How to Understand Stablecoins? Different researchers have varying views on stablecoins. Some believe stablecoins represent a new stage in the evolution of human currency, while others argue that they break away from the paradigm of sovereign credit money. Alaric, the author from Vancisco, asserts that stablecoins are actually a payment tool and a product of “Tokenization.”
(a) How Are Stablecoins Created?
When discussing tokenization, we must first understand tokens in the blockchain. A token is a digital certificate in blockchain systems with the following characteristics:
- Property Features: Ownership equals possession (whoever holds the private key to a specific address owns the tokens within that address), peer-to-peer transactions, and transactions settle instantly without relying on a third party. The simplest way to understand property features is by comparing them to cash. Cash is anonymous; whoever holds the cash is its owner, and transactions between two people can take place directly without needing banks or payment institutions to witness or record the transaction.
- Openness and Controllable Anonymity: Anyone can participate in the blockchain ecosystem by installing a digital wallet, and this process does not require approval from any individual or institution.
- Smart Contract Support: Tokens are programmable, allowing for smart operations via computer code to enable intelligent transaction scenarios.
- Integration of Messaging and Fund Flow: This is important in cross-border payments, as it enables transactions without reliance on the SWIFT messaging system.
- Inherently Cross-Border: Blockchain operates on the internet, meaning token transactions are naturally cross-border. Token transactions between any two people on Earth are as convenient as exchanging information over the internet.
Having described the technical characteristics of tokens, how do tokens acquire value? This requires the process of tokenization. Tokenization enables the holding, trading, clearing, and settlement of assets using tokens. These assets may include financial assets like currency and securities, or physical assets such as gold.
The product of tokenization is a digital asset. Digital assets carry new risks and return features, support new application scenarios, can serve as new policy tools, but also create new regulatory challenges. Stablecoins are a form of digital asset.
The most representative forms of tokenization are central bank digital currencies (CBDCs), tokenized deposits, stablecoins, tokenized securities, and tokenized money market funds. Their issuance process differs completely from Bitcoin. Bitcoin has no underlying reserves and is issued in a decentralized manner via an algorithm that limits its total supply to 21 million coins.
Tokenization requires a trusted issuing institution. The issuing institution issues tokens based on reserve assets. The reserve assets are on the asset side, while tokens are on the liability side, with a one-to-one correspondence between tokens and reserve assets.
To ensure that users trust each token to represent one unit of reserve assets, the issuing institution must follow three basic rules:
- 1:1 Issuance Rule: For every unit of reserve asset, one token must be issued. In various scenarios, this rule is also called “full reserve issuance” or “100% reserve issuance.”
- 1:1 Redemption Rule: If a user requests to redeem tokens, the issuing institution must return the corresponding reserve assets to the user. This is crucial for understanding stablecoin regulation.
- Trustworthiness Rule: How does the issuer prove the authenticity and adequacy of the reserve assets, that the tokens held by users are backed by real value, and that they haven’t issued tokens out of thin air? This requires regulation. The issuing institution must, under regulatory guidance, hire independent third-party organizations to conduct regular audits of the reserve assets’ authenticity and adequacy, and provide full disclosure.
Of course, there are other forms of tokenization. For example, tokenizing the future cash flows of a company, project, or asset, which is essentially tokenizing income rights. Virtual assets like Bitcoin and Ethereum, which have no underlying reserve assets, can be seen as tokenizations of the right to use the Bitcoin network and Ethereum network—they represent the use rights of these blockchain networks.
Different issuers, mechanisms, reserve assets, and tokenization methods intersect to form a rich digital asset ecosystem.
(b) Key Points of Mainstream Stablecoin Solutions
Mainstream stablecoins are typically pegged to a single fiat currency, issued based on full fiat currency reserves, and their reserve asset management is strictly regulated. The following discussion will focus on this mainstream stablecoin solution.
The issuance of stablecoins does not involve the expansion of central bank balance sheets (e.g., central banks making re-loans or engaging in open market purchases), nor does it involve commercial bank lending. No new money is created; rather, existing money in the secondary banking system, composed of central banks and commercial banks, is tokenized via distributed ledger technology, creating a new form of currency circulation based on distributed ledger technology.
