a16z: Stablecoins are on the rise. What new opportunities do entrepreneurs have?

Written by: Sam Broner

Compiled by: Shenchao TechFlow

Traditional finance is gradually incorporating stablecoins into its system, and the trading volume of stablecoins is also continuously growing. Stablecoins, due to their fast, almost zero-cost, and programmable nature, have become the best tool for building global fintech.

However, the transition from traditional technology to emerging technology not only means a fundamental transformation of business models but also the emergence of brand-new risks. After all, the self-custody model based on digital registered assets is fundamentally different from the traditional banking system that has evolved over hundreds of years.

So, in this transformation process, what broader monetary structure and policy issues do entrepreneurs, regulators, and traditional financial institutions need to address?

This article will delve into three core challenges and their possible solutions, providing directions for entrepreneurs and builders of traditional financial institutions: the issue of monetary unity; the application of dollar stablecoins in non-dollar economies; and the potential impact of a better currency supported by government bonds.

1. "Monetary Unity" and the Construction of a Unified Monetary System  

"Monetary unity" refers to the situation where, in an economy, regardless of who issues the currency or where it is stored, various forms of currency can be exchanged at a 1:1 ratio and can be used for payments, pricing, and contract performance. Monetary unity means that even if multiple institutions or technologies issue similar currency-like instruments, the entire system remains a unified monetary system. In other words, whether it is deposits of Chase, deposits of Wells Fargo, balances of Venmo, or stablecoins, they should always be completely equivalent at a 1:1 ratio. This unity is maintained despite differences in the way institutions manage assets and their regulatory statuses. To some extent, the history of the US banking industry is the history of creating and improving systems to ensure the substitutability of the US dollar.

Global banking industries, central banks, economists, and regulatory agencies all advocate for monetary unity because it greatly simplifies transactions, contracts, governance, planning, pricing, accounting, security, and daily economic activities. Today, businesses and individuals have become accustomed to monetary unity.

However, currently, stablecoins are not fully integrated into the existing financial infrastructure, so "monetary unity" cannot be achieved. For example, if Microsoft, a bank, a construction company, or a homebuyer tries to exchange $5 million worth of stablecoins through an Automated Market Maker (AMM), due to slippage caused by insufficient liquidity depth, the user will not be able to complete the exchange at a 1:1 ratio and will ultimately receive less than $5 million. This situation is unacceptable if stablecoins are to completely revolutionize the financial system.

A universally applicable "par value exchange system" can help stablecoins become part of a unified monetary system. If this goal cannot be achieved, the potential value of stablecoins will be greatly reduced.

Currently, stablecoin issuers like Circle and Tether mainly provide direct exchange services for stablecoins (such as USDC and USDT) to institutional clients or users who go through verification processes. These services usually have minimum transaction thresholds. For example, Circle provides Circle Mint (formerly Circle Account) for enterprise users to mint and redeem USDC; Tether allows verified users to directly redeem, with thresholds usually above a certain amount (such as $100,000). The decentralized MakerDAO allows users to exchange DAI for other stablecoins (such as USDC) at a fixed exchange rate through the Peg Stability Module (PSM), thus acting as a verifiable redemption/exchange mechanism.

Although these solutions work to a certain extent, they are not universally available and require integrators to interface with each issuer individually. If direct integration is not possible, users can only convert between stablecoins or exchange stablecoins for fiat currency through market execution, rather than settling at par value.

Without direct integration, a company or application may promise to maintain a very small exchange spread—for example, always exchanging 1 USDC for 1 DAI and controlling the spread within 1 basis point—but this promise still depends on liquidity, balance sheet space, and operational capabilities.

In theory, Central Bank Digital Currencies (CBDCs) can unify the monetary system, but the many accompanying problems (such as privacy concerns, financial surveillance, restricted money supply, and slow innovation speed) make it almost certain that a better model imitating the existing financial system will win out.

Therefore, the challenge for builders and institutional adopters is how to build a system so that stablecoins can become "real money" like bank deposits, fintech balances, and cash, despite their heterogeneity in collateral, regulation, and user experience. The goal of incorporating stablecoins into monetary unity provides huge development opportunities for entrepreneurs.

Widespread Availability of Minting and Redemption  

Stablecoin issuers should closely cooperate with banks, fintech companies, and other existing infrastructures to achieve seamless and par-value deposit and withdrawal channels. This will provide stablecoins with par-value substitutability through existing systems, making them no different from traditional currencies.

Stablecoin Clearing House  

Establish a decentralized cooperative organization—similar to ACH or Visa in the stablecoin field—to ensure instant, frictionless, and transparently priced conversions. The Peg Stability Module is a promising model, but if the protocol can be expanded on this basis to ensure par-value settlement between participating issuers and fiat currencies, the functionality of stablecoins will be significantly enhanced.

