This is how I understand the uprising of stablecoins, let me know if I am wrong:
One of the best businesses is to offer this service:
Give me your money, I'll give it back to you later.
Because then you can lend out that money to someone who offers this service:
Give me your money, I'll give it back to you later. Plus some interest.
You now have a business which, at almost no cost, generates money. The interest offered by the latter service.
Doing so is regulated. You need to jump through a lot of hoops and you are very limited in whom you can lend out your customers' money to.
But you can design the same type of business with stablecoins. By offering:
Hello! I have two offerings: 1: I sell someNiceCoin for a dollar. 2: I buy someNiceCoin for a dollar.
For your customer it is the same. They give you money and get it back later.
But now you are not a "money holder". You are a trader. A trader of some coin you invented. You don't need to jump through so many hoops and you can lend out the money you earn from selling someNiceCoin to services with higher yields.
I think this is somewhat reasonable, but with plenty of asterisks / not the "arbitrage" this would imply.
There is still a "real", regulated money-holder in the loop - it's just Bridge (the manager of the cash reserves backing the coin - and licensed money transmitter etc etc). Or in the case of USDC - Circle, the "money-holder" / manager of reserves (also has tons of licensed / is very regulated). And the ETH network (where the coin itself sits) for much of the tech / logistics of making that held-money usable.
In fact - because neither Bridge nor Circle are banks, they can't do the fractional reserve that banks do, and are only allowed to do the 1:1 backed thing, with super regulated entities like BlackRock. "you can lend out the money you earn from selling someNiceCoin to services with higher yields" is strictly not true - they _cannot_ lend the money out, they have to store the money in ways that the end-consumers could do themselves, directly.
In that frame - the "efficiency" for you as a fintech is that instead of having to work with a bank on a "stored value" program, you can just work with Bridge and Circle, whose technological primitives are leaps / bounds ahead of the bank, but more importantly - who are much more flexible to work with than the median "partner bank", because they are not banks.
The whole "partner bank" ecosystem only really even scales because there are API providers like Increase.com / Unit.co etc to wrap them.
This was also where I initially landed after finding out that the custom stablecoin could not leave my Bridge instance.
I think the role that crypto plays in enabling this is as a neutral, credible storage layer on which this token can be held, that is not my Postgres database as (eg.) Bridge - these tokens still are actual ERC-20s/etc that are present on-chain, as are the wallets that hold them -- but yeah, I'm:
- not sure how instrumental that actually is here
- not sure if that's just incidentally the easiest structure for Bridge, whose primary business revolves around facilitating payments via stablecoin (now, as a part of Stripe)
Blockchain guarantees there is no double spend while not having one controlling entity. Legal requirements are there to do exactly the same thing - not let managers mess with other people money.
But there are 2 separate controlling entities in this scenario. The hypothetical company that wants to issue the stablecoin and Bridge. They have complete and full control over the money anyway, blockchain or not.
What you describe sounds like the opposite of my perspective.
You make it sound like stablecoins offer a benefit to all sides because of better technology.
My expectation is that they offer a benefit to the borrower because the borrower is less regulated and can lend out the money with higher risk and by doing so generate a higher yield.
You mention "1:1 backed thing, with super regulated entities" as if that means the money is safe. But as we have seen with Silicon Valley Bank, even lending out the money to the government via bonds is not safe enough in all circumstances. And my expectation is that issuers of stablecoins can do even more risky types of lending than Silicon Valley Bank did.
The difference is in the assumption of "higher risk". Most of this borrowing is eventually the US Govt because the stablecoins are backed by T bills. So its not as much of an arbitrage as you say.
But then can you have a world where all the money is only stablecoins and backed by "something"? I think that has interesting implications for monetary supply and central banking
> But then can you have a world where all the money is only stablecoins and backed by "something"? I think that has interesting implications for monetary supply and central banking
This strikes me as among the biggest macro risks, and (IIRC) is one of the reasons banks are fighting to prohibit stablecoins from granting yield (to keep the banking system working).
A different primitive that is related to stablecoin but not the same thing, popular among banks, is the "deposit token" - basically a stablecoin, but backed by bank deposits rather than 1:1 cash reserve, and operated by banks. eg. JPM's "JPMD": https://www.jpmorgan.com/payments/newsroom/kinexys-usd-digit...
Not sure how popular / active they are yet, but I imagine they will become a bigger deal as stablecoins are further regulated / banks push harder on their own interests.
USDC gets me 4% on Coinbase, and USDB and other Bridge-issued custom stablecoins also give the customer rewards that they can pass onto the holder (thanks to MMF/similar cash equivalents behind the scenes etc).
But yes - this is why banks want to prevent stablecoin issuers from being allowed to grant rewards
If I deposit dollars in a savings account I will get paid interest, but that is different from the dollar itself being an interest-bearing asset. I think the same thing applies to stablecoins. Does USDC pay interest to the holder or do I have to make a USDC deposit at Coinbase in order to get paid interest? Also, banks already offer a ton of products that generate yield. I don't see why a product that seems relatively similar to many products that banks already offer would destroy their business... unless such a product is much better than what banks offer, but that doesn't seem to be the case.
>unless such a product is much better than what banks offer, but that doesn't seem to be the case.
I think you're basically correct here. I think the fear of the banks - and why they are insistent on prohibiting stablecoins from generating yield/interest (via the GENIUS act) - is that that doesn't stay true in the long-term, as stablecoins ascend as a cross-border payment/storage rail.
>Does USDC pay interest to the holder or do I have to make a USDC deposit at Coinbase in order to get paid interest?
I believe USDC from Coinbase is framed as "reward", and is downstream of an agreement Coinbase has with Circle to get that "reward" from Circle for all USDC deposits it holds on platform. Other "rates" you can get on centralized stablecoins tend to be similar AFAICT.
In that case, wouldnt sp500 or vanguard be bigger risks to banks existing?
I think most people think banks make money by holding your money and giving you some interest when they actually make money by bringing money into existance out of nowhere when they issue mortgages.
I don't see why not - I'm sure the banks (or others more expert than me) would argue for stablecoins being somehow distinct in this regard, but yeah don't know why eg. Vanguard wouldn't also be a credible cause of deposit flight.
