Original Title: Contrarian Take: How Stablecoins' Disruption of Money Creation Stands in its way to Mass Adoption
Original Author: @DeFiCheetah, @VelocityCapInvestor
Original Translation: zhouzhou, BlockBeats
Editor's Note: Stablecoins combine technological innovation with the financial system, bringing payment efficiency while challenging central banks' control over currency. They are akin to "full reserve banks," and while they do not create credit money, they may influence liquidity and interest rates. Future developments may lead to a partial reserve system or integration with CBDCs, reshaping the global financial landscape.
The following is the original content (reorganized for readability):
The rise of blockchain finance has sparked intense discussions about the future of money, with many topics previously confined to academia and central bank policy circles. Stablecoins—a type of digital asset designed to maintain parity with national fiat currencies—have become a mainstream bridge between traditional finance and decentralized finance. While many are optimistic about the adoption prospects of stablecoins, from the U.S. perspective, promoting stablecoins may not be the best choice, as it disrupts the dollar's money creation mechanism.
Brief Summary: Stablecoins are essentially competing with the deposit scale within the U.S. banking system. Therefore, they weaken the money creation mechanism conducted through the "partial reserve system" and affect the effectiveness of the Federal Reserve's monetary policy (whether through open market operations or other means of regulating the money supply), as they reduce the total deposit amount in the banking system.
It is particularly noteworthy that, compared to the money multiplier effect of banks using long-term bonds as collateral, the money creation capacity of stablecoins is very limited, as stablecoins are primarily collateralized by short-term government bonds (which are insensitive to interest rate changes). Thus, the widespread use of stablecoins in the U.S. may weaken the effectiveness of the "monetary transmission mechanism."
Even if stablecoins may increase demand for government bonds and lower the U.S. government's refinancing costs, their impact on money creation still exists.
Money creation can only remain unchanged if the dollar, as collateral, flows back into the banking system in the form of "bank deposits." However, the reality is that this approach is not cost-effective for stablecoin issuers, as they would miss out on "risk-free government bond yields."
Banks also cannot treat stablecoins as fiat deposits because stablecoins are issued by private entities, which introduces additional counterparty risk.
The U.S. government is also unlikely to redirect funds flowing into the stablecoin system from purchasing government bonds back into the banking system. This is because these funds are sold at different interest rates, and the government would have to pay the interest rate spread between government bond yields and bank deposit rates, which would increase the federal fiscal burden.
More critically: the "self-custody" feature of stablecoins is incompatible with the custodial mechanism of bank deposits. Almost all digital assets, except for on-chain assets, require custody. Therefore, the expansion of stablecoin scale within the U.S. directly threatens the normal operation of the money creation mechanism.
The only way to make stablecoins compatible with money creation is to allow stablecoin issuers to operate as banks. However, this is inherently very challenging, involving complex issues such as regulatory compliance and financial interest groups.
Of course, from the global perspective of the U.S. government, promoting stablecoins is more beneficial than harmful: it helps to expand the dollar's dominance, strengthens the dollar's status as a global reserve currency, makes cross-border payments more efficient, and greatly assists non-U.S. users who urgently need stable currency. However, it will be quite difficult to vigorously promote stablecoins within the U.S. without undermining the domestic money creation mechanism.
To explain the core content of this article in more detail, it analyzes the operational logic of stablecoins from multiple angles:
Partial Reserve System and Money Multiplier Effect: The mechanism of reserve support for stablecoins is fundamentally different from that of traditional commercial banks.
Regulatory Constraints and Economic Stability: Discusses how stablecoins challenge the existing monetary policy framework, market liquidity, and financial stability.
Future Outlook: Looks at possible regulatory models, partial reserve models, and the development path of central bank digital currencies.
Partial Reserve System vs. Fully Reserved Stablecoins
Classic Money Multiplier Principle
In mainstream monetary theory, the core mechanism of money creation is the "partial reserve system." A simplified model can illustrate how commercial banks expand base money (usually denoted as M0) into broader forms of money, such as M1 and M2.
If R is the statutory or bank-set reserve ratio, then the standard money multiplier is approximately:
m = 1 / R
For example, if banks must keep 10% of deposits as reserves, then the money multiplier m is about 10. This means that for every $1 injected into the system (such as through open market operations), up to $10 in new deposits may ultimately be formed in the banking system.
M0 (Monetary Base): Cash in circulation + Commercial banks' reserves at the central bank
M1: Cash in circulation + Demand deposits + Other checkable deposits
M2: M1 + Time deposits, money market accounts, etc.
In the U.S., M1 ≈ 6 × M0. This expansion mechanism supports the development of the modern credit system and is the core foundation for mortgage loans, corporate financing, and other productive capital operations.
Stablecoins as "Narrow Banks"
Stablecoins issued on public chains (such as USDC, USDT) typically promise 1:1 backing with fiat reserves, U.S. government bonds, or other highly liquid assets. Therefore, these issuers do not "lend" customer deposits like traditional commercial banks. Instead, they provide liquidity on-chain by issuing digital tokens that can be fully redeemed for "real dollars."
From an economic perspective, these stablecoins resemble narrow banks: financial institutions that support their "deposit-like liabilities" with 100% high-quality liquid assets.
