a16z Partner: What Entrepreneurial Opportunities Does the Mainstreaming of Stablecoins Bring?

Entrepreneurs and policymakers who understand the complexity of stablecoins will have the opportunity to shape a smarter, safer, and more efficient financial future.

Written by: Sam Broner, a16z crypto investment partner

Compiled by: Luffy, Foresight News

Traditional finance is beginning to integrate stablecoins, and the trading volume of stablecoins is continuously increasing. Stablecoins have become the best way to build global fintech because they offer fast transaction speeds, are nearly free, and are easy to program. The shift from old technology to new technology means that we will adopt a completely different way of operating, and this transition will also bring new risks. After all, the self-custody model that values digital bearer assets instead of registered deposits is fundamentally different from the banking system that has evolved over centuries.

So, what are the broader monetary structure and policy issues that entrepreneurs, regulators, and traditional financial practitioners need to address in order to make the transition a success? In this article, we will delve into three major challenges and their possible solutions that can be focused on by both start-ups and traditional financial institutions: the issue of currency unity, dollar stablecoins in non-dollar economies, and the deep impact of Treasury backing stablecoins on financial markets.

The Challenge of "Monetary Uniqueness" and the Construction of a Unified Currency System

Monetary unity means that all forms of money in an economy are interchangeable at face value (1:1) and can be used for payment, pricing, and contractual agreements. This means that even if there are multiple issuers or technology carriers, the entire monetary system needs to remain uniform. For example, U.S. Chase Bank's U.S. dollar, Wells Fargo's U.S. dollar, Venmo account balances, despite the differences in their asset management regimes and regulatory attributes, should theoretically always maintain a 1:1 exchange with stablecoins. The history of the U.S. banking industry is, to some extent, the history of creating and perfecting the system of dollar fungibility.

The World Bank, central banks of various countries, economists, and regulators all advocate for the singularity of currency, as it greatly simplifies transactions, contracts, governance, planning, pricing, accounting, security, and daily payment processes. For this reason, businesses and individuals take the singularity of currency for granted.

But now the operation of stablecoins is not "single" because the integration of stablecoins with existing financial infrastructure is very low. If Microsoft, banks, construction companies, or home buyers try to exchange stablecoins worth 5 million dollars through automatic market makers (AMM), the exchange rate obtained by the user will be lower than 1:1 due to slippage caused by liquidity depth. A large transaction would disrupt market volatility, and the dollar value ultimately received by the user would shrink. If stablecoins are to fundamentally change the financial system, this is unacceptable.

Establishing a unified exchange system for stablecoin par values is key to integrating it into the unified currency system. If it cannot become a part of the unified currency system, the practical value of stablecoins will be greatly diminished.

Currently, stablecoin issuers such as Circle and Tether mainly provide direct redemption services for institutional customers or users who have passed the verification process, and often set a minimum transaction threshold. For example, Circle provides USDC minting and redemption services for enterprises through Circle Mint (formerly Circle Account); Tether allows verified users (usually over $100,000) to redeem directly; MakerDAO, a decentralized protocol, allows users to exchange DAI for other stablecoins (such as USDC) at a fixed exchange rate by pegging to the Stability Module (PSM), which is essentially a verifiable redemption/exchange tool.

These solutions, while effective, lack widespread adoption and require integration parties to cumbersome connect with each issuer. If direct integration is not possible, users can only complete stablecoin exchanges or exits through market trading (rather than par value settlement), which means that even if enterprises or applications promise to maintain a very small exchange point difference (for example, exchanging 1 USDC for 1 DAI within 1 basis point), their commitments are still constrained by liquidity, balance sheet space, and operational capabilities.