(I do vaguely remember reading that banks were concerned about people moving to money-market fund products that had bank-like functionality)
> you can lend out the money you earn from selling someNiceCoin to services with higher yields.
> And my expectation is that issuers of stablecoins can do even more risky types of lending than Silicon Valley Bank did.
To be clear - stablecoin issuers are not allowed to "lend" the money out like a bank or a regulated lender _at all_ - much less doing "riskier" lending. Bridge and Circle still have to, by law, maintain 1:1 cash/cash-equivalent [0] reserves, which means the best they can do is things like US treasuries / money-market funds - which are also primitives accessible to consumers and businesses directly (ie. not inherently competitive).
Certainly there is still great benefit to Bridge, Circle, and the customers issuing stablecoins through them - because it gets them MMF/treasury yield without having to do a "stored value" program at a bank etc - but the issuers who are converting user deposits into stablecoins are also only getting user deposits in exchange for doing useful things.
People don't deposit funds into Mercury just because Mercury gives them 4% (there are plenty of places you can get 4%). You put money into Mercury for the software - this is primarily an implementation detail of how Mercury manages that money, affords to give you a competitive (4%) rate, and affords to give you great software.
1:1 cash/cash-equivalent reserves, which means the
best they can do is things like US treasuries /
money-market funds
Whether US Treasuries are "cash equivalent" is debatable / depends on the specifics. A dollar is worth a dollar tomorrow. A 10-year US treasury might not.
Are you saying the holder of a stable coin is not taking a higher long-tail risk than the holder of a dollar in a checking account of a bank?
To be even more specific though, "cash equivalent" and the sorts of treasuries that implies are specifically short-duration ones (ie. this cash cannot be parked in a 10-year US treasury either)
Cash equivalents are short-term commitments "with temporarily idle cash and easily convertible into a known cash amount"
Issuing a branded stable coins of this kind lets you earn carry interest on tbills. Fine. Now, why would anyone buy a branded stable coin that explicitly doesn't promise a return?
(Bonus random question: is a UK premium bond a stable coin?)
>Now, why would anyone buy a branded stable coin that explicitly doesn't promise a return?
In practice, you're not even buying these (or at least - that is not the presentation). What you're actually doing is making a deposit into a "stablecoin" account at a place like Stripe (who now offers a Stripe Stablecoin Account, denominated in the USDB custom stable), Slash.com, Dakota.xyz, etc. IIRC Mercury is also a design partner of Stripe's blockchain.
When you make that deposit - either from your regular bank account via ACH/wire, or via USDC - it settles into the account as the branded stablecoin. When you send funds out - you're either sending as fiat or as USDC.
In short - you're not proactively "buying" the coin, and in fact - Stripe describes [0] the USDB coin as closed-loop & "not for public sale", and I think the others are the same. You're just depositing your funds into a platform, in order to use them on-platform - and the platform is holding them as a "custom stablecoin."
1) Assume the buyer/seller holds capital from sources that the majority of the market considers “illicit” and/or is legally sanctioned and/or physically frozen or restricted. Aka the capital can never be called (or at a discount that is unknowable) or the transaction could be later legally reversed or nullified by one or more legal entities. But of course the StableCoin market maker fails to communicate this risk. Therefore the real value of either side of the trade could be zero despite the non-zero StableCoins being transferred. Thus that’s not really a “trade” because there are hidden substantial risks.
2) Along the lines of Matt Levine “Stablecoin treasury strategy?” Consider that the buyer is a publicly listed company, and they fundraise based upon purchase of the digital asset. Then you are doing what most banks consider is not trading but fueling speculation (and normally you can’t expose average retail investors to these risks).
The innovation of StableCoins is much less about Capitalism and much more about re-packaging fraud. And given how lax the prosecution of fraud was during the Financial Crisis, there’s a big meta-bet that StableCoin “traders” will never face losses.
>Assume the buyer/seller holds capital from sources that the majority of the market considers “illicit” and/or is legally sanctioned and/or physically frozen or restricted
This is not feasible legally, and is where your claim falls apart.
From the now-passed GENIUS act [0] which regulates the stablecoin issuer:
- "Permitted payment stablecoin issuers must maintain reserves backing outstanding payment stablecoins on at least a one-to-one basis, consisting only of certain specified assets, including US dollars and short-term Treasuries."
Their point is that if the money held in reserve are proceeds from criminal activity, it is possible for the assets to be seized or frozen by the feds (which would render them no longer backed 1-to-1 even if they were before then). The text of the law you quoted doesn't really change anything.
I see, I misread: that’s interesting. I would assume the issuer would still be liable to resolve the backing, but yeah I could see how that poses systemic risk.
I also don’t think such a risk could realistically remain hidden - this is still going to be heavily regulated and audited, and industry will wise up to the sorts of risk that emerge.
Actually there is a lot of cost, in terms of bank reputation, loan underwriting, and finding consumers and businesses to lend to. There is an entire loan servicing department etc.
Banks are allowed to keep fractional reserves and lend out money they create out of thin air.
Stablecoins are not. (Hi, Terra Luna!) Stablecoin issuers like DAI even overcollateralized. That money is sitting there doing nothing. Enter… banks.
USDT rebuffed the EU’s push to get them to deposit into European banks. They prefer US treasuries (and the current admin is lucky they’re doing it because the treasuries are taking a dive… and some of them are even looking into forcing partners to buy US treasuries and issue stablecoins).
The GENIUS act requires stablecoin issuers essentially to keep 100% of the money in deposits and to work with US banks, and prop up the US treasuries and dollar.
You see, originally, Tether (issuers of USDT, the original stablecoin) kept a lot of their collateral in Bitcoin, which was essentially creating an asset bubble / ponzi scheme where newly printed USDT propped up BTC and vice versa. But since the US government started running multi-trillion-dollar deficits every year, it has also become a ponzi scheme, just a sovereign-debt-based ponzi scheme.
That’s the real play here, for a country that’s $35 trillion in debt and needs to keep demand for its treasuries going… because printing money as UBI — to trickle up, get taxed and service the debt properly — just aint in its overton window. The link below goes over exactly how a UBI could solve multiple problems at once over a few decades (help cushion the demand shocks for human labor, help make taxes on pollution and fossil fuels popular, and help the government actually pay off its debt)… but since USA probably isn’t going to do this on a federal level, it might make sense to go bottom-up, town by town:
Seems like a really inefficient way to do points… my CC company gives me 3 points and I eventually redeem them for USD.
