Stablecoin Paradox: Why Stablecoins May Hinder Their Own Adoption in the U.S.

Author: DeFi Cheetah Source: X, @DeFi_Cheetah Translation: Shan Oba, Golden Finance

The rise of blockchain finance is sparking debates about the future of currency, covering topics that were previously limited to academia and central bank policy circles. Stablecoins—digital assets designed to be pegged to fiat currencies—have become the main bridge between traditional finance and Decentralized Finance. Although many are optimistic about the widespread adoption of stablecoins, from the perspective of the United States, promoting stablecoins may not be the optimal choice, as it could disrupt the dollar’s money creation mechanism.

1.Key Points

Stablecoins are actually competing with the total deposits in the U.S. banking system. As a result, the money creation ability based on the fractional reserve model is undermined, and the Federal Reserve’s ability to regulate the money supply through open market operations and other means will also be diminished—because the total deposits in the banking system have decreased.

Specifically, the money-creating effect of stablecoins is marginal, as most stablecoins have shorter-maturing U.S. Treasuries (i.e., less sensitive to changes in interest rates). In contrast, banks are much more money-creating because their liabilities are usually made up of debt instruments with longer maturities. Therefore, the popularity of stablecoins in the United States may damage the transmission mechanism of monetary policy.

Even if stablecoins can indeed increase the demand for government bonds, thereby reducing the refinancing costs for the U.S. government, this issue still exists.

Unless the dollar collateral assets of stablecoins flow back into the banking system through bank deposits, the ability to create money cannot be maintained—however, from the perspective of stablecoin issuers, this practice is not cost-effective, as it means giving up risk-free government bond yields.

Banks cannot use stablecoins as a substitute for fiat currency deposits, as stablecoins are issued by private entities, increasing counterparty risk.

The U.S. government will also not actively return the funds flowing into the stablecoin system back to the banking system, as this money is obtained by issuing government bonds at different interest rates. The government needs to pay the spread between the coupon rate of government bonds and the interest rate of bank deposits, which will undoubtedly increase the burden of fiscal expenditure.

The most important thing is that the self-custody nature of stablecoins determines that it is not compatible with bank deposits: the custody of all digital assets does not belong to the bank, and only on-chain assets can achieve self-custody. Therefore, the more influential stablecoins are in the United States, the more they will interfere with the traditional money creation system. **

The only way to make stablecoins compatible with currency creation is: to have stablecoin issuers operate as banks. However, this is undoubtedly a highly challenging issue that involves a tug-of-war between regulatory compliance and the vested interests of industry giants.

Of course, from the perspective of the U.S. government, promoting the global development of stablecoins is beneficial: it helps to spread the dominance of the dollar, strengthen the narrative of the dollar as a reserve currency, improve the efficiency of cross-border payments, and provide assistance to overseas users in need of stable currency. However, it will be more difficult to implement stablecoins domestically in the U.S. without compromising the currency creation mechanism.

To thoroughly analyze this issue, this article will break down the intrinsic logic of stablecoins from multiple perspectives:

2. Fractional Reserve Banks vs Full Reserve Stablecoins

2.1 Classic Money Multiplier Model

In mainstream monetary theory, the creation of money largely relies on the fractional reserve system. A simplified model demonstrates how commercial banks can amplify base money (M0) to broader monetary concepts such as M1 and M2. If R is the reserve ratio, then the money multiplier m ≈ 1/R.

For example, if a bank must hold 10% of deposits as reserves, the multiplier m can reach 10. This means that injecting 1 dollar into the system (such as through open market operations) could ultimately result in 10 dollars of new deposits.

• M0: Base Currency (Cash in circulation + Reserves held at the central bank)

• M1: Cash + Demand Deposits + Checking Deposits

• M2: M1 + time deposits, money market accounts, etc.

In the United States, M1 is about 6 times that of M0. This expansion mechanism supports the creation of modern credit and is the foundation for productive capital financing such as mortgages and corporate loans.

2.2 Stablecoins as “Narrow Banks”

Stablecoins issued on public chains (such as USDC, USDT) typically promise a 1:1 reserve with fiat currencies, government bonds, or other quasi-cash assets. Therefore, these issuers (official) do not issue customer deposit loans like commercial banks. Instead, they provide liquidity through the issuance of fully redeemable “true dollar” tokens on-chain. From an economic structure perspective, these stablecoins resemble “narrow banks”: that is, they are supported by 100% highly liquid assets for their deposit-like liabilities.

From a purely theoretical point of view, the currency multiplier of this type of stablecoin is close to 1: unlike commercial banks, the stablecoin issuer accepts $100 million in deposits and holds $100 million in Treasury bonds without creating additional money. However, if stablecoins are widely accepted, they can function like a currency. As we’ll discuss later, stablecoins may indirectly expand the money supply by freeing up underlying funds (such as those obtained from Treasury auctions).

