape a smarter, safer, and superior financial future.
Acknowledgments
Special thanks to Tim Sullivan for his unwavering support. Thanks also to Aiden Slavin, Miles Jennings, Scott Kominers, Christian Catalini, and Luca Prosperi for their profound feedback and suggestions that made this article possible.
About the Author
Sam Broner is a partner in the a16z crypto investment team. Before joining a16z, he was a software engineer at Microsoft, helping to establish Fluid Framework and Microsoft Copilot Pages. Sam also studied at MIT Sloan School of Management, participated in the Hamilton Project at the Boston Federal Reserve, led the Sloan Blockchain Club, curated Sloan's first AI Summit, and received MIT's Patrick J. McGovern Award for creating entrepreneurial communities. You can follow him on X (formerly Twitter) @SamBroner or visit his personal website sambroner.com to read more.