Is that not the L1 L2 network stuff, but just far less efficient than a DB write?
From the consumer perspective totally - but those credit card points come from the interchange the issuer makes from issuing the card / your card txns (ie. as a proportion of your _spend_ using the card).
The sort of rewards you get for storing your business's cash at eg. Mercury, or using a wallet like Cash App - have to come from yield generated by the actual cash deposits, which is the sort of program that is much harder to operate / requires close ongoing partnership with partner banks / etc.
If I'm eg. Mercury, storing the dollars you (business) deposit into my platform in a "branded" stablecoin will get me the same rewards - bc it's backed 1:1 by eg. a money-market fund at Blackrock - for much less of the operational burden, _because_ I'm not participating in a stored value program at an actual bank. The alternative today is that Mercury does store it at a bank, does have to maintain a "stored value" program with that bank, and the yields are standard bank interest (rather than eg. MMF).
Moreover - through Bridge, I can withdraw fiat USD and deposit fiat USD into that "branded stablecoin", and it's just an in-app balance in the fintech app - so the fact that it's a stablecoin doesn't change my experience at all other than in conferring standard rewards. If you look at how eg. Stripe Stablecoin Account labels the balance, it just calls it "Digital dollars" - so it's not much more than a backend implementation detail, really.
Imagine you do it with PG - add a column “money”, put some numbers into it and issue a ToS guaranteeing money in your db 1-to-1 exchange to USD. Because now you store money amount in your db and can manipulate them at will you have to be a bank. Good luck with that.
I think the difference is that there is still a maintenance of stored value, but that stored value is now able to earn more yield than what you would by depositing it at a bank.
In both the cases described in the article - using Unit or Bridge - you pass on the work of stored value to someone else. But Unit doesn't earn as much by being the stored value as Bridge would because Bridge is invested into T bills / MMFs. Hence, Mercury coin is better than running a bank using Unit.
This is a great question, I actually don't even think it's strictly a matter of "more" yield.
To dig into your example a bit deeper, there are a few general differences with an (eg.) Unit vs. Bridge.
- With a BaaS like unit, you're often actually forming a partnership _not just_ with Unit (a software provider), but the partner banks Unit works with. More specifically, you're operating two sorts of programs with the partner bank: programs around "money transmission" (_moving_ money on behalf of customers) and around "stored value" (_storing_ money on behalf of customers). Each of these programs tends to be pretty involved - as is having to be in a three-party agreement etc, working with an old-school bank, under legacy banking constructs, etc.
- With Bridge: Bridge is your single partner. Bridge _itself_ has partner banks for the sake of both banking + money movement, but when you store customer funds as stablecoins in a crypto "wallet" Bridge spins up, it is operationally different than if you were to store them as fiat in a customer-specific bank account you opened at Bridge's partner bank, under a classic FBO/DDA program. The partner bank Bridge using is more involved in the money _transmission_ piece, when you want to receive customer funds in as fiat, or push customer funds out as fiat - but the funds being stablecoin at rest would seem to reduce the burden here.
So yes that might result in some cost-saving, but it's also just (vaguely) _easier_ to do from a technical/operational POV.
(Some of the details above may be wrong / vary by provider / etc - but having worked with both of these sorts of providers at some length, this is my "felt" difference and high-level understanding).
(For those of us who remember what runs on a bank with your savings in it feel like) What if any protection is there, that you will be able to withdraw your money when a massive dunk in Bitcoin crashes a bunch of major holders and you want your savings back?
"It’s always backed one-to-one by the equivalent value of US dollars held in cash and short-duration money market funds at BlackRock."
So while there are other (potentially novel) sorts of counterparty risks - the backing is definitely more robust than (and pretty much entirely decoupled from) Bitcoin/the rest of the crypto sphere, and is closer to dropping funds off in a Fidelity money market.
This is correct and addressed with diversification. Is money is spread across multiple safe instruments your chances to get in trouble is minimal. If you do get in trouble then your exposure is small too.
Indeed, and good call out; one likely source of the "novel" counterparty risk I allude to (though really not even novel - "different" is probably the more reasonable word).
People who ask such questions aren't stupid enough to be in crypto.
It's easy to unravel the entirety of crypto:
Who is willing to spend any money for crypto?
It's the same people who want to profit from reselling crypto at a higher price.
That's all there is to it. If you understand this, you also understand why the system eventually has to fail, leaving holders with trillions in losses that funded the profits people took out of the system.
I think there is plenty of counter-evidence in how this is being approached:
- The obvious: these are stablecoins, whose value is pegged to and 1:1 backed by fiat currency / is not capable of the cliche pump&dump dynamics of other crypto tokens.
- To the extent that (eg. today) they are coupled to a network like ETH or Solana (whose holders stand to gain) - both Stripe and Circle are building L1 blockchains right now whose native gas tokens are stablecoins, and are therefore also decoupled from any of the bagholder stuff. Merits of those chains aside: the big players want to further eliminate that dynamic and are putting their money where their mouth is.
- Stripe (and other legitimate fintechs) want to use stablecoins specifically because they legitimately make cross-border payments much easier, and because there is serious/earnest usage emerging. SWIFT actually does suck (not just to the cliche engineer-who-wants-better-APIs way, but even a banking professional would tell you), international payments are more unsolved than you think outside of a few fintechs who are basically just managing massive ledgers + a ton of liquidity around the world.
(In short: I think your take is something that may have made more sense 5-10 years ago, when Stripe themselves ditched crypto for the reasons that it didn't work for anything useful and was primarily a means of gambling)
Crypto was never gambling. It's a wealth redistribution scheme.
I don't trust stablecoins that are built on the same technology, by the same actors, and are then used to facilitate most of crypto's trading volume.
I am not convinced of their backing, and I think it likely that together with the crypto collapse stable coin issuers are going to fall like dominos too.
As for Stripe, they announced that their first customer for this is some Argentinian bike importer. We will see if it's that useful a tool in the future. It's not yet the case.
