If the scale of stablecoins is large enough (for example, if Circle occupies 30% of the M2 supply—currently stablecoins only account for 1% of M2), they may pose a threat to the U.S. economy.

Original Title: Rethinking ownership, stablecoins, and tokenization (with Addison)

Written by: @bridge__harris, member of @foundersfund

Translated by: zhouzhou, BlockBeats

Editor’s Note: If stablecoins reach a sufficient scale, they may threaten the U.S. economy by reducing the money supply in the banking system and weakening the Federal Reserve's ability to implement monetary policy. However, stablecoins promote the dominance of the dollar globally, enhance the efficiency of cross-border payments, and help non-U.S. residents access stable currencies. When the supply of stablecoins reaches trillions of dollars, issuers like Circle may become part of the U.S. economy, and regulators will need to balance monetary policy with the demand for programmable money.

Below is the original content (reorganized for readability):

Addison (@0xaddi) and I have recently been discussing the immense interest in the combination of TradFi and cryptocurrency and its core practical use cases. Here is a summary of our conversation regarding the U.S. financial system and how cryptocurrency can integrate into it using "first principles":

The current mainstream narrative suggests that tokenization will solve many financial problems—this may be true, or it may not.

The issuance of stablecoins creates new money supply, just like banks do. The current trajectory of stablecoin development raises an important question: how do they interface with the traditional fractional reserve banking system? In this system, banks only hold a portion of deposits as reserves and lend out the rest, effectively creating new money supply in practice.

Tokenization has become a market trend

The current narrative is "tokenize everything"—from publicly traded stocks to private equity to government bonds—this is beneficial for both cryptocurrency and the global financial system. However, to think about the changes happening in the market from "first principles," we need to clarify the following questions:

• How does the existing asset ownership system work?
• How will tokenization change this system?
• Why is tokenization necessary?
• What is the true "dollar," and how is new money created?

Currently in the U.S., large asset issuers (such as publicly traded companies) entrust the custody of their ownership certificates to DTCC (Depository Trust & Clearing Corporation). DTCC is responsible for tracking ownership records for about 6,000 accounts that interact with it, and these accounts further manage the asset ledgers of their end users. For private companies, the model is slightly different; companies like Carta primarily manage the equity ledgers of enterprises.

Both models rely on highly centralized ledger management. The DTCC model resembles a "nested doll" structure, where individual investors may need to go through 1 to 4 different intermediaries before reaching the actual ledger entries at DTCC. These intermediaries may include the broker or bank where the investor opened their account, the broker's custodian or clearing company, and DTCC itself. While ordinary retail investors may not be directly affected by this hierarchical system, it adds a significant amount of due diligence work and legal risk for institutions.

If DTCC could directly natively tokenize assets, the reliance on these intermediaries would decrease, as market participants could interact more directly with the clearinghouse—but this is not the solution currently proposed in mainstream discussions.

Current tokenization models typically involve an entity holding the underlying asset and recording it as an entry on its main ledger (for example, a sub-entry of DTCC or Carta), and then creating a new tokenized version for trading on-chain. This model is inherently inefficient because it introduces additional intermediaries, leading to value extraction, increased counterparty risk, and delays in settlement and clearing. Additionally, adding an intermediary disrupts composability, as assets require extra "wrapping and unwrapping" steps when circulating between traditional finance and decentralized finance, which may further delay transactions.

A better solution might be to have all assets "natively tokenized," directly putting the ledgers of DTCC or Carta on-chain, allowing all asset holders to enjoy the benefits of on-chain programmability.

One of the main reasons for promoting stock tokenization is to achieve global market access and provide 24/7 trading and settlement. If tokenization can become a bridge for stocks to enter emerging markets, it would indeed lead to a leap forward in the existing system, allowing billions of people worldwide to access U.S. capital markets. However, it remains unclear whether tokenization on the blockchain is a necessary means, as this issue primarily involves regulation rather than technical limitations.

Similar to the regulatory arbitrage of stablecoins, whether asset tokenization can become an effective regulatory arbitrage method over a sufficiently long time scale remains to be seen. Similarly, a common bullish view on on-chain stocks is their potential to combine with perpetual contracts, but the main obstacles to the development of stock perpetual contracts are entirely regulatory issues, not technical ones.

Stablecoins (i.e., tokenized dollars) are structurally similar to tokenized stocks, but the architecture of the stock market is more complex, involving a whole set of clearinghouses, exchanges, and brokers, and is subject to strict regulation. Unlike "ordinary" crypto assets (like BTC), tokenized stocks are not natively tokenized assets; they are backed by real-world assets and have lower composability.