Key points of mainstream stablecoin solutions include:
- Tokens represent money in the blockchain.
- Tokens circulate within the blockchain, replacing money in the secondary banking system.
- Although tokens circulate on the blockchain, the corresponding money remains locked in the secondary banking system.
- Stablecoins are tokenized forms of commercial bank deposit money, which can be invested in low-risk, high-liquidity assets such as government bonds, forming the reserve assets for stablecoins.
- The main goal of reserve asset management is to ensure the redemption of stablecoin users.
- Stablecoins are widely accepted as a payment tool outside the issuer.
In the International Monetary Fund (IMF) literature, these are classified as e-money. The European Union’s “Crypto-Asset Markets Regulation” (MiCA) positions mainstream stablecoins as e-money tokens, which are tokenized forms of e-money.
If we use the strict definition of currency, stablecoins are payment tools, not currency instruments. Further analysis shows that lending with stablecoins does not create new stablecoins, whereas commercial bank lending creates deposit money.
Objective Analysis of the Impact of USD Stablecoins
(a) USD Stablecoins and the Crypto Asset Market
USD stablecoins mainly function in the crypto asset market as a transaction medium, unit of account, and store of value:
- In the crypto asset market, most users buy crypto assets using USD stablecoins, and the main returns from selling crypto assets are USD stablecoins.
- Crypto assets are priced in USD stablecoins, which are then converted into fiat currency equivalents.
- Users frequently use USD stablecoins for asset transfers between different crypto asset exchanges.
How should we understand crypto assets? Despite receiving endorsement from the Trump administration, crypto assets are essentially speculative assets:
- The crypto asset market has little connection to the real economy and does not participate in productive activities. Crypto asset trading mainly results in wealth redistribution in society.
- Crypto asset prices are driven by transactions and lack traditional fundamentals. Key influencing factors include U.S. monetary and regulatory policies, market liquidity, participant activity levels, and the richness of trading channels.
- The crypto asset market is a global market dominated by the U.S. The main catalyst for the rise since late 2023 has been the U.S. SEC’s approval of Bitcoin spot ETFs and Trump’s victory in the U.S. election.
If we compare the crypto asset market to a casino, USD stablecoins act like chips within that system.
The risks in the crypto asset market due to speculation, leverage, liquidity, duration conversions, interlinkages, human greed, fraud, and regulatory gaps are fundamentally similar to those in mainstream financial markets.
These risks can spill over into mainstream financial markets, primarily through stablecoin reserves, crypto asset ETFs, publicly listed companies holding crypto assets, and companies engaged in crypto asset businesses. As the connection between the crypto asset market and mainstream financial markets deepens, these risk transmission channels are strengthening.
(b) USD Stablecoins and Dollarization
After accumulating a large user base in crypto asset trading, USD stablecoins are rapidly penetrating other use cases, including cross-border trade settlement, intercompany payments, consumer payments, employee salary payments, and corporate investments.
The use of USD stablecoins in cross-border payments and fund transfers, due to their speed, low cost, and lack of reliance on the banking system, has made them popular with both individual and institutional users.
However, it should be noted that behind the speed and low cost of USD stablecoins is the fact that they are not as strictly regulated as commercial banks in cross-border payments, nor do they incur the same regulatory compliance costs. For example, Tether (USDT) has fewer than 150 employees according to public reports. Given the volume of USDT transactions, these employees are far too few to support the necessary KYC, AML, and CFT work.
Some researchers compare the transaction volume of stablecoins to that of Visa and Mastercard, claiming that stablecoins have surpassed them in cross-border payments. However, as previously noted, over 99% of stablecoin transaction volume comes from crypto asset trading. This is a typical “apples-to-oranges” comparison.
In regions like Latin America, Africa, and Southeast Asia, large numbers of residents hold and use USD stablecoins to hedge against domestic economic instability and currency devaluation risks.
USD stablecoins, in digital form, have driven the global dollarization process. This digital form of dollarization further strengthens the international status of the dollar, eroding the monetary sovereignty of other countries and potentially exacerbating economic imbalances in these nations.