Yeah - there's no real advantage to crypto, even less so for a stable coin (it really seems to be someone /trying/ to make crypto look legitimate, with absolutely no reason to buy.
Here's how a buyer of the coin should see it - I have 1 USD and I can put that money into a bank, into my pocket, or under my bed mattress.
If I buy a crypto stable coin.. I can hope that the coin doesn't fall over (as others have), and, uhhhh, that's about it.
The owner of the stable coin might be able to trade it with someone else, for goods or services, but the only reason either party would switch from the fiat currency to the crypto is to avoid regulation, whether that be because the goods/services are controlled, or because the transfer of money is controlled.
Any thought of "investing" the dollar into the "stable" coin is void, because it's a stable coin that's supposedly fixed to the value of the dollar, one goes in... one comes out
Payment of interest for holding the dollar, that's regulated, and the risk of the coin disappearing, or being shut down by the feds means that the reward would have to be high to make it worthwhile (IMO)
Cross border payments with stable coin is way easier and faster than with USD. When crypto is in a bull cycle demand for stable coins raise as short term interest, sometimes up to 50%/year (for a few hours or a day). Stable coins generate yield for their operators, they won’t run with your money due to the same reasons why a bank CEO won’t.
> Cross border payments with stable coin is way easier and faster than with USD.
Only when it's because the other methods are highly restricted.
I make cross border payments quite regularly, and it's cheaper, faster, and safer, using the regulated systems (denominated in fiat currency).
> When crypto is in a bull cycle demand for stable coins raise as short term interest, sometimes up to 50%/year (for a few hours or a day).
And, pray tell, what happens when the reverse happens, and a death spiral begins?
> Stable coins generate yield for their operators, they won’t run with your money due to the same reasons why a bank CEO won’t.
From Wikipedia:
Tether's USDT is currently the world's largest market capitalization stablecoin. Tether initially claimed their stablecoin is fully backed by fiat currency. However, in October 2021, it failed to produce audits for reserves used to collateralize the quantity of minted USDT stablecoin.[44] Tether were fined $41 million by the Commodity Futures Trading Commission (CFTC) for deceiving consumers.[45] The CFTC found that Tether only had enough fiat reserves to guarantee their stablecoin for 27.6% of the time during 2016 to 2018. Since then, Tether began issuing assurance reports on USDT backing, although some speculation persists regarding the use of Chinese commercial paper for reserves.[46] As at March 2025, Tether had never completed an audit by an accounting firm.
Edit:
The reason that crypto is most often presented as an alternative is because it's "Not regulated"
The reason I have faith in a fiat currency, and not crypto (of any kind) is the regulation - the handlers are regulated, the way that the banks invest the money that they hold is (supposed to be) regulated.
When banks have had the regulations on how they can use the money they hold relaxed is what has caused the last two DEPRESSIONS - 1930s, and 2010s (GFC)
There's zero advantage to use crypto except, as stated before, when the goods/services being exchanged are restricted, or the cross border trading is restricted.
Those border trades, you're dealing with countries where the banking system has failed (because the government has failed), or you are at risk of breaking sanctions or financing terrorism.
Edit: Used restricted where I'd previously used the word regulated to try and make the point clearer
There are some real questions here. If you issue a "branded stablecoin", are you responsible if the company holding the reserves goes bust or is "hacked"? Probably.
You're certain to be sued. Can't disclaim that liability. Can't be anonymous. See the new GENIUS Act [1].
I'm not sure if I'm missing the point here, but stablecoins could be exchanged for something of value at a fixed price. The USD used to be this - you could exchange it for gold. But it was more convenient to give paper money than exchange gold.
A Big Mac may cost $5 now, $10 in the future. But I would like a Big Mac Coin that lets me exchange it for one Big Mac in any time in the future. It has value as long as McDonald's exist and is willing to accept the coins, which is better than you can say of most crypto.
It may be a different sized burger, it may have somewhat different ingredients. Even our "classic coke" is nothing like the original coke. But this is what I'd expect from branded stablecoins.
I think you have a much cooler, futuristic vision of a "branded stablecoin" than what I'm talking about :) Almost like a more practical/feasible version of the "flatcoin" concept Balaji Srinivasan (of Coinbase/a16z/etc) had a while ago: https://x.com/balajis/status/1422993084002934788.
Frankly also my initial source of disappointment when I found out what this _actually_ is.
But yeah - in the case of this post / Bridge's offering, "branded" stablecoins are still redeemable for 1 USD, the only point of the "branding" is who is entitled to the yield and for how much "program management" around the stored value (relative to eg. a "stored value" program at a partner bank).
Aren't futures all backed by some financial entity? The first problem is it's a third party. That party may go bankrupt. Plus, it's probably in another country. McDonald's is in all the countries.
It's also best when it's backed by the company honoring it. If Ronald Bank decides that they're one day no longer in partnership with McDonald's, they might choose to swap it with Whoppers, which are not quite equivalent, but that's a flexibility that some people might want to have.
I don't want a thousand Big Macs worth of futures though. I just want maybe 10. Or a hundred. If I'm broke or get labeled a terrorist or refugee, I can trade one for food. If say, any McDonald's accepts them, they'd be more liquid than USDC.
Plus McDonald's has plans lasting for decades. My futures may no longer be valid in 6 years.
This is how I understand the uprising of stablecoins, let me know if I am wrong:
One of the best businesses is to offer this service:
Because then you can lend out that money to someone who offers this service: You now have a business which, at almost no cost, generates money. The interest offered by the latter service.Doing so is regulated. You need to jump through a lot of hoops and you are very limited in whom you can lend out your customers' money to.
But you can design the same type of business with stablecoins. By offering:
For your customer it is the same. They give you money and get it back later.But now you are not a "money holder". You are a trader. A trader of some coin you invented. You don't need to jump through so many hoops and you can lend out the money you earn from selling someNiceCoin to services with higher yields.
I think this is somewhat reasonable, but with plenty of asterisks / not the "arbitrage" this would imply.
There is still a "real", regulated money-holder in the loop - it's just Bridge (the manager of the cash reserves backing the coin - and licensed money transmitter etc etc). Or in the case of USDC - Circle, the "money-holder" / manager of reserves (also has tons of licensed / is very regulated). And the ETH network (where the coin itself sits) for much of the tech / logistics of making that held-money usable.