To establish an efficient on-chain market, the entire traditional financial system needs to be replicated, and due to liquidity concentration and existing network effects, this will be an extremely complex and nearly impossible task. Simply tokenizing stocks and putting them on-chain does not solve all problems, as ensuring that these assets are liquid and compatible with the traditional financial system requires significant infrastructure development and thoughtful design.

However, if Congress passes a law allowing companies to issue digital securities directly on-chain without going public through an IPO, then the existence of many traditional financial institutions would become unnecessary (and this possibility may be reflected in new market structure legislation). Tokenized stocks could also reduce the compliance costs of going public for companies.

Currently, governments in emerging markets have no incentive to legalize access to U.S. capital markets, as they prefer to keep capital within their domestic economic systems. From the U.S. perspective, loosening access would raise anti-money laundering (AML) issues.

Supplementary Note: To some extent, the variable interest entity (VIE) structure adopted by Alibaba ($BABA) in the U.S. stock market can be considered a form of "tokenization." U.S. investors do not directly hold Alibaba's original shares but instead hold shares in a Cayman Islands company and enjoy economic rights to Alibaba through contracts. While this approach does expand market access, it also creates new entities and new equity structures, greatly increasing the complexity of the assets.

The True Dollar & the Federal Reserve

The true dollar is an accounting item on the Federal Reserve's ledger. Currently, about 4,500 entities (banks, credit unions, some government agencies, etc.) can access these "true dollars" through the Federal Reserve's master account. No native crypto institution can directly access these funds unless you count Lead Bank and Column Bank, which provide services for some crypto companies like Bridge.

Institutions with master accounts can use Fedwire, a nearly zero-cost, near-instant settlement payment network that operates 23 hours a day, essentially allowing for instantaneous settlement. The true dollar belongs to M0 (the sum of all balances on the Federal Reserve's ledger), while "pseudo-dollars" are M1 created by commercial banks through loans, which is about 6 times the size of M0.

From a user experience perspective, using true dollars is actually quite good—transfer costs are only about 50 cents, and settlements can be instant. Whenever you wire funds from your bank account, your bank operates through Fedwire, which has almost zero downtime, instant settlement, and very low latency. However, due to compliance risks, anti-money laundering requirements, and fraud detection considerations, banks have set many restrictions on large payments, leading to friction on the user end.

The Bear Case for Stablecoins

From this structure, the potential risk facing stablecoins is that if "true dollars" can be accessed more broadly without intermediaries, the core function of stablecoins would be diminished. Currently, stablecoin issuers rely on banking partners, which have master accounts with the Federal Reserve. For example:

• USDC enters the Federal Reserve system through JPMorgan and Bank of New York Mellon;
• USDT connects to the U.S. banking system through financial institutions like Cantor Fitzgerald.

So, why don’t stablecoin issuers apply directly for a Federal Reserve master account?

After all, this would be akin to a "cheat code" that would allow them to:

• Directly earn 100% risk-free Treasury yields without needing to store reserves through bank intermediaries as they do now;
• Solve liquidity issues and achieve faster settlements.

Requests from stablecoin issuers for Federal Reserve master accounts are likely to be denied, just as The Narrow Bank's application was rejected. Additionally, crypto banks like Custodia have also failed to obtain master accounts. However, Circle may have a close enough relationship with its partner banks that even without a master account, its liquidity may not be significantly affected.

The reason the Federal Reserve will not approve stablecoin issuers' applications for master accounts is that the dollar system relies on a fractional reserve banking system—the entire economic system is built on banks holding only a small amount of reserves.

Banks create new money through debt and loans, and if anyone could access 90% or 100% risk-free returns (without lending funds to mortgages, businesses, etc.), who would still want to use traditional banks? If no one deposits money, banks cannot lend, create money, and the economy would come to a halt.

When evaluating master account eligibility, the Federal Reserve primarily considers two core principles:

• No excessive cybersecurity risks should be introduced;
• It should not interfere with the Federal Reserve's implementation of monetary policy.

For these reasons, it is nearly impossible for current stablecoin issuers to obtain master accounts.

The only possible scenario is that stablecoin issuers "become" banks (but they may not be willing to do so). The GENIUS Act proposes to impose bank-like regulation on stablecoin issuers with a market capitalization exceeding $10 billion. In other words, if stablecoin issuers ultimately must accept bank-level regulation, they may resemble a bank more in the long term. However, even so, due to the 1:1 reserve requirement, they would still be unable to operate like fractional reserve banks.

So far, stablecoins have not been stifled by regulation, primarily because most stablecoins (like Tether) are established overseas. The Federal Reserve's global dominance of the dollar is thus maintained—even if not through a fractional reserve banking model—because it helps solidify the dollar's status as a reserve currency. However, if large institutions like Circle (or even a narrow bank) are widely used for deposit accounts in the U.S., the Federal Reserve and the Treasury may become concerned, as this would lead to funds flowing out of banks operating under the fractional reserve model, which are key to the Federal Reserve's implementation of monetary policy.

