Original title: Contrarian Take: How Stablecoins Disruption of Money Creation Stands in its way to Mass Adoption
Original author: @DeFi_Cheetah, @VelocityCap_Investor
Original translation: zhouzhou, BlockBeats
Editors note: Stablecoins combine technological innovation with the financial system, bringing payment efficiency while challenging the central banks monetary control. They are similar to full reserve banks and although they do not create credit money, they may affect liquidity and interest rates. Future development may move towards a partial reserve system or merge with CBDC, reshaping the global financial landscape.
The following is the original content (for easier reading and understanding, the original content has been reorganized):
The rise of blockchain finance has sparked a heated discussion about the future of money, many of which were previously limited to academia and central bank policy circles. Stablecoins - digital assets designed to maintain parity with national fiat currencies - have become a mainstream bridge between traditional finance and decentralized finance. Although many people are optimistic about the adoption of stablecoins, from the perspective of the United States, promoting stablecoins may not be the best option because it will disrupt the dollars money creation mechanism.
Brief summary: Stablecoins actually compete with the size of deposits in the U.S. banking system. Therefore, it weakens the mechanism of money creation through the fractional reserve system and also affects the effectiveness of the Federal Reserves monetary policy implementation (whether through open market operations or other means to control the money supply) because it reduces the total amount of deposits in the banking system.
In particular, it is important to point out that compared to the money multiplier effect of banks using long-term bonds as collateral, the money creation capacity of stablecoins is very limited, because stablecoins are mainly collateralized by short-term government bonds (these assets are not sensitive to interest rate changes). Therefore, the widespread use of stablecoins in the United States may weaken the effect of the monetary transmission mechanism.
Even though stablecoins may increase demand for Treasury bonds and reduce the U.S. government’s refinancing costs, their impact on money creation remains.
Money creation can only be maintained when the U.S. dollar is used as collateral and flows back into the banking system in the form of bank deposits. But the reality is that this approach is not cost-effective for stablecoin issuers because they will miss out on risk-free Treasury bond returns.
Banks also cannot treat stablecoins as fiat currency deposits because they are issued by private institutions, which brings additional counterparty risks.
It is also unlikely that the U.S. government will redirect the funds that flow into the stablecoin system due to the purchase of Treasury bonds back to the banking system. Because these funds are sold at different interest rates, the government has to pay the difference between the Treasury bond interest rate and the bank deposit interest rate, which will increase the federal fiscal burden.
More importantly, the self-custody feature of stablecoins is incompatible with the custody mechanism of bank deposits. In addition to on-chain assets, almost all digital assets require custody. Therefore, the expansion of the scale of stablecoins in the United States 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. But this is very challenging in itself, involving many complex issues such as regulatory compliance and financial interest groups.
Of course, from the global perspective of the US government, promoting stablecoins has more advantages than disadvantages: it helps to expand the dominance of the US dollar, strengthen the US dollars position as the global reserve currency, make cross-border payments more efficient, and greatly help non-US users who are in urgent need of stablecoins. However, it will be quite difficult to vigorously promote stablecoins in the United States without destroying the domestic currency creation mechanism.
In order to explain the core content of this article in more detail, the operating logic of stablecoins is analyzed from multiple perspectives:
Fractional reserve system and money multiplier effect: The reserve support mechanism of stablecoins is completely different from that of traditional commercial banks.
Regulatory constraints and economic stability: Explore how stablecoins challenge existing monetary policy frameworks, market liquidity, and financial stability.
Future vision: Looking ahead to possible regulatory models, fractional reserve models, and the development path of central bank digital currencies.
Fractional Reserve vs Fully Reserve-Backed Stablecoins
The classic money multiplier principle
In mainstream monetary theory, the core mechanism of money creation is the fractional reserve system. A simplified model can illustrate how commercial banks expand base money (usually recorded as M0) into more general forms of money, such as M1 and M2.
If R is the reserve requirement ratio set by law or by the bank itself, the standard money multiplier is approximately:
m = 1 / R
For example, if banks must hold 10% of their deposits as reserves, the money multiplier, m, is about 10. This means that for every $1 injected into the system (e.g., through open market operations), up to $10 of new deposits may eventually form in the banking system.
M0 (Monetary Base): Cash in circulation + Commercial banks reserves at the central bank
M1: Cash in circulation + current deposits + other deposits that can be used to write checks
M2: M1 + time deposits, money market accounts, etc.
In the United States, M 1 ≈ 6 × M 0 . This expansion mechanism supports the development of the modern credit system and is the core foundation for mortgage lending, corporate financing, and other productive capital operations.
Stablecoins as “Narrow Banks”
Stablecoins issued on public chains (such as USDC, USDT) usually promise 1:1 backing with fiat currency reserves, U.S. Treasury bonds, or other highly liquid assets. Therefore, these issuers do not lend customer deposits like traditional commercial banks. Instead, they provide liquidity on the chain by issuing digital tokens that are fully convertible into real dollars.