In fact - because neither Bridge nor Circle are banks, they can't do the fractional reserve that banks do, and are only allowed to do the 1:1 backed thing, with super regulated entities like BlackRock. "you can lend out the money you earn from selling someNiceCoin to services with higher yields" is strictly not true - they _cannot_ lend the money out, they have to store the money in ways that the end-consumers could do themselves, directly.
In that frame - the "efficiency" for you as a fintech is that instead of having to work with a bank on a "stored value" program, you can just work with Bridge and Circle, whose technological primitives are leaps / bounds ahead of the bank, but more importantly - who are much more flexible to work with than the median "partner bank", because they are not banks.
The whole "partner bank" ecosystem only really even scales because there are API providers like Increase.com / Unit.co etc to wrap them.
Everything you're describing makes sense in terms of legal requirements, but none of it seems to require any form of cryptocurrency or stablecoins.
This was also where I initially landed after finding out that the custom stablecoin could not leave my Bridge instance.
I think the role that crypto plays in enabling this is as a neutral, credible storage layer on which this token can be held, that is not my Postgres database as (eg.) Bridge - these tokens still are actual ERC-20s/etc that are present on-chain, as are the wallets that hold them -- but yeah, I'm:
- not sure how instrumental that actually is here
- not sure if that's just incidentally the easiest structure for Bridge, whose primary business revolves around facilitating payments via stablecoin (now, as a part of Stripe)
Blockchain guarantees there is no double spend while not having one controlling entity. Legal requirements are there to do exactly the same thing - not let managers mess with other people money.
But there are 2 separate controlling entities in this scenario. The hypothetical company that wants to issue the stablecoin and Bridge. They have complete and full control over the money anyway, blockchain or not.
What you describe sounds like the opposite of my perspective.
You make it sound like stablecoins offer a benefit to all sides because of better technology.
My expectation is that they offer a benefit to the borrower because the borrower is less regulated and can lend out the money with higher risk and by doing so generate a higher yield.
You mention "1:1 backed thing, with super regulated entities" as if that means the money is safe. But as we have seen with Silicon Valley Bank, even lending out the money to the government via bonds is not safe enough in all circumstances. And my expectation is that issuers of stablecoins can do even more risky types of lending than Silicon Valley Bank did.
The difference is in the assumption of "higher risk". Most of this borrowing is eventually the US Govt because the stablecoins are backed by T bills. So its not as much of an arbitrage as you say.
But then can you have a world where all the money is only stablecoins and backed by "something"? I think that has interesting implications for monetary supply and central banking
> But then can you have a world where all the money is only stablecoins and backed by "something"? I think that has interesting implications for monetary supply and central banking
This strikes me as among the biggest macro risks, and (IIRC) is one of the reasons banks are fighting to prohibit stablecoins from granting yield (to keep the banking system working).
A different primitive that is related to stablecoin but not the same thing, popular among banks, is the "deposit token" - basically a stablecoin, but backed by bank deposits rather than 1:1 cash reserve, and operated by banks. eg. JPM's "JPMD": https://www.jpmorgan.com/payments/newsroom/kinexys-usd-digit...
Not sure how popular / active they are yet, but I imagine they will become a bigger deal as stablecoins are further regulated / banks push harder on their own interests.
Why would a stablecoin granting yield keep the banking system from working?
The theory, at least, is that everyone would eventually be incentivized to move deposits out of the banking system and into this.
(I am not sufficiently expert here to comment on the odds of an outcome like that)
Considering that stablecoins don't pay interest to the holder, I don't know why anyone would be incentivised to move their funds into stablecoins.
USDC gets me 4% on Coinbase, and USDB and other Bridge-issued custom stablecoins also give the customer rewards that they can pass onto the holder (thanks to MMF/similar cash equivalents behind the scenes etc).
But yes - this is why banks want to prevent stablecoin issuers from being allowed to grant rewards
If I deposit dollars in a savings account I will get paid interest, but that is different from the dollar itself being an interest-bearing asset. I think the same thing applies to stablecoins. Does USDC pay interest to the holder or do I have to make a USDC deposit at Coinbase in order to get paid interest? Also, banks already offer a ton of products that generate yield. I don't see why a product that seems relatively similar to many products that banks already offer would destroy their business... unless such a product is much better than what banks offer, but that doesn't seem to be the case.
>unless such a product is much better than what banks offer, but that doesn't seem to be the case.
I think you're basically correct here. I think the fear of the banks - and why they are insistent on prohibiting stablecoins from generating yield/interest (via the GENIUS act) - is that that doesn't stay true in the long-term, as stablecoins ascend as a cross-border payment/storage rail.
>Does USDC pay interest to the holder or do I have to make a USDC deposit at Coinbase in order to get paid interest?
I believe USDC from Coinbase is framed as "reward", and is downstream of an agreement Coinbase has with Circle to get that "reward" from Circle for all USDC deposits it holds on platform. Other "rates" you can get on centralized stablecoins tend to be similar AFAICT.
Meanwhile a 4-week T-bill has a 4.16% coupon equivalent with almost no counterparty risk relative to the 4% USDC.
USDC should be paying more than T-bills to compensate for the counterparty risk.
In that case, wouldnt sp500 or vanguard be bigger risks to banks existing?
I think most people think banks make money by holding your money and giving you some interest when they actually make money by bringing money into existance out of nowhere when they issue mortgages.
I don't see why not - I'm sure the banks (or others more expert than me) would argue for stablecoins being somehow distinct in this regard, but yeah don't know why eg. Vanguard wouldn't also be a credible cause of deposit flight.
(I do vaguely remember reading that banks were concerned about people moving to money-market fund products that had bank-like functionality)
> you can lend out the money you earn from selling someNiceCoin to services with higher yields.
> And my expectation is that issuers of stablecoins can do even more risky types of lending than Silicon Valley Bank did.
To be clear - stablecoin issuers are not allowed to "lend" the money out like a bank or a regulated lender _at all_ - much less doing "riskier" lending. Bridge and Circle still have to, by law, maintain 1:1 cash/cash-equivalent [0] reserves, which means the best they can do is things like US treasuries / money-market funds - which are also primitives accessible to consumers and businesses directly (ie. not inherently competitive).