Trusted Neutral Collateral Layer  

Transfer the substitutability of stablecoins to a widely adopted collateral layer (such as tokenized bank deposits or wrapped government bonds). In this way, stablecoin issuers can innovate in branding, marketing strategies, and incentive mechanisms, while users can unpack and convert stablecoins as needed.

Better Exchanges, Intent Matching, Cross-Chain Bridges, and Account Abstraction  

Use improved existing or known technologies to automatically find and execute deposit, withdrawal, or exchange operations at the best exchange rate. Build multi-currency exchanges to minimize slippage, while hiding complexity, so that stablecoin users can enjoy predictable fees even when used on a large scale.

Dollar Stablecoins: A Double-Edged Sword for Monetary Policy and Capital Regulation  

2. Global Demand for Dollar Stablecoins  

In many countries, there is an extremely large structural demand for the US dollar. For citizens living under high inflation or strict capital controls, dollar stablecoins are a lifeline—they can both protect savings and directly access the global business network. For enterprises, the US dollar, as an international unit of account, can simplify and enhance the value and efficiency of international transactions. However, the reality is that cross-border remittance fees are as high as 13%, 900 million people in the world live in high-inflation economies but cannot use stable currencies, and 1.4 billion people are underbanked. The success of dollar stablecoins not only reflects the demand for the US dollar but also embodies the desire for a "better currency."

For various reasons such as politics and nationalism, countries usually maintain their own monetary systems because this gives policymakers the ability to adjust the economy according to local actual conditions. When disasters affect production, key exports decline, or consumer confidence wavers, the central bank can alleviate the impact, enhance competitiveness, or stimulate consumption by adjusting interest rates or issuing currency.

However, the widespread adoption of dollar stablecoins may weaken the ability of local policymakers to regulate the local economy. This impact can be traced back to the "Impossible Trinity" theory in economics. This theory states that a country can only choose two of the following three economic policies at any time:

Free capital flow;

A fixed or strictly managed exchange rate;

An independent monetary policy (autonomously setting domestic interest rates).  

Decentralized peer-to-peer transactions will have an impact on all three policies of the "Impossible Trinity":

Transactions bypass capital controls, fully opening the lever of capital flow;

"Dollarization" may weaken the policy effects of managing exchange rates or domestic interest rates by anchoring citizens' economic activities to the international unit of account (the US dollar).  

Decentralized peer-to-peer transfers have an impact on all policies in the "Impossible Trinity." Such transfers bypass capital controls, forcing the "lever" of capital flow to be fully opened. Dollarization, by linking citizens to the international unit of account, can weaken the impact of policies managing exchange rates or domestic interest rates. Countries rely on the narrow channels of the correspondent banking system to guide citizens to local currencies, thereby implementing these policies.

Although dollar stablecoins may pose challenges to local monetary policies, they are still attractive in many countries. The reason is that the low-cost and programmable US dollar brings more trade, investment, and remittance opportunities. Most international businesses are priced in US dollars, and accessing the US dollar can make international trade faster, more convenient, and thus more frequent. In addition, governments of various countries can still tax deposit and withdrawal channels and supervise local custodian institutions.

Currently, various regulations, systems, and tools have been implemented at the level of the correspondent banking system and international payments to prevent money laundering, tax evasion, and fraud. Although stablecoins rely on a public, transparent, and programmable ledger, which facilitates the construction of security tools, these tools need to be truly developed. This provides opportunities for entrepreneurs to connect stablecoins with the existing international payment compliance infrastructure to maintain and enforce relevant policies.

Unless we assume that sovereign countries will give up valuable policy tools for the sake of efficiency (very unlikely) and completely ignore fraud and other financial crimes (almost impossible), entrepreneurs still have the opportunity to develop systems to improve the integration of stablecoins with the local economy.

To enable stablecoins to be smoothly integrated into the local financial system, the key lies in embracing better technology while enhancing safeguards such as foreign exchange liquidity, anti-money laundering (AML) supervision, and other macroprudential buffers. Here are some potential technical solutions:

Local Acceptance of Dollar Stablecoins  

Integrate dollar stablecoins into local banks, fintech companies, and payment systems, supporting small-value, optional, and potentially taxable exchange methods. This can enhance local liquidity without completely weakening the status of the local currency.

Local Stablecoins as Deposit and Withdrawal Channels  

Launch local currency stablecoins with deep liquidity and deep integration with local financial infrastructure. When launching extensive integration, a clearing house or a neutral collateral layer may be needed (refer to the first part above). Once local stablecoins are integrated, they will become the best choice for foreign exchange transactions and the default option for high-performance payment networks.