3. Impact of Monetary Policy

3.1 Central Bank Master Account and Systemic Risk

Obtaining a Federal Reserve master account is a key step for stablecoin issuers, as financial institutions with such accounts enjoy several advantages:

• Direct access to central bank currency: The main account balance is one of the safest forms of liquidity (part of M0).

• Access the Fedwire system: Large transactions can achieve near-instant settlement.

• Use of Federal Reserve Standing Facilities: Including potential liquidity support mechanisms such as the discount window or interest on excess reserves (IOER).

However, granting stablecoin issuers direct access to these facilities raises two main “excuses” or concerns:

• Operational Risk: Integrating real-time blockchain ledgers with Federal Reserve infrastructure could introduce entirely new system vulnerabilities.

• Monetary Policy Control Ability: If a large amount of funds shifts to 100% reserve stablecoins, it will irreversibly change the Federal Reserve’s ability to adjust credit conditions through a fractional reserve system.

Therefore, traditional central banks may resist placing stablecoin companies on an equal footing with commercial banks, fearing that it weakens their ability to regulate credit and liquidity during times of crisis.

3.2 New Net Money Triggered by Stablecoins

When the issuer of a stablecoin holds a large amount of U.S. Treasury bonds or other government debts, a subtle but important effect occurs: double spending effect—that is, the U.S. government can use public funds for refinancing expenditures, while these stablecoins continue to circulate in the market, being used like currency.

Therefore, even though stablecoins do not have the high multiplier effect like some fractional reserve systems, they can at most double the actual circulation of disposable dollars to a certain extent. From a macro perspective, this means that stablecoins inject government debt into the daily transaction system, opening up another transmission channel.

4. Partial Reserve, Mixed Models and the Future of Stablecoins

4.1 Will stablecoin issuers mimic fractional reserve banks?

There are opinions suggesting that in the future, stablecoin issuers may be allowed to use part of their reserve funds for lending, thereby creating money like commercial banks. This would require a robust regulatory framework, including banking licenses, FDIC insurance, and capital adequacy standards (such as the Basel Accords). Although there have been some legislative proposals (such as the “GENIUS Act”) providing a pathway for stablecoin issuers to become bank-like institutions, these proposals generally emphasize a 1:1 reserve requirement, meaning that there will be no shift to a fractional reserve model in the short term.

4.2 Central Bank Digital Currency (CBDC)

A more radical alternative is the development of Central Bank Digital Currency (CBDC), which involves central banks issuing digital liabilities directly to consumers and businesses. CBDC has the potential to combine the programmability of stablecoins with the trustworthiness of sovereign currencies. However, for commercial banks, the risks of disintermediation cannot be ignored: if the public can open digital accounts directly with the central bank, it could lead to a massive outflow of deposits from the banking system, limiting their lending capacity.

4.3 Potential Impact on the Global Liquidity Cycle

In the current context, leading stablecoin issuers (such as Circle and Tether) hold hundreds of billions of dollars in short-term U.S. Treasury bonds, and fluctuations in stablecoin demand may have a significant impact on the U.S. money market. For example, a wave of stablecoin “redemptions” could force issuers to sell large amounts of government bonds, driving up yields and potentially disrupting the short-term financing market. Conversely, if the issuance of stablecoins surges, it could also depress T-Bill yields. This mutual influence indicates that if stablecoins reach a scale comparable to large money market funds, they could potentially “penetrate” into the channels of the traditional monetary system.

5. Conclusion

Stablecoins are at the intersection of technological innovation, regulatory scrutiny, and traditional monetary theory. They provide “money” with programmability and universal accessibility, establishing a new paradigm for payments and settlements. However, these advantages also disrupt the crucial balance within the existing financial system—particularly the fractional reserve lending mechanism and the monetary control capabilities of central banks.

In short, stablecoins may not replace commercial banks, but will continue to pressure traditional banking to accelerate innovation. As their scale expands, central banks and financial regulators face complex challenges in balancing global liquidity management, regulatory responsibilities, and the economic multiplier effect of relying on partial reserves. The future direction of stablecoins—whether it be stricter regulation, a partial reserve system, or incorporation into a larger framework of CBDCs—will determine the future of digital payments and may also change the evolution path of global monetary policy.

Ultimately, stablecoins highlight a fundamental contradiction: the pull between the efficiency gains provided by a more direct, fully-backed reserve system and the economic growth momentum brought by a fractional reserve model. To navigate this new frontier steadily, rigorous economic analysis is still needed to find the optimal balance between transaction efficiency and money creation.