Traditional finance is beginning to incorporate stablecoins, and stablecoin volumes are growing. Stablecoins are already the best way to build a global fintech because they’re fast, nearly free, and easily programmable. The transition from old to new tech means adopting fundamentally different approaches to how we’ll do business — and the transition will also see the rise of new kinds of risk. After all, a self-custodial model denominated in digital bearer assets instead of registered deposits is a radical departure from the banking system that has been evolving over centuries.
So what are the broader monetary structural and policy considerations that entrepreneurs, regulators, and incumbents will need to address to navigate the transition? Here, we dive deep on three such challenges and possible solutions that builders — whether at a startup or in TradFi — could focus on now: The singleness of money; dollar stablecoins in non-dollar economies, and the effects of better money backed by treasuries.
The singleness of money is the idea that all forms of money within an economy — regardless of who issues them or where they are kept — are interchangeable at par (1:1) and can be used for payments, pricing, and contracts. Singleness of money indicates that there is one unified monetary system, even if multiple institutions or technologies issue money-like instruments. In practice, your Chase dollars equal your Wells Fargo dollars equal your Venmo balance, and should equal your stablecoins — always exactly one-to-one. This holds true despite underlying differences in how those institutions manage their assets and important but often overlooked differences in regulatory status. The history of U.S. banking is, in part, the history of creating and improving systems to ensure dollar fungibility.
World banks, central banks, economists, and regulators love the singleness of money because it vastly simplifies transactions, contracts, governance, planning, pricing, accounting, safety, and every day transactions. And at this point, businesses and individuals take the singleness of money for granted.
But “singleness” is not how stablecoins work today because stablecoins are poorly integrated into existing infrastructure. If Microsoft, a bank, a construction company, or a home purchaser tried to exchange, say, $5M in stablecoins on an automated market maker (AMM), that user would receive less than a 1:1 conversion due to slippage from liquidity depth. A large transaction would move the market and the user would get less than $5M after conversion. If stablecoins are to revolutionize finance, this is unacceptable.
A universal at-par conversion system would help stablecoins function as part of a unified monetary system. And if they don’t function as components of a unified monetary system, stablecoins will not be nearly as useful as they could be.
Here’s how stablecoins work today. Issuers like Circle and Tether provide direct redemption services for their stablecoins (USDC and USDT, respectively) primarily for institutional clients or those who go through a verification process. These often involve minimum transaction sizes. For example, Circle offers Circle Mint (formerly Circle Account) for businesses to mint and redeem USDC. Tether allows direct redemption for verified users, typically above a certain threshold (e.g., $100,000). MakerDAO, being decentralized, has the Peg Stability Module (PSM), which allows users to swap DAI for other stablecoins (like USDC) at a fixed rate, effectively serving as a verifiable redemption/conversion facility.
These solutions work, but they’re not universally accessible, and they require integrators to tediously connect to each issuer. Without access to a direct integration, users are stuck converting between stablecoins or offramping stablecions with market execution instead of settlement at par.
Without direct integrations, a business or application might claim they’ll maintain extremely tight bands — say, always redeeming 1 USDC for 1 DAI within a 1 basis point spread — but that promise is still conditional on liquidity, balance sheet space, and operational capacity.
Central bank digital currencies (CBDCs) could, in principle, unify the monetary system, but they come with so many other issues — privacy concerns, financial surveillance, constrained money supply, slower innovation — that better models that mimic today’s financial system will almost certainly win.
The challenge for builders and institutional adopters, then, is to build systems that make stablecoins “just money,” alongside bank deposits, fintech balances, and cash, despite collateral, regulatory, and UX heterogeneity. Aiming to have stablecoins join the singleness of money presents entrepreneurs with opportunities to build:
Enormous structural demand for the U.S. dollar exists in many countries. For citizens living with high inflation or tight capital controls, dollar-stablecoins are a lifeline — a way to protect savings and plug directly into global commerce. For businesses, dollars are the international unit of account, valuing and simplifying international transactions. People need a fast, widely accepted, stable currency to spend and save, but today cross-border wires can cost as much as 13%, 900M people live in high inflation economies without access to a stable currency, and 1.4B people are underbanked. The success of dollar stablecoins is a testament not just to the demand for dollars, but for better money.