On-Chain Foreign Exchange Market  

Create a matching and price aggregation system across stablecoins and fiat currencies. Market participants may need to support existing foreign exchange trading models by holding reserves of income-generating instruments and adopting high-leverage strategies.

Competitors Challenging MoneyGram  

Build a compliant, physical retail cash deposit/withdrawal network and encourage agents to settle in stablecoins through incentive mechanisms. Although MoneyGram recently announced a similar product, there are still plenty of opportunities for other participants with mature distribution networks.

Improved Compliance  

Upgrade existing compliance solutions to support stablecoin payment networks. Utilize the programmability of stablecoins to provide richer and faster insights into fund flows.

Through these two-way improvements in technology and regulation, dollar stablecoins can not only meet the needs of the global market but also achieve deep integration with the existing financial system during localization, while ensuring compliance and economic stability.

3. The Potential Impact of Government Bonds as Collateral for Stablecoins  

The popularity of stablecoins is not because they are collateralized by government bonds, but because they provide an almost instant, almost free trading experience and have unlimited programmability. Fiat-backed stablecoins are the first to be widely adopted because they are the easiest to understand, manage, and regulate. The core driving force of user demand lies in the practicality and trustworthiness of stablecoins (such as around-the-clock settlement, composability, global demand), rather than the nature of their collateral assets.

However, fiat-backed stablecoins may face challenges due to their success: what will happen if the scale of stablecoin issuance grows tenfold in the next few years—from the current $262 billion to $2 trillion—and regulators require that stablecoins must be supported by short-term US Treasury bills (T-bills)? This scenario is not impossible, and its impact on the collateral market and credit creation may be profound.

Holding of Short-Term Treasury Bills (T-bills)  

If $2 trillion worth of stablecoins are supported by short-term US Treasury bills—currently widely recognized as one of the compliant assets by regulators—this means that stablecoin issuers will hold about one-third of the $7.6 trillion short-term Treasury bill market. This transformation is similar to the role of Money Market Funds in the current financial system—concentrated holding of liquid, low-risk assets, but its impact on the Treasury bill market may be greater.

Short-term Treasury bills are considered one of the safest and most liquid assets in the world. At the same time, they are denominated in US dollars, simplifying exchange rate risk management. However, if the scale of stablecoin issuance reaches $2 trillion, this may lead to a decline in Treasury bill yields and reduce the active liquidity in the repo market. Each newly added stablecoin is actually equivalent to an additional demand for Treasury bills. This will enable the US Treasury to refinance at a lower cost, and at the same time, may cause T-bills to become more scarce and expensive for other financial institutions. This will not only compress the income of stablecoin issuers but also make it more difficult for other financial institutions to obtain collateral for managing liquidity.

One possible solution is for the US Treasury to issue more short-term debt, such as expanding the market size of short-term Treasury bills from $7 trillion to $14 trillion. However, even so, the continuous growth of the stablecoin industry will still reshape the supply and demand dynamics.

The rise of stablecoins and their profound impact on the Treasury bill market reveal the complex interaction between financial innovation and traditional assets. In the future, how to balance the growth of stablecoins and the stability of the financial market will become a key issue faced by regulators and market participants together.

Narrow Banking Model  

Fundamentally, fiat-backed stablecoins are similar to narrow banking (Narrow Banking): they hold 100% reserves, exist in the form of cash equivalents, and do not make loans. This model is inherently low-risk, and it is also one of the reasons why fiat-backed stablecoins can obtain early regulatory approval. Narrow banking is a trustworthy and easy-to-verify system that can provide a clear value proposition for token holders, while avoiding the comprehensive regulatory burden required by traditional fractional-reserve banking. However, if the scale of stablecoins grows tenfold to $2 trillion, then these funds are fully supported by reserves and short-term Treasury bills, which will have a profound impact on credit creation.

Economists are concerned about the narrow banking model because it limits the ability of capital to provide credit for the economy. Traditional banks (i.e., fractional-reserve banks) usually only keep a small amount of customer deposits as cash or cash equivalents, and the remaining deposits are used to issue loans to enterprises, homebuyers, and entrepreneurs. Under the supervision of regulators, banks ensure that depositors can withdraw cash when needed by managing credit risks and loan terms.

However, regulators do not want narrow banks to absorb deposit funds because the funds under the narrow banking model have a lower money multiplier effect (that is, the multiple of credit expansion supported by a single US dollar is lower). Eventually, the economy depends on credit to operate: regulators, enterprises, and daily consumers all benefit from a more active and interdependent economy. If even a small part of the US $17 trillion deposit base migrates to fiat-backed stablecoins, banks may lose their cheapest source of funds. This will force banks to face two unfavorable choices: either reduce credit creation (such as reducing mortgage loans, auto loans, and SME credit lines) or make up for deposit losses through wholesale financing (such as short-term loans from the Federal Home Loan Bank), but this is not only more expensive but also has a shorter term.

