Stablecoins: The "Narrow Banks" of Contemporary Times
Washington once again promises to reshape money through code. The political headwinds behind the newly passed Genius Act breathe new life into a recurring fantasy that technology can ultimately eliminate the instability at the core of finance. While this promise is enticing, reality is cruel: we can modernize money, but we still transport it through "pipes" built in the 19th century.
This beautiful idea partly stems from the collapse of Silicon Valley Bank in 2023. This was not a new trouble caused by subprime mortgages or exotic derivatives, but a recurrence of the oldest ailment in banking: maturity mismatch. Depositors, especially those without insurance, can withdraw deposits on demand, but banks must make long-term investments. When interest rates soar and trust breaks, user withdrawals follow, assets are sold at low prices, and the government must intervene again.
"Narrow banks" were once seen as a solution, an institution that only holds cash or short-term government bonds. (Odaily note: The "narrow bank" concept originated in the United States after the Great Depression in the 1930s, referring to a banking model that only accepts deposits and invests these deposits entirely or almost entirely in highly liquid, ultra-low-risk assets like short-term government bonds or central bank reserves)
While "narrow banks" have a high safety coefficient, they lack vitality, cannot create credit, have no loans, and no growth.
Stablecoins are a reimagining of "narrow banks" in the technological era: private digital tokens pegged to the dollar and claimed to be supported by one-to-one liquidity reserves. For example, Tether and USDC claim to provide programmable, borderless, tamper-proof deposits, minus the regulatory burden.
But beneath the digital glamour, the ancient fragility of finance remains: these tokens still completely depend on trust. Reserves are often opaque, custodians may be offshore, audits are selective, and redemption is still just a promise.
Therefore, when trust wavers, the entire system collapses. The stablecoin TerraUSD crashed in 2022 because it tried to maintain its dollar peg using algorithms instead of real reserves. Its value depended on another exchangeable token, Luna. However, when confidence crumbled, investors rushed to redeem TerraUSD, dumping massive amounts of Luna into the market. With no reliable collateral and escalating circumstances, both tokens collapsed within days. Beyond such extreme situations, even today's supposedly "fully collateralized" stablecoins can fluctuate in price when the market questions the authenticity of their reserves.
The Genius Act Bolsters the Dollar's "Exorbitant Privilege"
The Genius Act is Washington's attempt to establish a stablecoin order. It creates an official "payment stablecoin" category, prohibits stablecoin issuers from paying interest to emphasize utility value over speculation, and requires issuers to fully collateralize with cash or government bonds. Issuers must obtain permission, register in the US, and submit to a new certification system. Foreign participants need US permission and must follow US rules or be excluded.
The act's advantages are clear: no fancy algorithms, no unregulated random factors, and no mixing of speculative and payment functions. Many of their wishes are realized. It provides consumer protection, prioritizes bankruptcy redemption, and promises monthly reserve disclosures. Scholars who criticize crypto chaos have finally achieved their desires.
But clarity does not mean safety. The act formally defines stablecoins as "narrow banks". This means stablecoins will not experience maturity mismatches, but also bypass trust intermediaries, the core engine of the financial industry (converting savings into investments), turning risk funds into idle funds.
Meanwhile, the act leaves strategic loopholes. Issuers with asset sizes below $10 billion can choose state-level supervision, which will encourage regulatory arbitrage. In a crisis, stablecoin redemption demands might trigger government bond sell-offs, thus disrupting the hedge asset markets supporting them.
Some economists warn that by anchoring stablecoins to government bonds, we are merely shifting systemic risk to a new corner that is politically popular but operationally untested. Supporters, however, are singing geopolitical praises. The law ensures stablecoins are pegged to the dollar, supported by dollar reserves (like government bonds), and settled through US institutions. As non-US stablecoins remain stagnant, US-backed digital tokens will become the default tool for global payments, savings, and cross-border transfers.
This is the intersection of the Bretton Woods system and Silicon Valley, a regulatory game aimed at extending the dollar's "exorbitant privilege" into the internet era. The Genius Act might consolidate the dollar's dominance more effectively than any Federal Reserve currency swap agreement or trade pact.
Another noteworthy benefit is that by providing regulatory clarity, the act might help bring crypto innovation back to the US mainland. In recent years, US legal uncertainty has led to the exodus of blockchain talent and capital. Despite stablecoins' many shortcomings, they might become a foothold for broader digital financial experiments to occur within US institutions rather than externally.
Stablecoins Have Not Transcended Banking
But trust cannot be outsourced to code. It is created by institutions, audits, and rules. Ironically, blockchain—a technology born in rebellion against financial regulation—is now trying to gain legitimacy through the disclosure and regulation it once tried to evade. The Genius Act provides this clarity, but the trade-offs are fully apparent.
In finance, as in fables, powerful forces often mask greater vulnerabilities. If stablecoins become integrated into daily transactions, their failure will not be limited to the crypto world; it will become a shared problem for households, businesses, and taxpayers.
The act also opens doors for large tech companies or commercial giants to enter the payment space under relatively relaxed rules, raising concerns about privacy, competition, and market concentration in a digital dollar infrastructure driven by scale rather than safety.
Despite continuous hype, stablecoins have not transcended banking. They merely replicate banking's contradictions in a new form. Blockchain's true vision was to end trust dependence. Yet now, we are doubling down on trust under federal regulation.
Money remains a social contract: a promise that someone somewhere will compensate for your losses. No amount of code or collateral can eliminate the credibility demand of this promise. Simultaneously, no regulatory action can abolish the fundamental trade-off in finance: safety comes at the expense of efficiency. Forgetting this invites the next crisis.
Stablecoins repackage old risks as innovation. The danger is not what they are, but what we pretend they are not.
Click to Learn About BlockBeats Job Openings
Welcome to Join the BlockBeats Official Community:
Telegram Subscription Group: https://t.me/theblockbeats
Telegram Communication Group: https://t.me/BlockBeats_App
Twitter Official Account: https://twitter.com/BlockBeatsAsia