Among other political and nationalistic reasons, countries maintain their own currency because it gives policymakers the ability to tune the economy to local realities. When a disaster affects production, a key export slumps, or consumer confidence wavers, the central bank can tweak interest rates or issue currency to dampen shocks, improve competitiveness, or increase spending.
Widespread adoption of dollar-stablecoins could make it harder for local policymakers to shape their own economies. The reason is rooted in what economists call the “impossible trinity,” the principle that a country can pick only two of the following three economic policies at any one time: (1) free capital flows, (2) a fixed or tightly managed exchange rate, and/or (3) an independent monetary policy that sets domestic interest rates as it sees fit.
Decentralized peer-to-peer transfers affect all three of the policies in the impossible trinity. Transfers bypass capital controls, forcing the capital flow lever wide open. Dollarization can reduce the policy impact of a managed exchange rate or domestic interest rate by anchoring citizens to an international unit of account. Countries rely on the narrow pipe of correspondent banking to shepherd citizens into a local currency and therefore enforce these policies.
Dollar stablecoins are still attractive to foreign countries, however, because cheaper, programmable dollars attract trade, investment, and remittances. Most international business is denominated in dollars, so access to dollars makes international trade faster, easier, and therefore more common. And governments can still tax on- and off-ramps and supervise local custodians.
But a wide range of regulations, systems, and tools, implemented at the correspondent banking and international payments level, prevent money laundering, tax evasion, and fraud. While stablecoins exist on publicly available and programmable ledgers, making safety tools easier to build, those tools do have to actually be built, giving entrepreneurs an opportunity to link stablecoins to existing international payment compliance infrastructure that is used to maintain and deploy these policies.
Unless we expect sovereign countries to give up valuable policy tools in the name of efficiency gains (unlikely), and to stop caring about fraud and other financial crimes (also unlikely), entrepreneurs have the opportunity to build systems that improve how stablecoins will be integrated into local economies.
The challenge is to embrace better technology while also improving the safeguards, like foreign exchange liquidity, anti-money laundering (AML) oversight, and other macro-prudential buffers — so that stablecoins can integrate with local financial systems. These technology solutions would allow:
Stablecoin adoption is growing because they are nearly instant, nearly free, and infinitely programmable money — not because stablecoins are backed by treasuries. Fiat reserve stablecoins are merely the first to be widely adopted because they are the easiest to understand, manage, and regulate. User demand is driven by utility and confidence (24/7 settlement, composability, global demand), not necessarily by the collateral stack.
But fiat-reserve stablecoins could become the victim of their own success: What happens if stablecoin issuance grows tenfold — say, from $262 billion today to $2 trillion in a few years — and regulators require stablecoins to be backed with short-dated U.S. Treasuries? This scenario is at least within the realm of the probable and the effects on collateral markets and credit creation could be significant.
If $2 trillion of stablecoins sit in short-dated Treasuries — one of the only assets regulators currently bless — issuers would own roughly one-third of the $7.6 trillion T-bill float. This shift would echo the role money market funds play today — concentrated holders of liquid, low-risk assets — but with larger implications for treasury markets.
T-bills are appealing collateral: They’re widely thought of as one of the least risky and most liquid assets in the world; and they’re also denominated in dollars, simplifying currency risk management. But $2T of stablecoin issuance would potentially lower treasury yields and reduce active liquidity in the repo market. Each additional stablecoin is an extra bid on treasuries, allowing the U.S. Treasury to refinance itself more cheaply and/or making T-bills scarcer — and pricier — for the rest of the financial system. This would likely reduce income for stablecoin issuers while making it harder for other financial institutions to source the collateral they need to manage liquidity.
One solution is for the Treasury to issue more short-term debt — say, expanding the T-bill float from $7T to $14T — but even then, a growing stablecoin sector will reshape supply-demand dynamics.
More fundamentally, fiat-reserve stablecoins resemble narrow banks: they hold 100% reserves in cash equivalents and do not lend. That model is inherently low-risk — and part of why fiat-reserve stablecoins are finding early regulatory acceptance. Narrow banking is a trustworthy and easy-to-verify system that gives token holders a clear claim on value, while avoiding the full regulatory burden placed on fractional reserve banks. But a 10x growth in stablecoins means $2T of dollars fully backed by reserves and bills — with knock on effects for credit creation.
