Circle Chief Economist Gordon Liao: Overseas stablecoins are evolving in three key directions

Introduction

In recent years, the landscape of digital currency evolution has taken several distinctly different paths around the world. China has firmly chosen a sovereign digital currency issued directly by the central bank — Digital Renminbi (e-CNY) — and will transition from version 1.0 of digital cash to version 2.0 of digital deposit money starting in 2026. Meanwhile, on the other side of the ocean, another model is rapidly growing amid regulatory battles: “stablecoins” issued by private institutions like Tether, Circle, and others, aiming to anchor their value to the US dollar. Understanding the different experiments with digital currency in other regions not only helps us learn from broad experiences but also aids in building a Chinese-style digital currency development path. It also facilitates joint exploration with multiple parties on the infrastructure of the future global financial system.

At the forefront of the “On-Chain Future of Financial Systems and Intelligent Agent Economies” dialogue at Luohan Hall, Gordon Liao, Chief Economist of Circle, shared his industry observations on the overseas stablecoin sector. As a macroeconomist who previously worked at the Federal Reserve Board, he did not emphasize the market noise of price fluctuations but instead attempted to analyze and reconstruct this emerging form from the principles of monetary banking.

In Gordon’s view, after an early frenzy of speculation, overseas stablecoins are evolving in three key directions, which include both improvements to traditional financial pain points and bold assumptions about future intelligent agent economies:

2. Return to “Narrow Banking”: Compliant stablecoins like USTC (Circle) are gradually becoming full-reserve currencies, separating payment functions from credit risk to avoid systemic risks like the Silicon Valley Bank collapse. He pointed out that this essentially revives the classic “narrow banking” theory in the digital currency era, with the potential to realize a single currency.

3. Addressing Cross-Border Payment Challenges: One of the most immediate use cases for stablecoins today is bypassing the intermediary banking system and SWIFT network involved in traditional cross-border transfers, enabling near-instant global payments.

4. Rewriting the Internet’s Business DNA: The current internet, lacking a native payment layer, is forced to rely on a “traffic-for-ads” business model. He believes that emerging blockchain-based payment methods can not only become the machine language for high-frequency collaboration among on-chain AI intelligent agents but also fundamentally reconstruct the value realization logic of the internet.

For domestic financial observers and practitioners, this is a highly valuable “reference from others’ gardens,” echoing some considerations in the transition of digital renminbi to version 2.0. Through Gordon’s analysis, we gain a close-up view of another attempt at digital currency. However, we should also be aware of the risks involved, such as “disintermediation” of finance, shadow banking, and issues related to the digital currency issuer’s sovereignty over the currency.

The following is the full translation of Gordon Liao’s speech:

Thank you for the invitation. I am pleased to gather here today with many familiar faces, share some of my thoughts, and look forward to the discussion later.

First, a brief introduction about myself. My professional background is mainly in finance: from starting as a trader, then transitioning into academia, and later joining the Federal Reserve Board. In recent years, I have served as the Chief Economist at Circle. Circle is the issuer of USDC, which is generally considered the most widely used regulated stablecoin. Additionally, Circle is committed to providing a range of platform services, including blockchain infrastructure such as the Layer-1 blockchain Arc built specifically for stablecoins, and interoperability solutions.

In today’s presentation, I will first explain the development of stablecoins in overseas markets from a financial perspective and the underlying principles, then explore some technical issues.

The Digital “Narrow Bank”

What is a stablecoin? From the perspective of the balance sheet, it can be seen as a form of “narrow banking.” As early as the 1920s, American economist Irving Fisher proposed the concept of “100% money,” which requires commercial banks’ deposits to be fully backed by reserves. In this case, the assets on the commercial bank’s balance sheet are entirely composed of government liabilities.

Over the past decade, overseas stablecoins have undergone significant evolution. Initially, stablecoin issuers issued tokens on public blockchains (creating liabilities), with the corresponding assets on their balance sheets being a diverse mix, including short-term US Treasuries, riskier assets like commercial paper, and short-term loans.