Central Bank Digital Currency (CBDC) can, in principle, unify the currency system, but they also face many other issues: privacy concerns, financial regulation, limited money supply, slowed innovation, and a better model that mimics today's financial system will almost certainly prevail. Therefore, the challenge for builders and institutional adopters is to create a system where stablecoins can become "pure money", just like bank deposits, fintech balances, and cash, without being affected by collateral, regulation, and user experience differences. Entrepreneurs can try to break through in the following directions:

• Popularizing minting and redemption channels: Issuers closely cooperate with banks, fintech companies, and other existing infrastructures to achieve seamless and cost-effective deposits and withdrawals, utilizing existing systems to enable par value interchangeability, making stablecoins indistinguishable from traditional currencies.
• Stablecoin Clearinghouse: Create a decentralized partner, similar to ACH or Visa in the stablecoin space, to ensure instant, frictionless, and fee-transparent exchanges. MakerDAO's pegged stability module is a promising model, but if it is extended to a par value settlement protocol across issuers and fiat currencies, the effect will be greatly improved.
• Develop a trustworthy neutral collateral layer: Transfer fungibility to widely adopted collateral layers (such as tokenized bank deposits or wrapped government bonds), enabling stablecoin issuers to innovate in branding, market strategies, and incentive mechanisms, while users can unpack and exchange on demand.
• Optimize exchanges, intents, bridging, and account abstraction: Automatically find and execute the optimal deposit or exchange paths using existing or cutting-edge technologies, build low-slippage multi-coin exchanges while hiding complexity, ensuring stablecoin users can enjoy predictable fees even during large-scale trades.

US Dollar Stablecoins, Monetary Policy, and Capital Regulation

There is a huge structural demand for the US dollar in many countries. For citizens living under high inflation or strict capital controls, dollar stablecoins are a lifeline, a way to protect savings and participate directly in global trade. For businesses, the U.S. dollar is the international unit of account that simplifies international transactions. People need a fast, widely accepted, and stable currency to spend and save, but today the cost of cross-border wire transfers is as high as 13%, 900 million people live in high-inflation economies without access to stable money, and 1.4 billion people lack banking services. The success of the USD stablecoin proves not only the demand for the US dollar, but also the need for a better currency.

Apart from political and nationalist reasons, countries maintain their own currencies because it allows policymakers to adjust the economy according to local conditions. When disasters affect production, key exports decline, or consumer confidence wavers, central banks can adjust interest rates or issue currency to mitigate shocks, enhance competitiveness, or stimulate consumption.

The widespread adoption of the US dollar stablecoin may weaken local policy autonomy. The reason lies in what economists refer to as the "impossible trinity," which states that a country can only choose two out of the following three economic policies at any given time: (1) free capital movement, (2) strict foreign exchange control, and (3) an independent monetary policy.

Decentralized peer-to-peer transfers will affect all three policies in the impossible trinity. Transfers bypass capital controls, forcing capital flows to leverage wide open. Dollarization weakens the effectiveness of policies managing exchange rates or domestic interest rates by anchoring the international unit of account. Countries rely on the intermediary banking system to guide citizens to use their local currency, thereby enforcing the aforementioned policies.

However, the US dollar stablecoin remains attractive to foreign countries because cheaper, programmable dollars can attract trade, investment, and remittances. Most international business is priced in US dollars, so obtaining dollars can make international trade faster and more convenient. Governments can still tax import and export channels and regulate local custodians.

However, various regulations, systems, and tools implemented at the level of correspondent banks and international payments can prevent money laundering, tax evasion, and fraud. While stablecoins exist on publicly available and programmable ledgers, making it easier to build security tools, these tools must actually be constructed, which provides entrepreneurs with the opportunity to connect stablecoins with existing international payment compliance infrastructure.

Unless sovereign countries are willing to give up valuable policy tools for efficiency (unlikely), and no longer care about fraud and other financial crimes (also unlikely), entrepreneurs have the opportunity to build systems that improve the integration of stablecoins with the local economy.