From an economic perspective, these stablecoins are more like narrow banks: financial institutions that back their “deposit-like liabilities” with 100% high-quality liquid assets.
From a purely theoretical perspective, the money multiplier of such stablecoins is close to 1: unlike commercial banks, when a stablecoin issuer accepts $100 million in deposits and holds an equivalent amount of Treasury bonds, it does not create “extra money.” But if these stablecoins gain widespread acceptance in the market, they can still function as money.
We will discuss this further later: Even if they do not have a multiplier effect themselves, the underlying funds released by stablecoins (such as funds from the U.S. Treasury auction used by stablecoin companies to buy Treasury bonds) may be used again by the government for spending, thereby having an overall monetary expansion effect.
The impact of monetary policy
The Feds Master Account and Systemic Risk
For stablecoin issuers, obtaining a master account at the Federal Reserve is crucial because financial institutions with this account enjoy a number of advantages:
Direct exposure to central bank money: The balance in the main account belongs to the highest level of liquid assets (i.e. part of M0).
Access to the Fedwire system: enables near-instant settlement of large transactions.
Enjoy the support of the Federal Reserves permanent tools: including the Discount Window and the Interest on Excess Reserves (IOER) mechanisms.
However, there are still two major “excuses” or obstacles to giving stablecoin issuers direct access to these facilities:
Operational Risk: Integrating a live blockchain ledger with the Federal Reserve’s infrastructure could introduce new technical vulnerabilities.
Limited control over monetary policy: If a large amount of funds flow into a 100% reserve stablecoin system, it may permanently change the fractional reserve credit regulation mechanism that the Fed relies on.
Therefore, traditional central banks may resist giving stablecoin issuers the same policy treatment as commercial banks, fearing that they will lose the ability to intervene in credit and liquidity during financial crises.
The “net new money effect” brought by stablecoins
When a stablecoin issuer holds a large amount of U.S. Treasury bonds or other government debt assets, a subtle but critical effect occurs, namely the double-spend effect:
The U.S. government uses the public’s money (i.e. the bond purchase funds of the stablecoin issuer) to finance spending;
At the same time, these stablecoins can still circulate and be used in the market like currencies.
Thus, even though not as robust as a fractional reserve mechanism, this mechanism could still potentially “double” the effective supply of dollars available for circulation to the greatest extent possible.
From a macroeconomic perspective, stablecoins actually open up a new channel that allows government borrowing to flow directly into the daily transaction system, enhancing the actual liquidity of money supply in the economy.
Fractional 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 fractional reserve mechanism of commercial banks to create money.
To achieve this, strict regulatory mechanisms similar to those in the banking system must be introduced, such as:
Banking License
Federal Deposit Insurance (FDIC)
Capital adequacy standards (such as Basel Accord)
Although some legislative drafts, including the “GENIUS Act,” provide a path to making stablecoin issuers “bank-like,” these proposals generally still emphasize a 1:1 reserve requirement, meaning that the likelihood of a shift to a fractional reserve model in the short term is low.
Central Bank Digital Currency (CBDC)
Another more radical option is for the central bank to directly issue central bank digital currency (CBDC), which is a digital liability issued directly by the central bank to the public and businesses.
The advantages of CBDC are:
Programmability (similar to stablecoins)
Sovereign credit endorsement (national issuance)
But for commercial banks, this poses a direct threat: if the public can open digital accounts at the central bank, they may transfer deposits out of private banks on a large scale, thereby weakening banks lending capacity and even triggering a digital bank run.
Potential impact on the global liquidity cycle
Today, large stablecoin issuers (such as Circle and Tether) hold tens of billions of dollars in short-term U.S. Treasury bonds, and their capital flows have had a real impact on the U.S. money market.
If users redeem stablecoins on a large scale, issuers may be forced to sell T-bills quickly, thereby pushing up yields and causing instability in short-term financing markets.
Conversely, if the demand for stablecoins surges, large purchases of T-bills could depress their yields.
This positive and negative bidirectional liquidity shock shows that once the market size of stablecoins reaches the level of large money market funds, they will truly penetrate into the traditional monetary policy and financial system operating mechanisms and become core participants in shadow currency.
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 payment and settlement. But at the same time, they also challenge the delicate balance of the modern financial system, especially the fractional reserve system and the central banks control over money.
In short, stablecoins will not directly replace commercial banks, but their existence continues to put pressure on the traditional banking system, forcing the latter to accelerate innovation.
As the stablecoin market continues to grow, central banks and financial regulators will have to face the following challenges:
How to coordinate global mobility changes
How to improve regulatory structure and cross-departmental collaboration
How to introduce greater transparency and efficiency without compromising the money multiplier effect
Future paths for stablecoins may include:
Stricter compliance supervision
Fractional Reserve Hybrid Model
Integration with CBDC systems
These choices will not only affect the development 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. How to find the best balance between transaction efficiency and monetary creativity will be a key issue in the evolution of the future monetary and financial system.