Some researchers argue that USD stablecoins improve the accessibility of financial services in underdeveloped areas, such as Africa, which has the largest user base for USD stablecoins. However, we should consider whether this is the result governments in these countries want.
(c) U.S. Policy on USD Stablecoins
A significant proportion of USD stablecoins (estimated to be over 70%) are issued offshore, with minimal regulation in areas like KYC, AML, and CFT, and are even used to bypass U.S. financial sanctions.
The features of public blockchains—permissionless, anonymous, and inherently cross-border—make stablecoins easy to use for money laundering, terrorist financing, tax evasion, and underground economy activities. On June 26, the Financial Action Task Force (FATF) emphasized the growing abuse of stablecoins in its report. FATF found that, since the 2024 report, the frequency of stablecoin use by terrorist organizations, drug traffickers, and other illegal actors has increased. Currently, more than half of on-chain illegal activities involve stablecoins. If stablecoins or virtual assets become widely adopted without unified regulatory standards, illegal financial risks could escalate.
In November 2021, the U.S. President’s Working Group on Financial Markets (PWG), the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC) released a regulatory report on stablecoins, but this report had little practical effect on stablecoin regulation.
On January 23, 2025, President Trump signed an executive order on “Promoting the Development of U.S. Digital Assets and Financial Technology,” which proposed “promoting dollar sovereignty: advancing and protecting the dollar’s sovereignty, including through actions to promote the development and growth of globally legitimate, compliant USD-backed stablecoins.”
On June 5, 2025, Circle, the issuer of USDC stablecoin, went public on the New York Stock Exchange.
On June 18, 2025, the U.S. Senate passed the “Guidance and Establishment of the U.S. Stablecoin National Innovation Act” (GENIUS Act), and the U.S. is set to establish the first federal regulatory framework for stablecoins.
The U.S. strategy for USD stablecoins can be summarized as: regulating USD stablecoins with leniency, allowing businesses to lead the digital “dollarization” process, and after the user base, issuance volume, and trading volume scale up, strengthening regulation in terms of issuer qualifications, reserve asset management, and KYC, AML, and CFT compliance.
(d) USD Stablecoins and U.S. Treasury Bonds
USD stablecoin reserve assets are invested in U.S. Treasury bonds. According to public reports, USDT reserves include over $120 billion in U.S. Treasury bonds, more than Germany holds. Therefore, promoting the issuance of USD stablecoins to create stable demand for U.S. Treasury bonds has become a market narrative endorsed by the Trump administration.
But what is the actual situation? Simple analysis shows that creating demand for U.S. Treasury bonds via USD stablecoins has limited impact on easing the U.S. debt issue.
- According to the GENIUS Act, USD stablecoin reserves can be invested in U.S. Treasury bonds maturing within 93 days (as previously pointed out, USDC’s reserve assets are mainly in short-term U.S. Treasury bonds), whereas long-term bonds are more significant for the U.S.
- The total U.S. national debt has exceeded $36 trillion, and even if all USD stablecoin reserves were invested in U.S. Treasury bonds, it would only amount to $245.2 billion.
- If USD stablecoin issuers hold large amounts of U.S. Treasury bonds and allow users to redeem freely, they may have to sell off U.S. Treasury bonds during large-scale redemptions, potentially destabilizing the U.S. Treasury bond market.
In theory, USD stablecoin reserve asset management faces an “impossible triangle”: large-scale issuance of USD stablecoins, large-scale investment of reserve assets in U.S. Treasury bonds, and the ability for users to redeem freely. These three objectives cannot be achieved simultaneously, determining the upper limit of USD stablecoin issuance.
Another market narrative is the “digital dollar cycle”: the U.S. expands USD stablecoin issuance by developing the crypto asset market, particularly through strategic Bitcoin reserves, and the larger issuance of USD stablecoins means more reserve assets can be used to buy U.S. Treasury bonds.
However, this cycle—”countries hoarding Bitcoin (partly funded by issuing U.S. debt) → pushing up Bitcoin prices → expanding USD stablecoin issuance → stablecoin reserve assets buying U.S. bonds”—resembles the logic of large shareholders of listed companies using stock pledges to finance and manage market capitalization, and its sustainability remains questionable.