Certainly there is still great benefit to Bridge, Circle, and the customers issuing stablecoins through them - because it gets them MMF/treasury yield without having to do a "stored value" program at a bank etc - but the issuers who are converting user deposits into stablecoins are also only getting user deposits in exchange for doing useful things.
People don't deposit funds into Mercury just because Mercury gives them 4% (there are plenty of places you can get 4%). You put money into Mercury for the software - this is primarily an implementation detail of how Mercury manages that money, affords to give you a competitive (4%) rate, and affords to give you great software.
[0]: https://en.wikipedia.org/wiki/Cash_and_cash_equivalents
Are you saying the holder of a stable coin is not taking a higher long-tail risk than the holder of a dollar in a checking account of a bank?
Yeah that's a good flag.
To be even more specific though, "cash equivalent" and the sorts of treasuries that implies are specifically short-duration ones (ie. this cash cannot be parked in a 10-year US treasury either)
Cash equivalents are short-term commitments "with temporarily idle cash and easily convertible into a known cash amount"
https://en.wikipedia.org/wiki/Cash_and_cash_equivalents
Issuing a branded stable coins of this kind lets you earn carry interest on tbills. Fine. Now, why would anyone buy a branded stable coin that explicitly doesn't promise a return?
(Bonus random question: is a UK premium bond a stable coin?)
>Now, why would anyone buy a branded stable coin that explicitly doesn't promise a return?
In practice, you're not even buying these (or at least - that is not the presentation). What you're actually doing is making a deposit into a "stablecoin" account at a place like Stripe (who now offers a Stripe Stablecoin Account, denominated in the USDB custom stable), Slash.com, Dakota.xyz, etc. IIRC Mercury is also a design partner of Stripe's blockchain.
When you make that deposit - either from your regular bank account via ACH/wire, or via USDC - it settles into the account as the branded stablecoin. When you send funds out - you're either sending as fiat or as USDC.
In short - you're not proactively "buying" the coin, and in fact - Stripe describes [0] the USDB coin as closed-loop & "not for public sale", and I think the others are the same. You're just depositing your funds into a platform, in order to use them on-platform - and the platform is holding them as a "custom stablecoin."
[0]: https://docs.stripe.com/crypto/stablecoin-financial-accounts...
Yes but two other considerations:
1) Assume the buyer/seller holds capital from sources that the majority of the market considers “illicit” and/or is legally sanctioned and/or physically frozen or restricted. Aka the capital can never be called (or at a discount that is unknowable) or the transaction could be later legally reversed or nullified by one or more legal entities. But of course the StableCoin market maker fails to communicate this risk. Therefore the real value of either side of the trade could be zero despite the non-zero StableCoins being transferred. Thus that’s not really a “trade” because there are hidden substantial risks.
2) Along the lines of Matt Levine “Stablecoin treasury strategy?” Consider that the buyer is a publicly listed company, and they fundraise based upon purchase of the digital asset. Then you are doing what most banks consider is not trading but fueling speculation (and normally you can’t expose average retail investors to these risks).
The innovation of StableCoins is much less about Capitalism and much more about re-packaging fraud. And given how lax the prosecution of fraud was during the Financial Crisis, there’s a big meta-bet that StableCoin “traders” will never face losses.
>Assume the buyer/seller holds capital from sources that the majority of the market considers “illicit” and/or is legally sanctioned and/or physically frozen or restricted
This is not feasible legally, and is where your claim falls apart.
From the now-passed GENIUS act [0] which regulates the stablecoin issuer:
- "Permitted payment stablecoin issuers must maintain reserves backing outstanding payment stablecoins on at least a one-to-one basis, consisting only of certain specified assets, including US dollars and short-term Treasuries."
[0]: https://www.lw.com/en/insights/the-genius-act-of-2025-stable...
Their point is that if the money held in reserve are proceeds from criminal activity, it is possible for the assets to be seized or frozen by the feds (which would render them no longer backed 1-to-1 even if they were before then). The text of the law you quoted doesn't really change anything.
I see, I misread: that’s interesting. I would assume the issuer would still be liable to resolve the backing, but yeah I could see how that poses systemic risk.
I also don’t think such a risk could realistically remain hidden - this is still going to be heavily regulated and audited, and industry will wise up to the sorts of risk that emerge.
“At no cost”
Actually there is a lot of cost, in terms of bank reputation, loan underwriting, and finding consumers and businesses to lend to. There is an entire loan servicing department etc.
Banks are allowed to keep fractional reserves and lend out money they create out of thin air.
Stablecoins are not. (Hi, Terra Luna!) Stablecoin issuers like DAI even overcollateralized. That money is sitting there doing nothing. Enter… banks.
USDT rebuffed the EU’s push to get them to deposit into European banks. They prefer US treasuries (and the current admin is lucky they’re doing it because the treasuries are taking a dive… and some of them are even looking into forcing partners to buy US treasuries and issue stablecoins).
The GENIUS act requires stablecoin issuers essentially to keep 100% of the money in deposits and to work with US banks, and prop up the US treasuries and dollar.
https://www.forbes.com/sites/ninabambysheva/2025/05/06/why-s...
You see, originally, Tether (issuers of USDT, the original stablecoin) kept a lot of their collateral in Bitcoin, which was essentially creating an asset bubble / ponzi scheme where newly printed USDT propped up BTC and vice versa. But since the US government started running multi-trillion-dollar deficits every year, it has also become a ponzi scheme, just a sovereign-debt-based ponzi scheme.
That’s the real play here, for a country that’s $35 trillion in debt and needs to keep demand for its treasuries going… because printing money as UBI — to trickle up, get taxed and service the debt properly — just aint in its overton window. The link below goes over exactly how a UBI could solve multiple problems at once over a few decades (help cushion the demand shocks for human labor, help make taxes on pollution and fossil fuels popular, and help the government actually pay off its debt)… but since USA probably isn’t going to do this on a federal level, it might make sense to go bottom-up, town by town:
https://community.intercoin.app/t/ubi-is-not-socialism-but-i...