From a purely theoretical standpoint, the money multiplier of these stablecoins is close to 1: unlike commercial banks, when stablecoin issuers accept $100 million in deposits and hold an equivalent amount in government bonds, they do not create "additional money." However, if these stablecoins gain widespread acceptance in the market, they can still function as money.
We will further explore: even if they do not possess a multiplier effect themselves, the underlying funds released by stablecoins (for example, funds from U.S. Treasury auctions being used by stablecoin companies to purchase government bonds) may also be used by the government for spending, thus having an overall money expansion effect.
Impact on Monetary Policy
Federal Reserve Master Account and Systemic Risk
For stablecoin issuers, obtaining a Federal Reserve master account is crucial, as financial institutions with this account enjoy several advantages:
Direct access to central bank money: Balances in the master account are considered the highest level of liquid assets (i.e., part of M0).
Access to the Fedwire system: Allows for near-instant settlement of large transactions.
Enjoy support from the Federal Reserve's standing facilities: Including mechanisms like the Discount Window and Interest on Excess Reserves (IOER).
However, granting stablecoin issuers direct access to these facilities still faces two major "excuses" or obstacles:
Operational risk: Integrating real-time blockchain ledgers with Federal Reserve infrastructure may introduce new technological vulnerabilities.
Limited control over monetary policy: If a large amount of funds flows into a 100% reserve stablecoin system, it may permanently alter the "partial reserve" credit control mechanism that the Federal Reserve relies on.
Therefore, traditional central banks may resist granting stablecoin issuers the same policy treatment as commercial banks, fearing a loss of intervention capability over credit and liquidity during a financial crisis.
The "Net New Money Effect" of Stablecoins
When stablecoin issuers hold large amounts of U.S. government bonds or other government debt assets, a subtle yet critical effect known as the "double-spend effect" may occur:
The U.S. government uses public funds (i.e., the bond-buying funds of stablecoin issuers) to finance expenditures;
At the same time, these stablecoins can still circulate in the market like money.
Thus, even if not as robust as the partial reserve mechanism, this mechanism may still effectively "double" the available dollar circulation.
From a macroeconomic perspective, stablecoins effectively open a new channel for government borrowing to flow directly into the daily transaction system, enhancing the actual liquidity of the money supply in the economy.
Partial Reserves, Hybrid Models, and the Future of Stablecoins
Will Stablecoin Issuers Move Towards a "Bank-like" Model?
Some speculate that in the future, stablecoin issuers may be allowed to use part of their reserves for lending, thereby mimicking the "partial reserve" mechanism of commercial banks to create money.
To achieve this, strict regulatory mechanisms similar to the banking system must be introduced, such as:
Bank licenses
Federal Deposit Insurance (FDIC)
Capital adequacy standards (such as Basel Accords)
Although some legislative proposals, including the "GENIUS Act," provide a path for stablecoin issuers to become "bank-like," these proposals still typically emphasize 1:1 reserve requirements, meaning the likelihood of transitioning to a partial reserve model in the short term is low.
Central Bank Digital Currency (CBDC)
Another more radical option is for central banks to directly issue Central Bank Digital Currency (CBDC), which are digital liabilities issued directly to the public and businesses by the central bank.
The advantages of CBDC include:
Programmability (similar to stablecoins)
Sovereign credit backing (state-issued)
However, this poses a direct threat to commercial banks: if the public can open digital accounts at the central bank, it may lead to large-scale withdrawals of deposits from private banks, thereby weakening banks' lending capacity and potentially triggering a "digital bank run."
Potential Impact on Global Liquidity Cycles
Today, large stablecoin issuers (such as Circle and Tether) hold hundreds of billions of dollars in short-term U.S. Treasury securities, and their capital flows have had a tangible impact on the U.S. money market.
If users redeem stablecoins on a large scale, issuers may be forced to quickly sell T-bills, thereby pushing up yields and causing instability in the short-term financing market.
Conversely, if demand for stablecoins surges, large purchases of T-bills may depress their yields.
This bidirectional "liquidity shock" indicates that once the market scale of stablecoins reaches that of large money market funds, they will truly penetrate traditional monetary policy and financial system operations, becoming core participants in the "shadow money" landscape.
Conclusion
Stablecoins are at the intersection of technological innovation, regulatory systems, and traditional monetary theory. They make "money" more programmable and accessible, providing a new paradigm for payments and settlements. However, they also challenge the delicate balance of the modern financial system, particularly the partial reserve system and central banks' control over money.
In short, stablecoins will not directly replace commercial banks, but their existence continues to exert pressure on the traditional banking system, forcing it to innovate more rapidly.
As the stablecoin market continues to grow, central banks and financial regulators will have to face the following challenges:
How to coordinate global liquidity changes
How to improve regulatory structures and interdepartmental collaboration
How to introduce greater transparency and efficiency without harming the money multiplier effect
The future path of stablecoins may include:
Stricter compliance regulations
Partial reserve hybrid models
Integration with CBDC systems
These choices will not only affect the trajectory of digital payments but may even reshape the direction of global monetary policy.
Ultimately, stablecoins reveal a core contradiction: the tension between an efficient, programmable full reserve system and a leveraged credit mechanism that can drive economic growth. Seeking the optimal balance between "transaction efficiency" and "money creation capability" will be a key issue in the evolution of the future monetary financial system.
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