Original Article Title: Can Markets Trust Stablecoins?

Original Article Author: Amit Seru, WSJ

Original Article Translation: Golem, Odaily Daily News

Stablecoins: The Contemporary "Narrow Bank"

Washington once again promises to reshape money with code, and the political headwinds behind the newly passed U.S. "Genius Bill" have given new life to this recurring fantasy, that technology can ultimately eliminate the instability at the core of finance. While this promise is alluring, the reality is cruel: we can modernize money, but we are still piping it through a 19th-century system.

This utopian idea is partly rooted in the 2023 collapse of a Silicon Valley bank. This was not a new trouble caused by subprime mortgages or any exotic derivatives, but a replay of the oldest vulnerability in banking: maturity mismatch. Depositors, especially those without insurance, can withdraw deposits on demand, but banks make long-term investments. When interest rates soar but trust breaks down, withdrawals follow, assets are sold at fire-sale prices, and the government has to intervene once again.

The "Narrow Bank" has been seen as a solution, an institution that holds only cash or short-term government bonds. (Odaily Note: The "Narrow Bank" concept originated in the U.S. in the 1930s after the Great Depression, as a banking model that only accepts deposits and invests all or nearly all of these deposits in highly liquid, ultra-low-risk assets (such as short-term government bonds or central bank reserves))

The "Narrow Bank," while very safe, lacks dynamism, cannot create credit, has no lending, and no growth.

Stablecoins are a reinvention of the "Narrow Bank" in the age of technology: private digital tokens pegged to the dollar and claimed to be backed by a one-to-one liquidity reserve. For example, Tether and USDC claim to provide programmable, borderless, tamper-proof deposits, reducing regulatory burdens.

But peeling back the digital facade, the ancient fragility of finance still exists, as these tokens still rely entirely on trust. But the reserves are often opaque, the custodians may be offshore, audits are selective, and redemption remains just a promise.

Therefore, when trust wavers, the entire system collapses. The stablecoin TerraUSD collapsed in 2022 as it attempted to maintain its peg to the dollar using an algorithm rather than real reserves. Its value depended on another convertible token, Luna. However, when confidence eroded, investors rushed to redeem TerraUSD, dumping large amounts of Luna on the market. With no reliable collateral and the situation escalating, both tokens collapsed within days. Apart from such extreme cases, even so-called "fully collateralized" stablecoins experience price fluctuations when the market questions the authenticity of the reserves behind them.

《Genius Bill》 Bolsters Dollar's “Exorbitant Privilege”

The Genius Bill is Washington’s attempt to establish stablecoin order. It creates the formal category of “payment stablecoins,” prohibits stablecoin issuers from paying interest to emphasize the stablecoin’s utility value rather than speculation, and requires issuers to fully back the stablecoin with cash or government bonds. Issuers must be licensed, registered in the U.S., and adhere to a new accreditation regime. Foreign participants need U.S. approval and must comply with U.S. rules, or be left out.

The advantages of the bill are clear: no fancy algorithms, no unregulated whims, and no mixing of speculative and payment functions. It fulfills many of their wishes. It provides consumer protection, prioritizes redemption in case of bankruptcy, and promises monthly reserve disclosures. Scholars critical of crypto chaos have finally seen their wish come true.

But clarity does not mean security. The bill formally classifies stablecoins as “narrow banks.” This means stablecoins will not suffer from maturity mismatch, but it also eliminates the trust intermediary, bypasses the core engine of the financial industry (turning savings into investment), and turns risk capital into idle funds.

At the same time, the bill also leaves strategic vulnerabilities. Issuers with assets under $100 billion can opt for state supervision, encouraging regulatory arbitrage. In a crisis, the demand to redeem stablecoins could trigger a sell-off of government bonds, disrupting the market for the hedge assets that support them.

Some economists warn that by anchoring stablecoins to government bonds, we are simply shifting systemic risk to a new corner, one that is politically popular but has not yet been extensively tested in operation. But supporters are also singing the geopolitical benefits. The law ensures stablecoins are pegged to the dollar, backed by dollar reserves (such as government bonds), and settled through U.S. institutions. With non-dollar stablecoins still stagnant, U.S.-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 age. The Genius Bill may solidify the dollar’s dominance more than any currency swap agreement or trade deal by the Fed.

Another notable benefit is that by providing regulatory clarity, the bill may help bring cryptocurrency innovation back to the U.S. In recent years, legal uncertainty in the U.S. has led to a drain of blockchain talent and capital. While stablecoins have many shortcomings, they could become a foothold for a wider range of digital financial experiments to take place within U.S. institutions rather than outside.

Stablecoins Have Not Transcended Banking

But trust can't be outsourced to code. It's created by institutions, audits, and rules. Ironically, blockchain, a technology born out of resistance to financial regulation, is now seeking legitimacy through the very transparency and oversight it once tried to evade. The "Genius Bill" has provided this clarity, but the cost of trade-offs has become abundantly clear.

In finance, as in fables, great power often masks greater fragility. If stablecoins become embedded in everyday transactions, then a failure would not be limited to the crypto world; it would become a shared problem for households, businesses, and taxpayers.

The bill has also opened the door for Big Tech or corporate giants to enter the payments field under relatively loose rules, sparking concerns about privacy, competition, and market concentration in a digital-dollar infrastructure dominated by scale rather than security.

Despite persistent hype, stablecoins have not transcended banking. They've merely replicated banking's contradictions in a new form. The true vision of blockchain is to end reliance on trust. Yet, we now find ourselves doubling down on trust under federal oversight.

Money remains a social contract: a promise that someone, somewhere will make good your loss. No amount of code or collateral can eliminate the need for this trust in the promise. Similarly, no regulatory action can override the fundamental trade-offs in finance: security comes at the cost of efficiency. Forgetting this invites the next crisis.

Stablecoins are repackaging old risks as innovation. The danger lies not in what they are, but in pretending they are not what they are.

Original Article Link

Welcome to join the official BlockBeats community:

Telegram Subscription Group: https://t.me/theblockbeats

Telegram Discussion Group: https://t.me/BlockBeats_App

Official Twitter Account: https://twitter.com/BlockBeatsAsia