WSJ: Are Stablecoins an Innovation, or a Modern Replica of the 19th-Century Financial "Pipeline"?

Original author: WSJ

Compiled by: Odaily Planet Daily Golem

Stablecoins: the contemporary "narrow bank"

Washington has once again promised to reshape money with code, and the political headwinds behind the newly passed Genius Act in the United States have given new life to this recurring fantasy that technology can finally remove instability from the financial core. This promise, while tempting, is a harsh reality: we can modernize money, but we are still transporting it with "pipelines" built in the 19th century.

This beautiful idea stemmed in part from the collapse of Silicon Valley Bank in 2023. This is not a new trouble caused by subprime mortgages or any exotic derivatives, but a repeat of the oldest hidden danger in banking: maturity mismatch. Depositors, especially those without insurance, can withdraw their deposits as needed, but banks make long-term investments. When interest rates soar but trust breaks, user withdrawals follow, assets are sold at low prices, and the government has to step in again.

"Narrow banks" were once seen as a solution, with institutions holding only cash or short-term Treasury bonds. (Odaily note: The concept of "narrow banking" first originated after the Great Depression in the United States in the 30s of the 20th century, and is a banking model that only accepts deposits and invests all or almost all of these deposits in extremely liquid, ultra-low-risk assets (such as short-term government bonds or central bank reserves)).

Although the "narrow bank" has a high safety factor, it lacks vitality, cannot create credit, has no loans, and has no growth.

Stablecoins are a recreation of "narrow banks" in the tech age: private digital tokens pegged to the US dollar and said to be backed by one-to-one liquidity reserves. Tether and USDC, for example, claim to offer programmable, borderless, tamper-proof deposits, minus the regulatory burden.

But peeling back the opulence of numbers, the age-old financial fragility remains, namely that these tokens remain entirely dependent on trust. But reserves are often opaque, custodians may have been offshore, audits are selective, and redemptions are still just a promise.

So when trust is shaken, the entire system collapses. The stablecoin TerraUSD collapsed in 2022 as it tried to maintain its peg to the US dollar using algorithms rather than real reserves. Its value relies on another convertible token, Luna. However, when confidence collapsed, investors rushed to redeem TerraUSD, selling large amounts of Luna to the market. With no reliable collateral and escalating events, both tokens collapsed within a few days. In addition to this extreme case, even so-called "fully collateralized" stablecoins today experience price fluctuations when the market questions the authenticity behind their reserves.

Genius Act fuels the dollar's 'excessive privilege'

The Genius Act is the result of Washington's attempt to establish a stablecoin order. It created a formal category of "pay-as-you-go stablecoins," prohibiting stablecoin issuers from paying interest to emphasize the stablecoin's utility rather than speculation, and requiring issuers to use cash or Treasury bonds for full collateralization. Issuers must be licensed, registered in the United States, and accept the new certification regime. Foreign participants need to obtain a U.S. license and must follow U.S. rules or be out.

The advantages of the bill are clear: no bells and whistles, no unregulated random factors, and no mixing of speculative and payment functions. The fulfillment of many of their wishes. It offers consumer protection, prioritizes redemptions in bankruptcy, and promises monthly reserve disclosures. Scholars who criticize crypto chaos have finally fulfilled their wish.

But clarity does not mean safety. The bill officially characterizes stablecoins as "narrow banks." This means that stablecoins do not have term mismatch, but it also eliminates trust intermediaries, the core engine of the financial industry (turning savings into investments) is bypassed, and risk-proof funds become idle funds.

At the same time, the bill also leaves strategic loopholes. Issuers with assets below $10 billion can opt for state-level oversight, which encourages regulatory arbitrage. In the event of a crisis, the demand to redeem stablecoins could trigger a sell-off in Treasuries, disrupting the safe-haven asset market that supports them.

Some economists warn that by anchoring stablecoins to Treasuries, we are simply shifting systemic risk to a new corner that, while politically popular, has not been tested on a large scale operationally. But supporters are also singing about the geopolitical benefits. The law ensures that stablecoins are pegged to the U.S. dollar, backed by U.S. dollar reserves, such as Treasury bonds, and settled through U.S. institutions. With non-USD stablecoins still stagnant, US-backed digital tokens will become the default tool for global payments, savings, and cross-border transfers.

This is the intersection of the Bretton Woods system and Silicon Valley, a regulatory game aimed at extending the dollar's "excessive privilege" into the Internet age. The Genius Act may consolidate the dollar's dominance more than any currency swap agreement or trade agreement from the Federal Reserve.

There is another notable benefit that by providing regulatory clarity, the bill could help bring crypto innovation back to the U.S. mainland. In recent years, uncertainty in U.S. law has led to a loss of blockchain talent and capital. Despite its shortcomings, stablecoins could serve as a springboard for broader digital financial experiments to take place within U.S. institutions rather than outside.

Stablecoins have not outperformed banking

But trust cannot be outsourced to code. It is created by institutions, audits and rules. Ironically, blockchain, a technology born out of defiance of financial regulation, is now trying to gain legitimacy through the disclosure and regulation it once tried to evade. The Genius Act provides this clarity, but the trade-offs are fully apparent.

In the realm of finance, as the fable says, great power often hides greater vulnerability. If stablecoins are integrated into everyday transactions, then once they fail, the impact will not be limited to the crypto world, it will become a common problem for households, businesses, and taxpayers.

The bill also opens the door for big tech companies or business giants to enter the payments space under relatively lenient rules, raising concerns about privacy, competition, and market concentration in a digital dollar infrastructure dominated by scale rather than security.

Despite the ongoing hype, stablecoins have not outperformed the banking industry. They simply replicate the contradictions of banking in a new form. The true vision of blockchain is to end trust dependence. However, we are now doubling down on trust under federal regulation.

Money is still a social contract: a promise that someone will make up for your losses somewhere. No amount of code or collateral can eliminate the need for credibility in this promise. At the same time, no act of regulation can abolish the fundamental trade-off in finance: security comes at the expense of efficiency. If this is forgotten, it will lead to the next crisis.

Stablecoins repackage old risks as innovations. The danger is not what they are, but that we pretend they are not.