The challenge is to embrace more advanced technologies while improving safeguards, such as foreign exchange liquidity, anti-money laundering (AML) regulation, so that stablecoins can be integrated into the local financial system. These technology solutions will enable:

• Promote the local acceptance of USD stablecoins: Integrate USD stablecoins into local banks, fintech, and payment systems, enhancing local liquidity through small, optional, and possibly taxable exchanges, while avoiding complete disruption of the local currency.
• Development of local stablecoins as funding and withdrawal channels: Launch local currency stablecoins with deep liquidity and deep integration with local financial infrastructure. While a clearing house or neutral collateral layer may be needed to drive broad integration (see Part I), once integrated into the financial infrastructure, native stablecoins will be the best FX instrument and high-performance payment channel.
• Build an on-chain foreign exchange market: Create a matching and price aggregation system across stablecoins and fiat currencies. Market participants may need to hold reserves in interest-bearing instruments and support existing foreign exchange trading strategies through significant leverage.
• Competitors of MoneyGram: Establish a compliant entity retail cash deposit and withdrawal network, incentivizing agents to use stablecoin for settlement. Although MoneyGram has launched similar products, there are still many opportunities for other companies with established distribution channels.
• Enhance Compliance: Upgrade existing compliance solutions to support stablecoins. Leverage the enhanced programmability of stablecoins to provide richer and faster insights into cash flows.

The Deep Impact of Government Bonds as Collateral for Stablecoins

The adoption rate of stablecoins is continuously growing because they are almost instant, free, and infinitely programmable currencies, rather than because they have treasury backing. Fiat-backed stablecoins were first widely adopted simply because they are the easiest to understand, manage, and regulate. User demand is driven by utility and confidence (24/7 settlement, composability, global demand), rather than necessarily by the collateral itself.

But fiat-backed stablecoins may become victims of their own success: what would happen if the issuance of stablecoins increased tenfold, for example, from the current $262 billion to $2 trillion a few years later, and regulators required that stablecoins be backed by short-term U.S. Treasury bonds?

ownership of treasury bonds

If $2 trillion worth of stablecoins were issued in the form of short-term government bonds (one of the only assets currently recognized by regulators), the issuers would hold about one-third of the $7.6 trillion in circulation of U.S. government bonds. This shift would echo the role that money market funds play today, concentrating on holding highly liquid, low-risk assets, but would have a greater impact on the government bond market.

Treasuries are attractive collateral: they are widely regarded as one of the riskiest and most liquid assets in the world; And they're denominated in U.S. dollars, simplifying currency risk management. But a $2 trillion stablecoin issuance could lower Treasury yields and reduce buoyant liquidity in the repo market. Each additional stablecoin issued means an additional bid on Treasuries, which allows the U.S. Treasury to refinance at a lower cost, making Treasuries more scarce and expensive for the financial system as a whole. This could reduce the revenue of stablecoin issuers while making it more difficult for other financial institutions to obtain the collateral they need to manage liquidity.

One solution is for the Treasury to issue more short-term debt, such as expanding the circulation of Treasury bills from $7 trillion to $14 trillion, but even so, the continuously growing stablecoin industry will reshape supply and demand dynamics.

narrow banking business

More fundamentally, fiat reserve stablecoins are similar to banks in the narrow sense. They hold 100% cash equivalents in reserve and do not provide loans. This model is inherently less risky, which is one of the reasons why fiat reserve stablecoins were recognized by regulators in the early days. Narrow banking is a trusted and easily verifiable system that gives token holders a clear value proposition while avoiding the full regulatory burden borne by fractional reserve banks. But the 10x growth of the stablecoin means that $2 trillion will be fully backed by reserves and notes, which will have a knock-on effect on credit creation.

Economists are concerned that narrow banking limits the ability of capital to provide credit to the economy. Traditional banking, also known as fractional reserve banking, holds a small portion of customer deposits in the form of cash or cash equivalents, while lending out the majority of deposits to businesses, home buyers, and entrepreneurs. Regulated banks then manage credit risk and loan maturities to ensure that depositors can withdraw cash when needed. This is precisely why regulators do not want narrow banks to absorb deposits: the money multiplier of narrow banks (the amount of credit supported by a single dollar) is lower.

