Stablecoins have now crossed $250 billion globally, with all but $5 billion being USD denominated. This is an important moment in monetary history.
We are looking at the remaking of money, at least within the fractional reserve lending world. Since 80% of the world operated under this system, we can cover a large portion of the global population with one brush.
When we look at the money supply, this is controlled by the commercial banks. As I stated on numerous occasions, printing press goes brrr is not applicable in a non-banknote era.
We all know how this works (although it often gets overlooked). An individual puts money in the bank. The bank, then pools the cash and makes loans against this. Of course, since we are dealing with fractional, the banks can lend in excess of the cash on hand.
As an aside, in the US, the Fed waived the reserve requirements back in 2020 meaning there is no lending limit based upon cash holdings.
Some are led to believe the loans are backed by nothing. The belief is also incorrect. Double entry accounting mandates that each liability created requires a reciprocal asset. When a loan is made, a note is produced. This is a liability to the borrower but an asset to the bank.
This is often sold off to Wall Street, which pays cash. If the bank does not want to lend more, it simply buys government approved securities (mostly Treasuries or MBS).
It is important to understand the way this works to contrast it with stablecoins.
Stablecoins Are A New Monetary Architecture
People fear back runs. This is a concept that goes back to the 1920s. It is summarized in the film It's a Wonderful Life.
A bank run is the idea there is not enough cash in a bank if a large number of depositors want to make withdrawals. This is not the case anymore, at least not in the traditional sense.
As stated, the money is there. The problem is liquidity. Here is one of the first changes that benefit stablecoins.
We had a bank run with Silicon Valley Bank. That went under because they did not have the liquidity to match the demand for withdrawals. The bank had the assets.
The problem arose from the fact that college MBAs ran the bank. These people cannot comprehend why an institutions would buy a short term security when the longer dated ones pays a higher interest rate. The ROI doesn't make sense.
Old time bankers know the answer to this. A commercial bank isn't exclusively about the ROI. It requires liquidity. Not all deposits are the same. Grandma's savings versus a payroll account have different periods when cash is required.
Banks have historically tried to match the deposit to an applicable asset. Thus, payroll funds should not go to the purchase of a 30-year bond. The money will be required in 2-4 weeks.
Silicon Valley bank had billions in assets. Unfortunately, they were off-the run Treasuries and a mortgage portfolio comprised of San Francisco area real estate. Not exactly the breadbasket of liquidity.
Money Disconnected From The Commercial Banking System
The GENIUS Act, which is making its way through the US Senate, requires that stablecoin issuers back their coins with highly liquid assets. This means cash (typically 20%) with the remaining coming in the form of Treasuries, MBS, or Repo contracts. They key is "highly liquid".
This ushers in a brand new world of monetary architecture. It removes the effective money supply from the banks. That said, there are still ties to the banking system as we will show.
How does this work?
An issuer decides to put out 1 billion stablecoins. It does so by "selling" them into the market. In other words, people swap their US dollars for the stablecoin.
Upon full issuance, we have 1 billion transaction value available.
The dollars are used for the backing. In this instance, $200 million will end up as deposits within the banking system, "locked" away to back the coin. It is a liability on the banks balance sheet, hence the process above applies.
What happens to the remaining $800 billion?
This is not a bank deposit. Instead, it is used to buy assets, say T-Bills. Under this scenario, $800 billion buys the bills, which ultimately puts the dollars in the Treasury's account at the Fed. From here, the government pays it bills, sending the money into the commercial banking system via social security and other payments.
Of course, people take this money and pay their bills with it. Thus, the $800 billion is still circulating through the banking system.
So if we look at what I call the "effective money supply", we have this:
- $1 billion in stablecoin
- $800 billion in USD flowing through the economy
- $200 billion "locked" as a backing
This means the total purchasing (or transactional) power available to the public is $1.8 billion. We also have no fractionalization of the $! billion as the coins are backed by either cash or highly liquid assets.
Ties To The Banking System
This moves us away from commercial bank dependency. Stablecoin issuers are providing what people need, the ability to transfer value.
The challenge is we are not completely free of the banking system. By going with asset backed securities, Wall Street is still involved. This means the investment banks. They are the ones who trades in these assets. The Fed, for example, auctions Treasuries through the primary dealers, large investment banks that warehouse securities.
What we have is a growing importance of the custody of these assets which puts firms like JPMorgan at the center of it all.
As stated, we are seeing a shift in architecture. This is, in my view, just one phase of the process.
Ultimately, we will see a rise in "dark" stablecoins. These will have their own form, perhaps algorithmic or synthetic. Here we see these coins not backed by assets under the control of the banking system.
Under this circumstance, the money supply, is completely removed from the banking system. Issuers of these stablecoins can grow the effective money supply without any ties to Wall Street assets.