In recent years, the standards for issuing stablecoins — especially fiat-backed stablecoins — have greatly improved. This is due both to increased self-regulation by issuers and the overall progress of regulatory frameworks within jurisdictions. With the passage of the US “GENIUS Act” (Guiding and Establishing National Innovation for U.S. Stablecoins Act) in 2025, the implementation of Europe’s “Markets in Crypto-Assets Regulation” (MiCA) in 2024, and other jurisdictions developing related rules, we see a fundamental change in the asset reserve structure of stablecoins.

Today, if you look at dominant overseas stablecoins like USDC, you will find that their fiat assets are almost entirely composed of relatively low-risk financial instruments, with very short maturities and minimal credit risk exposure. Typically, these assets include short-term US Treasuries within 90 days, reverse repos collateralized by Treasuries, and a certain proportion of bank deposits.

Therefore, in terms of asset composition, today’s overseas stablecoins are very close to Fisher’s early “100% money” concept. Whenever a financial crisis occurs, economists often revisit the idea of full-reserve money — abandoning fractional reserve banking and lending. However, historically, this idea has never been fully realized. Today, through digital channels like stablecoins, we are witnessing, for the first time, how “narrow banking” as a form of money operates.

Achieving Monetary Singleness

Earlier, I mentioned that the US “GENIUS Act” was passed in 2025, and the Federal Reserve has recently issued consultations on “settlement accounts.” These accounts are essentially interest-free accounts opened at the Fed, originally not designed for non-bank institutions to hold reserves, but they are crucial for non-bank entities to access the real-time gross settlement system (RTGS) — in the US, this refers to FedWire. These settlement accounts enable non-bank institutions to hold short-term US Treasuries as 100% reserve assets and gain access to FedWire. Previously, FedWire could only be accessed through traditional master accounts or deposit accounts, which meant access was limited to commercial banks or deposit-taking institutions, often carrying significant credit risk.

Similarly, the European Central Bank’s (ECB) TARGET2 system has a scheme for non-bank access. This makes the concept of “100% pass-through government liabilities” possible, allowing stablecoin issuers to strip away various credit risks, including those related to deposit institutions.

This will be a major transformation in the history of monetary banking, embodying the idea of “monetary singleness.” In the early 19th century, the US experienced a “wildcat banking” era, where private institutions issued their own currencies, which traded at different prices in the market. To some extent, the current overseas stablecoin sector faces a similar situation: although in the primary market they can be exchanged 1:1 with fiat currency, in the secondary market their trading prices often carry premiums or discounts, deviating slightly from face value. If ultimately settlement can be completed via FedWire in the Federal Reserve’s accounts, it could mean achieving monetary singleness through a unified settlement mechanism.

Separation of Payments and Credit

From the balance sheet perspective, a key point of overseas stablecoins is that they separate the “credit creation” function of financial intermediaries from their “payment” function. Payment activities aim to facilitate high-value, high-frequency transactions, which are fundamentally different from lending involved in credit activities. If payment activities are separated from these banking credit activities, the risk of contagion can be avoided. You may recall that a few years ago, when large regional US banks like Silicon Valley Bank failed, there was a small panic in the payment system because many fintech companies had large deposits at SVB.

Stablecoins as full-reserve money mean that end-users can truly use them as a payment tool without worrying about the intrinsic credit risk of the obligor. This will also significantly reduce the leverage of financial intermediaries. History repeatedly shows that the leverage effect of financial intermediaries tends to lead to the accumulation of balance sheet risks and further financial turmoil. It was this kind of leverage accumulation that caused the 2008 financial crisis and the Great Depression of the 1930s.

We also see that this trend is being realized through new technological architectures. Some traditional financial intermediary activities — such as lending, trading, and brokerage services — are being completely transformed by on-chain programmable protocols. In many decentralized finance (DeFi) scenarios, stablecoins are increasingly used as “money LEGOs,” serving as foundational modules that enable efficient financial services through protocols. For example, “Automated Market Making” (AMM) is essentially a way to facilitate liquidity for crypto assets, programmed directly into smart contracts, no longer relying on traditional exchanges, order books, or market makers.