Seems like a really inefficient way to do points… my CC company gives me 3 points and I eventually redeem them for USD. Is that not the L1 L2 network stuff, but just far less efficient than a DB write?
From the consumer perspective totally - but those credit card points come from the interchange the issuer makes from issuing the card / your card txns (ie. as a proportion of your _spend_ using the card).
The sort of rewards you get for storing your business's cash at eg. Mercury, or using a wallet like Cash App - have to come from yield generated by the actual cash deposits, which is the sort of program that is much harder to operate / requires close ongoing partnership with partner banks / etc.
If I'm eg. Mercury, storing the dollars you (business) deposit into my platform in a "branded" stablecoin will get me the same rewards - bc it's backed 1:1 by eg. a money-market fund at Blackrock - for much less of the operational burden, _because_ I'm not participating in a stored value program at an actual bank. The alternative today is that Mercury does store it at a bank, does have to maintain a "stored value" program with that bank, and the yields are standard bank interest (rather than eg. MMF).
Moreover - through Bridge, I can withdraw fiat USD and deposit fiat USD into that "branded stablecoin", and it's just an in-app balance in the fintech app - so the fact that it's a stablecoin doesn't change my experience at all other than in conferring standard rewards. If you look at how eg. Stripe Stablecoin Account labels the balance, it just calls it "Digital dollars" - so it's not much more than a backend implementation detail, really.
The story of literally all blockchain-based solutions.
Imagine you do it with PG - add a column “money”, put some numbers into it and issue a ToS guaranteeing money in your db 1-to-1 exchange to USD. Because now you store money amount in your db and can manipulate them at will you have to be a bank. Good luck with that.
I think the difference is that there is still a maintenance of stored value, but that stored value is now able to earn more yield than what you would by depositing it at a bank.
In both the cases described in the article - using Unit or Bridge - you pass on the work of stored value to someone else. But Unit doesn't earn as much by being the stored value as Bridge would because Bridge is invested into T bills / MMFs. Hence, Mercury coin is better than running a bank using Unit.
Is that fair to say?
This is a great question, I actually don't even think it's strictly a matter of "more" yield.
To dig into your example a bit deeper, there are a few general differences with an (eg.) Unit vs. Bridge.
- With a BaaS like unit, you're often actually forming a partnership _not just_ with Unit (a software provider), but the partner banks Unit works with. More specifically, you're operating two sorts of programs with the partner bank: programs around "money transmission" (_moving_ money on behalf of customers) and around "stored value" (_storing_ money on behalf of customers). Each of these programs tends to be pretty involved - as is having to be in a three-party agreement etc, working with an old-school bank, under legacy banking constructs, etc.
- With Bridge: Bridge is your single partner. Bridge _itself_ has partner banks for the sake of both banking + money movement, but when you store customer funds as stablecoins in a crypto "wallet" Bridge spins up, it is operationally different than if you were to store them as fiat in a customer-specific bank account you opened at Bridge's partner bank, under a classic FBO/DDA program. The partner bank Bridge using is more involved in the money _transmission_ piece, when you want to receive customer funds in as fiat, or push customer funds out as fiat - but the funds being stablecoin at rest would seem to reduce the burden here.
So yes that might result in some cost-saving, but it's also just (vaguely) _easier_ to do from a technical/operational POV.
(Some of the details above may be wrong / vary by provider / etc - but having worked with both of these sorts of providers at some length, this is my "felt" difference and high-level understanding).
(For those of us who remember what runs on a bank with your savings in it feel like) What if any protection is there, that you will be able to withdraw your money when a massive dunk in Bitcoin crashes a bunch of major holders and you want your savings back?
It's a good question - Stripe's Stablecoin Account documentation is good reference here (they denominate balances in USDB, one of these "custom stablecoins" from Bridge): https://docs.stripe.com/crypto/stablecoin-financial-accounts...
"It’s always backed one-to-one by the equivalent value of US dollars held in cash and short-duration money market funds at BlackRock."
So while there are other (potentially novel) sorts of counterparty risks - the backing is definitely more robust than (and pretty much entirely decoupled from) Bitcoin/the rest of the crypto sphere, and is closer to dropping funds off in a Fidelity money market.
Another good (early - 2023) read on this topic: "There are now two types of PayPal dollars, and one is better than the other " https://www.moneyness.ca/2023/09/there-are-now-two-types-of-...
Fairly sure money market funds have risks and carry interest (interest = risk).
People found that out the hard way in 2008.
This is correct and addressed with diversification. Is money is spread across multiple safe instruments your chances to get in trouble is minimal. If you do get in trouble then your exposure is small too.
Indeed, and good call out; one likely source of the "novel" counterparty risk I allude to (though really not even novel - "different" is probably the more reasonable word).
People who ask such questions aren't stupid enough to be in crypto.
It's easy to unravel the entirety of crypto:
Who is willing to spend any money for crypto? It's the same people who want to profit from reselling crypto at a higher price.
That's all there is to it. If you understand this, you also understand why the system eventually has to fail, leaving holders with trillions in losses that funded the profits people took out of the system.
I think there is plenty of counter-evidence in how this is being approached:
- The obvious: these are stablecoins, whose value is pegged to and 1:1 backed by fiat currency / is not capable of the cliche pump&dump dynamics of other crypto tokens.
- To the extent that (eg. today) they are coupled to a network like ETH or Solana (whose holders stand to gain) - both Stripe and Circle are building L1 blockchains right now whose native gas tokens are stablecoins, and are therefore also decoupled from any of the bagholder stuff. Merits of those chains aside: the big players want to further eliminate that dynamic and are putting their money where their mouth is.
- Stripe (and other legitimate fintechs) want to use stablecoins specifically because they legitimately make cross-border payments much easier, and because there is serious/earnest usage emerging. SWIFT actually does suck (not just to the cliche engineer-who-wants-better-APIs way, but even a banking professional would tell you), international payments are more unsolved than you think outside of a few fintechs who are basically just managing massive ledgers + a ton of liquidity around the world.
(In short: I think your take is something that may have made more sense 5-10 years ago, when Stripe themselves ditched crypto for the reasons that it didn't work for anything useful and was primarily a means of gambling)
Crypto was never gambling. It's a wealth redistribution scheme.
