a16z: Stablecoins are on the rise—what new opportunities do entrepreneurs have?
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a16z: Stablecoins are on the rise—what new opportunities do entrepreneurs have?
In-depth exploration of three core challenges and their potential solutions, providing guidance for entrepreneurs and builders in traditional financial institutions.
Navigating Web3 tides with focused insightsAuthor: Sam Broner
Translation: TechFlow
Traditional finance is gradually incorporating stablecoins into its framework, while stablecoin transaction volumes continue to grow. Thanks to their speed, near-zero cost, and programmability, stablecoins have become the ideal building block for global fintech.
However, transitioning from legacy systems to emerging technologies entails not only fundamental shifts in business models but also introduces entirely new risks. After all, self-custody based on digital bearer assets is fundamentally different from the centuries-old traditional banking system.
So what broader monetary structural and policy issues must entrepreneurs, regulators, and traditional financial institutions address during this transformation?
This article explores three core challenges and potential solutions, offering guidance for founders and builders in traditional finance: the issue of monetary uniformity; the use of dollar-backed stablecoins in non-dollar economies; and the potential implications of bond-backed superior forms of money.
1. "Monetary Uniformity" and Building a Unified Monetary System
"Monetary uniformity" refers to the principle that within an economy, regardless of who issues or stores it, all forms of money should be interchangeable at a 1:1 ratio and usable for payments, pricing, and contract fulfillment. Monetary uniformity means that even if multiple institutions or technologies issue money-like instruments, the entire system remains a single, unified monetary framework. In other words, Chase deposits, Wells Fargo deposits, Venmo balances, and stablecoins should all remain perfectly equivalent at par value. This equivalence persists despite differences in how institutions manage assets and their regulatory status. In many ways, U.S. banking history has been about creating and refining systems to ensure the interchangeability of dollars.
Global banks, central banks, economists, and regulators all champion monetary uniformity because it greatly simplifies transactions, contracts, governance, planning, pricing, accounting, security, and everyday economic activity. Today, businesses and individuals take monetary uniformity for granted.
Yet current stablecoins are not fully integrated into existing financial infrastructure and thus fail to achieve full "monetary uniformity." For example, if Microsoft, a bank, a construction company, or a homebuyer attempts to swap $5 million worth of stablecoins via an automated market maker (AMM), they may receive less than $5 million due to slippage caused by insufficient liquidity depth. If stablecoins are to truly transform the financial system, such outcomes are unacceptable.
A universally accessible "at-par redemption system" could help integrate stablecoins into a unified monetary system. Without achieving this, the potential value of stablecoins will be significantly diminished.
Currently, stablecoin issuers like Circle and Tether offer direct minting and redemption services for institutional clients or verified users (e.g., USDC and USDT). These services often come with minimum thresholds. For instance, Circle provides Circle Mint (formerly Circle Account) for enterprises to mint and redeem USDC; Tether allows verified users to redeem directly, typically above certain amounts (e.g., $100,000). Decentralized MakerDAO uses its Peg Stability Module (PSM) to let users exchange DAI for other stablecoins (like USDC) at a fixed rate, serving as a verifiable redemption mechanism.
While these solutions work to some extent, they are not universally accessible and require integrators to connect individually with each issuer. Without direct integration, users can only convert between stablecoins or into fiat through market execution, without guaranteed par settlement.
In the absence of direct integration, enterprises or applications might promise minimal exchange spreads—e.g., always exchanging 1 USDC for 1 DAI with a spread under one basis point—but such commitments depend on liquidity, balance sheet capacity, and operational capability.
Theoretically, central bank digital currencies (CBDCs) could unify the monetary system, but associated concerns around privacy, financial surveillance, constrained money supply, and slower innovation make it likely that better alternatives mimicking existing financial systems will prevail.
Therefore, the challenge for builders and institutional adopters is to design systems where stablecoins function as “real money” alongside bank deposits, fintech balances, and cash—even though they differ in collateral, regulation, and user experience. The goal of integrating stablecoins into monetary uniformity presents immense entrepreneurial opportunities.
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Widely Accessible Minting and Redemption
Stablecoin issuers should collaborate closely with banks, fintech firms, and existing infrastructure to enable seamless, par-value on- and off-ramps. This would grant stablecoins par-value fungibility through established systems, making them indistinguishable from traditional money.