Economists worry about narrow banking because it limits how capital is used to provide credit to the economy. Traditional banking, also known as fractional reserve banking, keeps a small portion of customer deposits in cash or cash equivalents but lends out most of the deposits to businesses, home buyers, and entrepreneurs. The bank, overseen by regulators, then manages the credit risk and loan maturities to make sure depositors can access their cash when they need to.
This is the reason why regulators don’t want narrow banks to take dollars from deposits — narrow banking dollars have a lower money multiplier (the rate at which a single dollar supports multiple dollars of credit).
Ultimately, the economy runs on credit: Regulators, businesses, and everyday customers benefit from a more active, interdependent economy. And if even a modest slice of the $17 trillion U.S. deposit base migrates into fiat-reserve stablecoins, banks could see their cheapest source of funding shrink. Those banks would have two unappealing choices: pull back on credit creation (fewer mortgages, auto loans, and SME credit lines), or replace the lost deposits with wholesale funding such as Federal Home Loan Bank advances, which are both costlier and shorter term.
But stablecoins are better money, so stablecoins support much higher money velocity. A single stablecoin can be sent, spent, lent, or borrowed — used! — many times a minute, controlled by humans or software, 24 hours a day, seven days a week.
Stablecoins also need not be backed by treasuries: Tokenized deposits are another solution, allowing stablecoin claims to sit on a bank’s balance sheet while moving around the economy at the speed of a modern blockchain. In this model, deposits would stay in the fractional-reserve banking system, where each stable-value token effectively continues to support the loan book of the issuing institution. The multiplier effect returns — not through velocity but through traditional credit creation — while users still get 24/7 settlement, composability, and on-chain programmability.
Designing stablecoins so they (1) keep deposits inside the fractional-reserve system through tokenised-deposit models; (2) diversify collateral beyond short-dated Treasuries into other high-quality, liquid assets; and (3) embed automatic liquidity pipes (on-chain repo, tri-party facilities, CDP pools) that recycle idle reserves back into credit markets, is less a concession to banks than an option for preserving economic dynamism.
Remember, the goal is to maintain an interdependent and growing economy where it’s easy to get a loan for a sensible business. Innovative stablecoin designs can achieve this by supporting traditional credit creation while also increasing money velocity, collateralized decentralized lending, and direct private lending.
While the regulatory environment has made tokenized deposits infeasible to date, increased regulatory clarity around fiat-reserve stablecoins opens the door for stablecoins that are backed by the same collateral that backs bank deposits.
Deposit backed stablecoins would allow banks to continue providing credit to their existing customers while improving capital efficiency and offering the programmability, cost, and speed improvements of stablecoins. A deposit-backed stablecoin could be a simple offering — when a user elects to mint a deposit-backed stablecoin, the bank deducts the balance from the users depository balance and shifts the depository obligation to an omnibus stablecoin account. Stablecoins representing a dollar-denominated bearer claim to these assets could be sent to the public address of the users choosing.
Besides deposit backed stablecoins, other solutions will improve capital efficiency, reduce friction in the treasury markets, and increase money velocity.
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There are big challenges, but each challenge brings huge opportunities. Founders and policymakers who grasp stablecoins’ nuances can shape a smarter, safer, better financial future.
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Acknowledgements: Special thank you, as always, to Tim Sullivan. Additional thank you to Aiden Slavin, Miles Jennings, Scott Kominers, Christian Catalini, and Luca Prosperi for their thoughtful feedback and suggestions that made this post possible.
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Sam Broner is a partner on the investing team at a16z crypto. Prior to joining a16z, Sam was a software engineer at Microsoft, where he was on the founding team of the Fluid Framework and Microsoft Copilot Pages. Sam also attended MIT’s Sloan School of Management, where he worked on Project Hamilton at the Federal Reserve Bank of Boston, led the Sloan Blockchain Club, directed Sloan’s first AI Summit, and won MIT’s Patrick J. McGovern award for creating an entrepreneurial community. Follow him on X @SamBroner, and read more of his work at sambroner.com.
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