Despite the above problems with the narrow banking model, stablecoins have higher monetary liquidity. A stablecoin can be sent, spent, lent, or collateralized—and can be used multiple times per minute, controlled by humans or software, and operated around the clock. This efficient liquidity makes stablecoins a higher-quality form of money.

In addition, stablecoins do not have to be supported by government bonds. One alternative is tokenized deposits (Tokenized Deposits), which allow the value proposition of stablecoins to be directly reflected on the bank's balance sheet while circulating in the economy at the speed of modern blockchains. In this model, deposits still remain within the fractional-reserve banking system, and each stable-value token actually continues to support the lending business of the issuing institution. In this model, the money multiplier effect is restored—not only through the velocity of money but also through traditional credit creation; and users can still enjoy around-the-clock settlement, composability, and on-chain programmability.

The rise of stablecoins provides new possibilities for the financial system, but also poses a balance problem between credit creation and system stability. Future solutions will need to find the best balance between economic efficiency and traditional financial functions.

To enable stablecoins to retain the advantages of the fractional-reserve banking system while promoting economic dynamics, design improvements can be made from the following three aspects:

Tokenized Deposit Model: Keep deposits in the fractional-reserve system through tokenized deposits (Tokenized Deposit).

Diversification of Collateral: Expand collateral from short-term Treasury bills (T-bills) to other high-quality, liquid assets.

Embed Automatic Liquidity Mechanisms: Reintroduce idle reserves into the credit market through on-chain repo agreements (on-chain repo), tri-party repo facilities, collateralized debt position (CDP) pools, etc.  

The goal is to maintain an interdependent and growing economic environment, making it easier to obtain reasonable commercial loans. By supporting traditional credit creation while improving monetary liquidity, decentralized mortgage lending, and direct private lending, innovative stablecoin designs can achieve this goal.

Although the current regulatory environment makes tokenized deposits not feasible yet, the regulatory clarity around fiat-backed stablecoins is opening the door for stablecoins collateralized by bank deposits.

Deposit-backed stablecoins (Deposit-Backed Stablecoins) can allow banks to continue to provide credit to existing customers, while improving capital efficiency and bringing the advantages of stablecoin programmability, low cost, and high-speed transactions. The operation method of this stablecoin is very simple: when a user chooses to mint a deposit-backed stablecoin, the bank will deduct the corresponding amount from the user's deposit balance and transfer the deposit obligation to a comprehensive stablecoin account. Subsequently, these stablecoins, as ownership tokens of assets denominated in US dollars, can be sent to the public address specified by the user.

In addition to deposit-backed stablecoins, other solutions can also improve capital efficiency, reduce friction in the Treasury bill market, and increase monetary liquidity.

Helping Banks Embrace Stablecoins  

Banks can enhance their net interest margin (NIM) by adopting or even issuing stablecoins. While users can withdraw funds from deposits, banks can retain the yields from underlying assets and maintain relationships with customers. Additionally, stablecoins provide banks with payment opportunities that require no intermediaries.  

Helping Individuals and Enterprises Embrace DeFi  

As more users manage funds and wealth directly through stablecoins and tokenized assets, entrepreneurs should help these users access capital quickly and securely.  

Expanding Collateral Types and Tokenization  

Broaden the scope of acceptable collateral beyond short-term Treasury bills to include municipal bonds, high-grade corporate paper, mortgage-backed securities (MBS), or other collateralized real-world assets (RWAs). This not only reduces reliance on a single market but also extends credit to borrowers other than the U.S. government, while ensuring high-quality and liquid collateral to maintain stablecoin stability and user trust.  

On-Chaining Collateral to Improve Liquidity  

Tokenize these collaterals—including real estate, commodities, stocks, and Treasury bonds—to create a richer collateral ecosystem.  

Adopting the Collateralized Debt Positions (CDPs) Model  

Drawing inspiration from CDP-based stablecoins like MakerDAO’s DAI, these stablecoins use diversified on-chain assets as collateral, not only diversifying risks but also replicating the monetary expansion function provided by banks on the blockchain. Meanwhile, these stablecoins should be subject to strict third-party audits and transparent disclosures to verify the stability of their collateral models.  

Despite significant challenges, each challenge brings enormous opportunities. Entrepreneurs and policymakers who can grasp the nuances of stablecoins will have the opportunity to shape a smarter, safer, and superior financial future.  

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