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Stablecoin Clearinghouse
Create a decentralized cooperative organization—akin to an ACH or Visa for stablecoins—to ensure instant, frictionless, and transparently priced conversions. The Peg Stability Module is a promising model, but expanding such protocols to guarantee par-value settlement among issuing parties and fiat could dramatically enhance stablecoin functionality.
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Trust-Minimized, Neutral Collateral Layer
Shift stablecoin fungibility onto a widely adopted collateral layer—such as tokenized bank deposits or wrapped Treasuries. This way, stablecoin issuers can innovate on branding, marketing, and incentives, while users can unwrap and convert stablecoins as needed.
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Better Exchanges, Intent-Based Matching, Cross-Chain Bridges, and Account Abstraction
Leverage improved versions of existing or known technologies to automatically find and execute optimal rates for onboarding, offboarding, or conversion. Build multi-currency exchanges to minimize slippage and hide complexity, allowing stablecoin users predictable fees even at scale.
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Dollar Stablecoins: A Double-Edged Sword for Monetary Policy and Capital Regulation
2. Global Demand for Dollar Stablecoins
In many countries, structural demand for the U.S. dollar is enormous. For citizens living under high inflation or strict capital controls, dollar stablecoins serve as a lifeline—preserving savings and enabling direct access to global commerce. For businesses, using the dollar as a unit of account simplifies and enhances the value and efficiency of international transactions. Yet reality shows cross-border remittance fees averaging 13%, nearly 900 million people enduring high-inflation economies without access to stable money, and 1.4 billion underserved by banking. The success of dollar stablecoins reflects not just demand for dollars, but a desire for a “better money.”
For political, nationalist, and practical reasons, nations typically maintain their own monetary systems, giving policymakers tools to respond to local conditions. When disasters disrupt production, key exports decline, or consumer confidence falters, central banks can adjust interest rates or issue currency to cushion shocks, boost competitiveness, or stimulate spending.
However, widespread adoption of dollar stablecoins may weaken local policymakers’ ability to manage domestic economies. This traces back to economics’ “impossible trinity,” which states that a country can only pursue two out of three policies at any time:
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Free capital mobility;
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Fixed or tightly managed exchange rates;
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Independent monetary policy (autonomous domestic interest rates).
Decentralized peer-to-peer transfers impact all three legs of the impossible trinity:
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They bypass capital controls, fully opening the lever of capital mobility;
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Dollarization may anchor citizens’ economic activity to an international unit of account (the dollar), undermining the effectiveness of exchange rate or domestic interest rate management.
Decentralized P2P transfers affect all three policy goals in the impossible trinity. Such transfers circumvent capital controls, forcing the capital mobility “lever” fully open. Dollarization, by tying citizens to an international unit of account, can diminish the impact of exchange rate or domestic interest rate policies. Countries currently rely on narrow correspondent banking channels to steer citizens toward local currencies and enforce these policies.
Despite potentially challenging local monetary policy, dollar stablecoins remain attractive in many countries. Low-cost, programmable dollars unlock more trade, investment, and remittance opportunities. Most international commerce is dollar-denominated; access to dollars makes cross-border trade faster, easier, and thus more frequent. Moreover, governments can still tax on- and off-ramps and supervise local custodians.
Today, various regulations, systems, and tools exist within correspondent banking and international payments to prevent money laundering, tax evasion, and fraud. While stablecoins operate on transparent, programmable ledgers—making it easier to build secure tools—these tools need to be developed. This creates opportunities for entrepreneurs to connect stablecoins with existing international payment compliance infrastructure to uphold and enforce policies.
Unless we assume sovereign nations will abandon valuable policy tools for efficiency (highly unlikely) and ignore financial crime altogether (nearly impossible), entrepreneurs still have room to develop systems that improve how stablecoins integrate with local economies.
To smoothly embed stablecoins into local financial systems, the key is embracing better technology while strengthening safeguards like foreign exchange liquidity, anti-money laundering (AML) oversight, and other macroprudential buffers. Here are some potential technical solutions:
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Local Adoption of Dollar Stablecoins
Integrate dollar stablecoins into local banks, fintech platforms, and payment systems, supporting small-scale, optional, and possibly taxed conversion methods. This boosts local liquidity without fully eroding the role of local currency.