Another rapidly growing area in DeFi is collateralized lending. This is similar to traditional repo loans or securities lending: end-users (often hedge funds) use these securities-backed loans for trading or leverage. Today’s DeFi can replicate this model: loans created based on fully collateralized digital securities, assets, or stablecoins, with settlement and clearing all on-chain. This increases transparency, making systemic risks more visible, and automates processes while drawing on traditional repo market concepts. Automation may help avoid the repeated freezing issues seen in repo markets.

Cross-Border Payments and Settlement

In terms of application scenarios, I believe cross-border payments are a huge market for overseas stablecoins because they address current pain points. Traditionally, remittances worldwide require a chain of correspondent banks, handling information transfer via SWIFT and settlement through updating ledgers of related banks in different jurisdictions. With stablecoins, end-users — whether merchants, exporters, or digital asset traders — can transfer value from one currency or jurisdiction to another on the blockchain, almost instantaneously.

Meanwhile, although most (over 90%) overseas stablecoins are currently dollar-pegged, this situation is rapidly changing. Many stablecoins denominated in local currencies are growing swiftly. Circle has issued a stablecoin called EURC, a euro-pegged stablecoin, with a circulation of about 300 million euros, but its growth rate far exceeds that of dollar stablecoins. As securities digitization (tokenization of securities) becomes more widespread, I expect the growth of these local currency stablecoins to accelerate further. When securities themselves are priced and traded in local currencies, it will be natural to use local currency stablecoins — rather than dollar stablecoins — for trading these digitized securities.

Additionally, this creates opportunities for different currencies to serve as international settlement mediums. For example, currently about 25% of global trade involves China, but the use of RMB for settlement is only about 5%. Therefore, there is huge potential for using currencies other than the US dollar for cross-border settlement. If the digitization of securities develops in tandem, people will not only be able to pay in local currencies but also store and invest using local currency stablecoins. Thus, digitalizing assets and securities can also help promote local currency stablecoins.

Development of Market Design

In terms of market design, I believe digitizing various risks will become increasingly important. The previously mentioned digital collateralized lending on DeFi platforms is one such growth area, as collateralized lending is relatively easier to implement. At the same time, we see that uncollateralized loans are also accelerating. These loans occur on-chain but require off-chain information (such as credit scores), mainly using blockchain technology as backend settlement services. Overall, I believe the digitization of credit tools (including sovereign and private credit) will trend upward.

Furthermore, in the past year or two, interest in prediction markets has surged, becoming a new phenomenon. In these markets, end-users can forecast the outcomes of specific events. For example, weather contracts allow predictions of rainfall exceeding certain thresholds, with payouts accordingly. These markets can also relate to elections or geopolitical events. The growth of these markets is astonishing, with annual growth rates multiplying several times.

Much of this is related to market design. From an economic perspective, prediction markets are similar to Arrow-Debreu securities, which pay a certain return in specific world states. This is, in a way, about completing the market, enabling trading of Arrow-Debreu securities and providing opportunities for risk hedging. It also relates to another core topic of this seminar: agentic payments. I believe that trading specific world states as prediction outcomes will push blockchain-based intelligent agent applications toward more interesting directions.

Potential Transformation of Internet Business Models

Finally, I want to discuss a technical issue. Overseas stablecoins represent another upgrade in internet payment technology. As is well known, internet payments have always been a challenge. In fact, the lack of a built-in native payment mechanism is one of the “original sins” of the internet. This deficiency has led internet companies’ business models to focus mainly on capturing user attention and data, with advertising as the primary revenue source. This has also led to the rise of internet giants like search engines and social media, resulting in mixed outcomes.

With micropayments and streaming payments enabled by blockchain and stablecoins, I believe we can solve the core problem of the internet: the inability to directly compensate content creators. The business models of large internet companies could shift from data and ad-based monetization to content and usage-based monetization. As AI rapidly changes how users interact with the internet, we will see more innovations in internet payments — for example, microtransactions where users pay fractions of a cent for each AI query. This could also promote the rise of “agentic payments,” where each autonomous agent (autonomous agent) pays other agents for services via blockchain micro-payments. This will usher in a whole new era.

Thank you all.

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