This is fundamentally the same issue faced by stablecoin banks: to issue loans, a banking license is required. But if stablecoins are not backed by "real dollars," they cease to be stablecoins, losing their reason for existence. This is precisely the "break" point of the fractional reserve model. However, theoretically, a stablecoin issued by a licensed bank holding a master account could operate under a fractional reserve model.

Banks vs. Private Credit vs. Stablecoins

The only benefit of becoming a bank is obtaining a Federal Reserve master account and FDIC insurance. These two privileges allow banks to assure depositors that their deposits are "real dollars" (backed by the U.S. government), even though these deposits have actually been lent out.

However, issuing loans does not necessarily require becoming a bank (private credit companies often do this). The difference between banks and private credit is that the "deposit certificates" provided by banks are considered actual dollars and can be exchanged for deposit certificates from other banks. Therefore, although a bank's assets are completely illiquid (locked in by loans), these deposit certificates remain fully liquid. This mechanism of converting deposits into illiquid assets (loans) while maintaining the perception of deposit value is at the core of money creation.

In a private credit system, the value of deposit certificates is pegged to the value of the underlying loan assets. Therefore, private credit does not create new money, and you cannot truly use deposit certificates from private credit for payments.

Using Aave as an analogy for how banks and private credit operate in the cryptocurrency world:

Private Credit: In the current system, you can deposit USDC into Aave and receive aUSDC. aUSDC is not always 100% backed by USDC, as part of the deposits have been lent to users, forming collateralized loans. Just as merchants do not accept private credit certificates, you cannot directly use aUSDC for payments.

However, if economic participants are willing to accept aUSDC just as they would accept USDC, then Aave functionally becomes equivalent to a bank, with aUSDC representing the "dollars" promised to depositors, while all the supporting assets (USDC) have been lent out.

A simple example: Addison provides a tokenized private credit of $1,000 to Bridget's credit fund, which can be consumed like dollars. Bridget then lends this $1,000 to others, creating a value of $2,000 in the system ($1,000 loan + $1,000 tokenized Bridget Fund). In this case, the $1,000 that has been lent out is merely debt, essentially similar to a bond, representing a claim on the $1,000 lent to Bridget.

Do Stablecoins Create "Net New Money"?

If we apply the above logic to stablecoins, then stablecoins do indeed functionally create "net new money." To elaborate:

Suppose you spend $100 to purchase a U.S. Treasury bond. You now hold a bond, but it cannot be used directly as currency; you can only sell it at market price. Meanwhile, the U.S. government is effectively spending that $100 (as it is essentially a loan).

Now suppose you deposit $100 into Circle, and Circle uses that money to purchase Treasury bonds. The government is still spending that $100—but you are also spending that $100 because you received 100 USDC, which you can use anywhere.

In the first case, you merely hold a Treasury bond, which cannot be used directly. In the second case, Circle has created a "mapping" of the Treasury bond, allowing it to be used like dollars.

From the perspective of the money issuance per dollar deposited, the impact of stablecoins is limited, as most stablecoins' reserve assets are short-term Treasury bonds, which are less affected by interest rate fluctuations. In contrast, banks' money issuance is far higher than that of stablecoins because banks have longer liability durations and higher loan risks. When you redeem a Treasury bond, the government pays you by selling another Treasury bond—this cycle continues indefinitely.

Ironically, although cryptocurrency is rooted in Cypherpunk values, every time a new stablecoin is issued, it effectively lowers the government's borrowing costs and fuels inflation (as demand for Treasury bonds increases, which essentially supports government spending).

If stablecoins reach a sufficient scale (for example, if Circle occupies 30% of the M2 supply—currently stablecoins only account for 1% of M2), they may pose a threat to the U.S. economy. This is because every dollar flowing from the banking system into stablecoins will net reduce the money supply (as the money "created" by banks exceeds that created by stablecoin issuance), and controlling the money supply has historically been the exclusive function of the Federal Reserve. Additionally, stablecoins would weaken the Federal Reserve's ability to implement monetary policy through the fractional reserve banking system.

Nevertheless, the advantages of stablecoins on a global scale are undeniable: they expand the influence of the dollar, reinforce the dollar's status as a reserve currency, enhance the efficiency of cross-border payments, and greatly assist non-U.S. residents who need stable currencies.

When the supply of stablecoins reaches trillions of dollars, issuers like Circle may become deeply integrated into the U.S. economy, at which point regulators will have to find a way to balance the demands of monetary policy with the need for programmable money.

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