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Local Stablecoins as On/Off-Ramps
Launch deeply liquid local-currency stablecoins tightly integrated with domestic financial infrastructure. At launch, clearinghouses or neutral collateral layers (see Part 1) may be needed. Once integrated, local stablecoins can become preferred vehicles for FX trading and default options for high-performance payment networks.
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On-Chain Foreign Exchange Markets
Create matching and price aggregation systems across stablecoins and fiat. Market makers may support existing FX models by holding yield-bearing reserves and employing leveraged strategies.
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Competitors Challenging MoneyGram
Build compliant, physical retail cash on/off-ramp networks and incentivize agents to settle in stablecoins. Although MoneyGram recently announced similar offerings, ample opportunity remains for players with mature distribution networks.
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Enhanced Compliance Tools
Upgrade existing compliance solutions for stablecoin payment networks. Leverage stablecoins’ programmability to deliver richer, faster insights into fund flows.
Through bidirectional improvements in technology and regulation, dollar stablecoins can meet global market needs while achieving deep integration with local financial systems, ensuring compliance and economic stability.
3. Implications of Treasury-Backed Stablecoins
Stablecoins gained popularity not because they are backed by Treasuries, but because they offer near-instant, nearly free transactions and infinite programmability. Fiat-backed stablecoins were first to gain broad adoption because they are easiest to understand, manage, and regulate. The core driver of user demand lies in stablecoins’ utility and trust (e.g., 24/7 settlement, composability, global demand), not the nature of their underlying collateral.
Yet fiat-backed stablecoins may face challenges due to their own success: if stablecoin issuance grows tenfold in the coming years—from today’s $262 billion to $2 trillion—and regulators require these stablecoins to be backed solely by short-term U.S. Treasury bills (T-bills), what happens? This scenario is plausible, and its impact on collateral markets and credit creation could be profound.
Holding Short-Term Treasuries (T-Bills)
If $2 trillion in stablecoins are backed by short-term U.S. Treasuries—one of the most widely accepted compliant assets—stablecoin issuers would hold roughly one-third of the $7.6 trillion T-bill market. This shift resembles the role of money market funds (MMFs) in today’s financial system: concentrating holdings in highly liquid, low-risk assets, but with potentially greater influence on the Treasury market.
T-bills are considered among the safest, most liquid assets globally, and being dollar-denominated, they simplify foreign exchange risk management. However, if stablecoin issuance reaches $2 trillion, Treasury yields could fall, and repo market liquidity could dry up. Each newly issued stablecoin represents additional demand for T-bills, enabling the U.S. Treasury to refinance at lower costs—but also making T-bills scarcer and more expensive for other financial institutions. This would compress stablecoin issuers’ margins and make it harder for others to obtain high-quality collateral for liquidity management.
One possible solution is for the U.S. Treasury to issue more short-term debt, perhaps doubling the T-bill market from $7 trillion to $14 trillion. Even then, continued growth of the stablecoin industry would reshape supply-demand dynamics.
The rise of stablecoins and their deep impact on Treasury markets reveal complex interactions between financial innovation and traditional assets. Going forward, balancing stablecoin growth with financial market stability will be a critical issue for regulators and market participants alike.
Narrow Banking Model
At their core, fiat-reserve-backed stablecoins resemble narrow banking: they hold 100% reserves in cash equivalents and do not extend loans. This inherently low-risk model is partly why fiat-backed stablecoins gained early regulatory acceptance. Narrow banking is a trusted, easily auditable system that offers token holders clear value while avoiding the full regulatory burden placed on fractional-reserve banks. But if stablecoin scale increases tenfold to $2 trillion—with all funds backed purely by reserves and T-bills—the implications for credit creation could be significant.
Economists worry about narrow banking because it limits capital available for lending to the real economy. Traditional (fractional-reserve) banks keep only a fraction of customer deposits as cash or equivalents, lending out the rest to businesses, homebuyers, and entrepreneurs. Under regulatory oversight, banks manage credit and maturity risks to ensure depositors can withdraw funds when needed.