I don't trust stablecoins that are built on the same technology, by the same actors, and are then used to facilitate most of crypto's trading volume.
I am not convinced of their backing, and I think it likely that together with the crypto collapse stable coin issuers are going to fall like dominos too.
As for Stripe, they announced that their first customer for this is some Argentinian bike importer. We will see if it's that useful a tool in the future. It's not yet the case.
USDC is 1-1 backed, audited and quite transparent. They won’t run with your money for the same reason your bank won’t do it.
Not quite. The USDC reserve is "attested" rather than "audited" on a monthly basis.
While that particular company might have a good reputation for crypto standards, it still is no bank.
It faces less strict requirements and for example doesn't include an ICFR opinion or recurring supervisory on-site exams.
Yeah - there's no real advantage to crypto, even less so for a stable coin (it really seems to be someone /trying/ to make crypto look legitimate, with absolutely no reason to buy.
Here's how a buyer of the coin should see it - I have 1 USD and I can put that money into a bank, into my pocket, or under my bed mattress.
If I buy a crypto stable coin.. I can hope that the coin doesn't fall over (as others have), and, uhhhh, that's about it.
The owner of the stable coin might be able to trade it with someone else, for goods or services, but the only reason either party would switch from the fiat currency to the crypto is to avoid regulation, whether that be because the goods/services are controlled, or because the transfer of money is controlled.
Any thought of "investing" the dollar into the "stable" coin is void, because it's a stable coin that's supposedly fixed to the value of the dollar, one goes in... one comes out
Payment of interest for holding the dollar, that's regulated, and the risk of the coin disappearing, or being shut down by the feds means that the reward would have to be high to make it worthwhile (IMO)
Cross border payments with stable coin is way easier and faster than with USD. When crypto is in a bull cycle demand for stable coins raise as short term interest, sometimes up to 50%/year (for a few hours or a day). Stable coins generate yield for their operators, they won’t run with your money due to the same reasons why a bank CEO won’t.
> Cross border payments with stable coin is way easier and faster than with USD.
Only when it's because the other methods are highly restricted.
I make cross border payments quite regularly, and it's cheaper, faster, and safer, using the regulated systems (denominated in fiat currency).
> When crypto is in a bull cycle demand for stable coins raise as short term interest, sometimes up to 50%/year (for a few hours or a day).
And, pray tell, what happens when the reverse happens, and a death spiral begins?
> Stable coins generate yield for their operators, they won’t run with your money due to the same reasons why a bank CEO won’t.
From Wikipedia: Tether's USDT is currently the world's largest market capitalization stablecoin. Tether initially claimed their stablecoin is fully backed by fiat currency. However, in October 2021, it failed to produce audits for reserves used to collateralize the quantity of minted USDT stablecoin.[44] Tether were fined $41 million by the Commodity Futures Trading Commission (CFTC) for deceiving consumers.[45] The CFTC found that Tether only had enough fiat reserves to guarantee their stablecoin for 27.6% of the time during 2016 to 2018. Since then, Tether began issuing assurance reports on USDT backing, although some speculation persists regarding the use of Chinese commercial paper for reserves.[46] As at March 2025, Tether had never completed an audit by an accounting firm.
Edit: The reason that crypto is most often presented as an alternative is because it's "Not regulated"
The reason I have faith in a fiat currency, and not crypto (of any kind) is the regulation - the handlers are regulated, the way that the banks invest the money that they hold is (supposed to be) regulated.
When banks have had the regulations on how they can use the money they hold relaxed is what has caused the last two DEPRESSIONS - 1930s, and 2010s (GFC)
There's zero advantage to use crypto except, as stated before, when the goods/services being exchanged are restricted, or the cross border trading is restricted.
Those border trades, you're dealing with countries where the banking system has failed (because the government has failed), or you are at risk of breaking sanctions or financing terrorism.
Edit: Used restricted where I'd previously used the word regulated to try and make the point clearer
There are some real questions here. If you issue a "branded stablecoin", are you responsible if the company holding the reserves goes bust or is "hacked"? Probably. You're certain to be sued. Can't disclaim that liability. Can't be anonymous. See the new GENIUS Act [1].
[1] https://www.congress.gov/bill/119th-congress/senate-bill/158...
You're asking the wrong questions. You're asking for regulation in a field that's actively working around regulation.
I'm not sure if I'm missing the point here, but stablecoins could be exchanged for something of value at a fixed price. The USD used to be this - you could exchange it for gold. But it was more convenient to give paper money than exchange gold.
A Big Mac may cost $5 now, $10 in the future. But I would like a Big Mac Coin that lets me exchange it for one Big Mac in any time in the future. It has value as long as McDonald's exist and is willing to accept the coins, which is better than you can say of most crypto.
It may be a different sized burger, it may have somewhat different ingredients. Even our "classic coke" is nothing like the original coke. But this is what I'd expect from branded stablecoins.
I think you have a much cooler, futuristic vision of a "branded stablecoin" than what I'm talking about :) Almost like a more practical/feasible version of the "flatcoin" concept Balaji Srinivasan (of Coinbase/a16z/etc) had a while ago: https://x.com/balajis/status/1422993084002934788.
Frankly also my initial source of disappointment when I found out what this _actually_ is.
But yeah - in the case of this post / Bridge's offering, "branded" stablecoins are still redeemable for 1 USD, the only point of the "branding" is who is entitled to the yield and for how much "program management" around the stored value (relative to eg. a "stored value" program at a partner bank).
So, a future?
Aren't futures all backed by some financial entity? The first problem is it's a third party. That party may go bankrupt. Plus, it's probably in another country. McDonald's is in all the countries.
It's also best when it's backed by the company honoring it. If Ronald Bank decides that they're one day no longer in partnership with McDonald's, they might choose to swap it with Whoppers, which are not quite equivalent, but that's a flexibility that some people might want to have.
I don't want a thousand Big Macs worth of futures though. I just want maybe 10. Or a hundred. If I'm broke or get labeled a terrorist or refugee, I can trade one for food. If say, any McDonald's accepts them, they'd be more liquid than USDC.
Plus McDonald's has plans lasting for decades. My futures may no longer be valid in 6 years.
Yes, but McChicken futures :)
Futures have an expiry date, dont they?