Why we need decentralized stablecoins

Editor’s note: This op-ed is part of a bigger package of crypto policy views. Find the rest here: “Making the U.S. the crypto capital: What it would take.”

Historically, the privilege to create money (typically by issuing a promissory note in the form of bank deposits) has been tightly guarded, granted exclusively to commercial banks operating within deeply complex and heavily regulated frameworks. Today, system designers are beginning to reimagine money by revisiting its first principles, leveraging the foundational capabilities of distributed ledger technology. Decentralized software (protocols) now can serve as reliable, efficient, and trustless systems that reduce the need for custodial financial intermediation, creating a digitally native form of money backed by any form of asset.

This world of so-called decentralized stablecoins stands to revolutionize not only the way we create money but, really, the whole financial intermediation stack. To advance along this path, it is essential for the United States to cultivate an environment that fosters genuine innovation while safeguarding both consumers and businesses.

Background: Creating money

The monetary system as we know it today was shaped in the wake of the Bretton Woods system’s collapse in 1971. It rests on an intricate and tightly interwoven relationship between the state treasury, the central bank, and commercial banks — a framework that has since defined the contours of global finance and economic policy. Over time, however, the system has revealed its critical limitations, from poor risk management to governance inefficiency, as well as its inability to meet the demands of an increasingly digitally native economy. 

As a result, depositors are increasingly turning to digital financial applications, where technology companies mediate interactions, shaping user experience and education. Today, when managing their finances, consumers engage primarily with productized front ends rather than directly with the financial institutions authorized to store and manipulate the underlying financial aggregates.

Within this landscape, stablecoins have emerged as one of the flagship achievements of digital finance. Stablecoins are digital assets whose designer pegs their price to another reference asset, typically a currency like the U.S. dollar. At their core, stablecoins, much like bank deposits, represent liability units issued against a pool of assets expected to exceed the value of those liabilities. (How the underlying assets can be redeemed by repaying / burning the associated stablecoin depends on every protocol’s specific architecture and governance.) The optimal nature of these backing mechanisms, however, remains an open question. As a result, the standards for creating these digital assets remain diverse, ranging from reserving policies, to issuance and redemption mechanisms, and degrees of control over the infrastructure. 

Having become a pillar of the crypto economy, stablecoins are now making inroads into the traditional financial landscape, becoming for example powerful tools for international payments and trade settlements for both individuals and institutions. As of February 2025, the total stablecoins outstanding float has reached approximately $220 billion, with more than $2 trillion in monthly transfer volumes. In comparison Visa processed an average of about $1.2 trillion per month in 2023. Stripe’s recent acquisition of Bridge, a stablecoin infrastructure startup, for $1.1 billion marks a significant symbolic milestone in the integration of stablecoins into mainstream financial services. By targeting low-hanging use cases with clear friction points, such as international payments, stablecoins are finally steadily gaining traction in mainstream financial applications.

The problem with centralization 

Yet, in prioritizing these functional benefits, many centralized stablecoin issuers have deliberately deferred to traditional institutions to control the money supply. In other words, rather than reimagining the financial infrastructure — that is, the best way to manufacture money in the first place — many centralized stablecoin issuers have concentrated primarily on innovating payment mechanisms, while relying on existing legacy systems for reserving and monetary creation. 

While the initial use cases of stablecoins proved sufficient to make first-generation issuers highly profitable, the rise of centralized stablecoin models presents significant challenges:

• These issuers have added another intermediary between deposit-taking institutions and the end-users of money, diminishing visibility into economic activity and impacting the ability to effectively steer monetary policy.
• Centralized models have entrenched inefficiencies in profit distribution, limiting flexibility and perpetuating rigidity within the financial stack.
• The concentration of issuance within a handful of dominant players has introduced systemic vulnerabilities, as these entities represent single points of failure intermediating massive transaction volumes, as the events surrounding SVB’s bailout suggested.

Decentralized stablecoins can do better, pioneering systems where highly transparent forms of money can be issued by anyone, permissionlessly or semi-permissionlessly, through immutable software existing on the blockchain. 

Benefits of decentralization 

Decentralized protocols offer a chance to redesign the monetary transmission stack, leveraging the cryptographic capabilities of public blockchains to achieve unparalleled levels of efficiency, security, and transparency. Unlike payment overlays built on top of legacy systems, decentralized stablecoins aim to reconstruct the checks and balances that make users trust the value behind a dollar balance, directly connecting the assets (i.e., the reserves) with the liabilities — and so creating fully digitally native money. 

Decentralized stablecoins, and decentralized finance (DeFi) in general, offer numerous advantages over traditional financial frameworks:

• Enhanced resilience: By distributing issuance across a decentralized network, decentralized stablecoins reduce single points of failure, mitigating system risk.
• Improved transparency: The ability to have real-time, on-chain visibility of the asset reserves backing stablecoins in issuance allows for better oversight by system designers, market participants, and regulators.
• Increased efficiency: The modularity and programmability inherent in DeFi enable improved capital efficiency and specialization, countering the traditional trend toward centralization and profit capture.
• Future proofing: As digitally native financial instruments, decentralized stablecoins are better suited than outdated bank APIs for seamlessly developing and launching consumer financial applications.

Ultimately, while most responsible decentralized stablecoin projects take a cautious approach by initially limiting their reserving policies to the safest assets — such as U.S. treasury bonds and reverse repos with systemically important financial institutions — the same foundational mechanisms can, over time, evolve to encompass a broader range of assets, gradually assuming a larger share of the credit creation role traditionally fulfilled by commercial banks within the economy.

Addressing the risks 

Nonetheless, it is important to acknowledge that system designers have sometimes exploited the perceived reliability of stablecoins to create money-like liquidity for highly volatile assets. While these constructs worked during bull markets, downturns revealed their flaws, culminating in catastrophic events such as the Terra-Luna collapse, which erased nearly $45 billion in market capitalization within a week. 

As dramatic as they were, failures like this aren’t new in finance, as they underscore an inherent conflict between money users and producers: the former seeking maximum resilience, while the latter often pushing the boundaries of leverage. It is critical to extract lessons and refine the design of those systems rather than dismissing their potential outright.

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The stakes are high, particularly as digital money begins to reshape traditional finance. While some of the most reputable and internationally relevant state treasuries, such as the U.S. Department of the Treasury, stand to gain from the efficiencies and reach of digital money, conventional financial intermediaries face existential risks. Their business models, built on centralised control and friction-laden processes, remain at odds with the decentralized, trust-minimized principles driving this wave of innovation. This tension presents a pivotal opportunity for leadership and transformation.

The United States has an opportunity to lead by fostering an open dialogue that establishes a regulatory foundation for responsible and ambitious monetary innovation. By doing so, it can strengthen its role as the global reserve currency issuer while also enhancing its position as a centre for financial intermediation and technological advancement. The financial sector has been ripe for innovation for far too long. Change is inevitable — it is now a question of whether to embrace a leadership role in this transition or to follow in its wake.

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Luca Prosperi is Cofounder and CEO atM^0, a project working on decentralized stablecoin infrastructure. Previously, he led Lending Oversight at the DeFi project MakerDAO and publishes research at Dirt Roads. Follow him on X: @LucaProsperi.

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