Yet regulators generally do not want narrow banks absorbing large deposits because such models result in a low money multiplier effect (i.e., less credit expansion per dollar of reserves). Ultimately, the economy runs on credit: regulators, businesses, and consumers all benefit from a more active, interconnected economy. If even a small portion of the U.S.’s $17 trillion deposit base migrates to fiat-reserve-backed stablecoins, banks could lose their cheapest funding source. This forces banks into two unattractive choices: reduce credit creation (e.g., fewer mortgages, auto loans, SME lines), or replace lost deposits via wholesale funding (e.g., short-term loans from FHLBs)—which is costlier and shorter-dated.
Despite these concerns, stablecoins offer far higher monetary velocity. A single stablecoin can be sent, spent, lent, or collateralized—potentially used dozens of times per minute—controlled by humans or software, operating 24/7. This superior liquidity makes stablecoins a higher-quality form of money.
Moreover, stablecoins don’t have to be Treasury-backed. An alternative is tokenized deposits, which place stablecoin value propositions directly on bank balance sheets while circulating at blockchain speeds throughout the economy. In this model, deposits remain within the fractional-reserve banking system; each stable-value token continues to support the issuer’s lending activities. Here, the money multiplier effect returns—not only via velocity, but also through traditional credit creation—while users retain benefits like 24/7 settlement, composability, and on-chain programmability.
The rise of stablecoins opens new possibilities for the financial system, but also poses a dilemma between credit creation and systemic stability. Future solutions must strike the right balance between economic efficiency and traditional financial functions.
To allow stablecoins to preserve advantages of the fractional-reserve system while promoting economic dynamism, designs could improve along three dimensions:
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Tokenized Deposit Model: Keep deposits within the fractional-reserve system via tokenized deposits.
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Diversified Collateral: Expand collateral beyond T-bills to include other high-quality, liquid assets.
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Embedded Automated Liquidity Mechanisms: Reinject idle reserves into credit markets via on-chain repo agreements, tri-party facilities, CDP pools, etc.
The goal is to sustain an interdependent, growing economy where sound commercial lending remains accessible. By supporting traditional credit creation while increasing monetary velocity, decentralized lending, and direct private credit, innovative stablecoin designs can achieve this.
Although current regulations make tokenized deposits impractical, growing clarity around fiat-reserve stablecoins is opening doors for deposit-backed stablecoins.
Deposit-backed stablecoins allow banks to continue lending to existing customers while improving capital efficiency and delivering the programmability, low cost, and high-speed advantages of stablecoins. The mechanism is simple: when a user chooses to mint a deposit-backed stablecoin, the bank deducts the corresponding amount from their deposit balance and transfers the liability to a pooled stablecoin account. The resulting stablecoins—representing ownership of dollar-denominated assets—are then sent to the user’s designated public address.
Beyond deposit-backed stablecoins, other solutions can improve capital efficiency, reduce friction in Treasury markets, and increase monetary liquidity.
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Help Banks Embrace Stablecoins
Banks can boost net interest margins (NIM) by adopting or even issuing stablecoins. Users can extract funds from deposits while banks retain earnings on underlying assets and customer relationships. Additionally, stablecoins give banks a disintermediated payment opportunity.
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Help Individuals and Businesses Embrace DeFi
As more users manage funds and wealth directly via stablecoins and tokenized assets, entrepreneurs should help them access capital quickly and securely.
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Expand and Tokenize Collateral Types
Widen acceptable collateral beyond T-bills to include municipal bonds, high-grade corporate paper, mortgage-backed securities (MBS), or other secured real-world assets (RWAs). This reduces reliance on a single market, extends credit to borrowers beyond the U.S. government, and maintains high quality and liquidity to preserve stablecoin stability and user trust.
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Bring Collateral On-Chain to Increase Liquidity
Tokenize collateral such as real estate, commodities, equities, and Treasuries to create a richer, more diverse collateral ecosystem.
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Adopt Collateralized Debt Position (CDP) Models
Learn from CDP-based stablecoins like MakerDAO’s DAI, which use diversified on-chain assets as collateral. These models distribute risk and recreate banks’ monetary expansion function on-chain. Require strict third-party audits and transparent disclosures to verify the stability of their collateral frameworks.
While daunting, every challenge brings tremendous opportunity. Entrepreneurs and policymakers who deeply understand the nuances of stablecoins will shape a smarter, safer, and superior financial future.
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