Ultimately, the economy relies on credit to operate. Regulatory agencies, businesses, and everyday consumers will benefit from a more active and interdependent economy. If a small portion of the $17 trillion deposit base in the U.S. migrates to fiat-backed stablecoins, banks may lose their cheapest source of funding, facing two dilemmas: reducing credit creation (less mortgage, auto loans, and small business credit limits), or replacing lost deposits with more expensive, shorter-term funds like advances from the Federal Home Loan Banks.

However, stablecoins, as "better money," can support a higher velocity of currency circulation. A single stablecoin can be sent, spent, lent, or borrowed multiple times per minute, controlled by humans or software, operating around the clock.

Stablecoins don't necessarily need to be backed by Treasury bonds, and tokenized deposits are another solution. It allows stablecoin claims to remain on bank balance sheets while flowing through the economy at the speed of modern blockchains. Under this model, deposits will remain in a partially reserve banking system, and each stable value token will actually continue to support the issuer's loan book. The multiplier effect is achieved not through velocity of circulation, but through traditional credit creation, while users still have access to round-the-clock settlement, composability, and on-chain programmability.

When designing a stablecoin, the following points should be considered:

• Retain deposits within a fractional reserve system through a tokenized deposit model;
• Expand collateral from short-term government bonds to other high-liquidity quality assets;
• Embed automatic liquidity pipelines (on-chain repurchase, third-party facilities, collateral debt position pools) to reinject idle reserves into the credit market.

This is not a compromise with banks, but a choice to maintain economic vitality. Remember, the goal is to sustain an interdependent and continuously growing economy that allows businesses to easily access loans.

Innovative stablecoin designs can achieve this goal by supporting traditional credit creation while increasing the speed of currency circulation, collateralized decentralized lending, and direct private lending.

Although the regulatory environment has made tokenized deposits difficult to achieve, the improvement in regulatory clarity for fiat-backed stablecoins has opened the door for stablecoins backed by bank deposits.

Deposit-backed stablecoins will allow banks to continue providing credit to existing customers while improving capital efficiency and offering the programmability, cost, and speed advantages of stablecoins. Deposit-backed stablecoins can be a simple issuance method: when a user chooses to mint a deposit-backed stablecoin, the bank deducts the balance from the user's deposit balance and transfers the deposit obligation to a consolidated stablecoin account. Stablecoins representing an anonymous claim denominated in dollars against these assets can be sent to a public address of the user's choice.

In addition to deposit-backed stablecoins, other solutions will improve capital efficiency, reduce friction in the treasury market, and increase the velocity of money.

• Promote the adoption of stablecoins by banks: By adopting or even issuing stablecoins, banks can retain the underlying asset yields and customer relationships when users withdraw deposits, enhancing net interest margins while eliminating the need for intermediaries in payment transactions.
• Helping individuals and businesses access DeFi: As more users directly manage wealth through stablecoins and tokenized assets, entrepreneurs should assist these users in quickly and safely obtaining funds.
• Expand the types of collateral and tokenize them: Extend acceptable collateral assets from government bonds to municipal bonds, high-rated corporate notes, mortgage-backed securities, or secured real assets, reducing reliance on a single market, providing credit to borrowers outside the U.S. government, while ensuring that the collateral is of high quality and sufficiently liquid to maintain the value of stablecoin and user confidence.
• Transfer collateral onto the chain to enhance liquidity: Tokenize collateral such as real estate, commodities, stocks, and government bonds to build a richer collateral ecosystem.
• Adopt a collateralized debt position model: like MakerDAO's DAI, utilizing diversified on-chain assets as collateral to diversify risk and replicate the monetary expansion provided by banks on-chain, while requiring such stablecoins to undergo strict third-party audits and transparent disclosures to verify the stability of the collateral model.

Summary

The rise of stablecoins has brought significant challenges, but behind every challenge lies an opportunity for innovation. Entrepreneurs and policymakers who understand the complexities of stablecoins will have the chance to shape a smarter, safer, and more efficient financial future.