When BlackRock Reimagines Stablecoins

Original Article Title: Rethinking ownership, stablecoins, and tokenization (with Addison)
Original Article Author: @bridge__harris, @foundersfund Member
Original Article Translation: zhouzhou, BlockBeats

Editor's Note: If stablecoins reach a large enough scale, they may pose a threat to the US economy, as they would reduce the money supply in the banking system and weaken the Federal Reserve's ability to implement monetary policy. However, stablecoins globally promote the dominance of the US dollar, improve cross-border payment efficiency, and help non-US residents access stable currency. When the supply of stablecoins reaches trillions of dollars, stablecoin issuers like Circle may become part of the US economy, and regulatory agencies will need to balance monetary policy with the demand for programmable money.

The following is the original content (reorganized for ease of reading comprehension):

Addison (@0xaddi) and I have been discussing the significant interest in integrating TradFi with cryptocurrency and its core practical use cases. Here is our conversation organized around the US financial system and how cryptocurrency can be integrated into it from a "first principles" perspective:

The current mainstream narrative suggests that tokenization will solve many financial problems—this may be true, or it may not.

The issuance of stablecoins will create new money supply, much like banks. The current trajectory of stablecoin development raises an important question: how do they interface with the traditional fractional reserve banking system? In this system, banks hold only a portion of deposits as reserves and lend out the rest, effectively creating new money supply in practice.

Tokenization Has Become a Market Trend

The current narrative is "tokenize everything"—from publicly traded stocks to private equity, and even government bonds—this is beneficial for both cryptocurrency and the global financial system. However, to think about the changes happening in the market from "first principles," we need to clarify the following questions:

· How does the existing asset ownership system work?

· How will tokenization change this system?

· Why is tokenization necessary?

· What is the true "dollar," and how is new money created?

Currently in the US, large asset issuers (such as publicly traded company stocks) delegate custody of their ownership certificates to the DTCC (Depository Trust Clearing Corporation). The DTCC is responsible for maintaining ownership records for about 6,000 accounts interacting with it, which further manage the asset ledgers of their end users. For private companies, the model is slightly different, where companies like Carta primarily manage the corporate equity ledger.

Both of these models rely on highly centralized ledger management. The DTCC model is akin to a "nesting doll" structure, where individual investors may need to go through 1 to 4 different intermediaries before finally reaching the actual DTCC ledger entry. These intermediaries may include the investor's brokerage or bank, the brokerage's custodian or clearing firm, and the DTCC itself. While regular retail investors may not be directly impacted by this hierarchical system, for institutions, it adds a significant amount of due diligence work and legal risk.

If the DTCC were able to directly tokenize assets at the native level, reliance on these intermediaries would be reduced as market participants could interact more directly with the clearinghouse — although this is not the currently proposed solution in mainstream discussions.

Current tokenization models typically involve an entity holding the underlying asset and recording it on its main ledger (e.g., as a subentry of the DTCC or Carta), then creating a new tokenized version on-chain for trading. This model is inherently inefficient as it introduces additional intermediaries, leading to value extraction, increased counterparty risk, settlement and clearing delays. Additionally, adding an intermediary disrupts composability, as assets need additional "wrapping and unwrapping" steps when moving between traditional finance and decentralized finance, potentially further delaying transactions.

A better solution may be to have all assets "native tokenized," directly putting the DTCC or Carta ledger on-chain, allowing all asset holders to benefit from on-chain programmability.

One of the primary reasons driving stock tokenization is to achieve global market access and provide 24/7 seamless trading and settlement. If tokenization could act as a bridge for stocks to enter emerging markets, it would indeed represent a quantum leap improvement to the existing system, enabling billions of people worldwide to access the U.S. capital markets. However, it remains unclear if tokenization on a blockchain is a necessary means as this issue primarily involves regulations rather than technological limitations.

Similar to regulatory arbitrage with stablecoins, whether asset tokenization can become an effective regulatory arbitrage strategy over a sufficiently long timeframe is still worth exploring. Likewise, a common bullish view on on-chain stocks is their potential combination with perpetual contracts, but the current primary barrier hindering the development of stock perpetual contracts is entirely a regulatory issue, not a technological one.

Stablecoins (i.e., tokenized dollars) structurally resemble tokenized stocks, but the architecture of the stock market is more complex, involving a whole set of clearinghouses, exchanges, and brokers, and is subject to strict regulation. Unlike "regular" crypto assets (such as BTC), tokenized stocks are not native tokenized assets, they are backed by real-world assets, and have lower composability.

In order to establish an efficient on-chain market, the entire traditional financial system needs to be replicated. Due to liquidity concentration and the impact of existing network effects, this would be an extremely complex and almost impossible task. Simply tokenizing stocks and putting them on-chain does not solve all problems because ensuring that these assets have liquidity and are compatible with the traditional financial system requires a significant amount of infrastructure development and thoughtful design.

However, if Congress were to pass a law allowing companies to directly issue digital securities on-chain without going through an IPO, many traditional financial institutions' existence would become unnecessary (this possibility may perhaps be reflected in a new market structure bill). Tokenized stocks could also reduce the compliance costs of a company going public.

Currently, governments in emerging markets do not have an incentive to legalize access to the U.S. capital markets as they prefer to keep capital within their own economy. From the U.S. perspective, opening up access would raise anti-money laundering (AML) concerns.

Addendum: To some extent, Alibaba ($BABA)'s Variable Interest Entity (VIE) structure in the U.S. stock market is already a form of "tokenization." U.S. investors do not directly hold Alibaba's original stock but rather hold shares in a Cayman Islands entity and have economic rights to Alibaba through contracts. While this approach has indeed expanded market access, it has also created new entities and equity structures, significantly increasing asset complexity.

Real Dollars The Federal Reserve

Real dollars are entries on the Federal Reserve's balance sheet. Currently, about 4,500 entities (banks, credit unions, some government entities, etc.) can access these "real dollars" through a Federal Reserve master account. No native crypto entity can directly access these funds, except perhaps Lead Banks and Column Banks that provide services to certain crypto companies like Bridge.

Institutions with a master account can use Fedwire, an almost zero-cost, near-instant settlement payment network that operates 23 hours a day, enabling near-instant settlement. Real dollars fall under M0 (the sum of all balances on the Federal Reserve's balance sheet), while "pseudo dollars" are M1 created by commercial banks through lending, about six times the size of M0.

From a user experience standpoint, using real dollars is actually quite good—transfer costs are only about 50 cents and can settle instantly. Whenever you wire funds from your bank account, your bank operates through Fedwire, which is almost always operational, settles instantly, and has very low latency. However, due to compliance risks, AML requirements, and fraud detection, banks have set many restrictions on large payments, causing user-side friction.

Stablecoin's Bear Case

From this perspective, the potential risk facing stablecoins is that if the "real USD" becomes more widely accessible without the need for intermediaries, the core role of stablecoins will be undermined. Currently, stablecoin issuers rely on banking partners, with these banks having accounts with the Federal Reserve. For example:

· USDC accesses the Fed system through JPMorgan Chase and the Bank of New York Mellon;

· USDT gains access to the U.S. banking system through financial institutions like Cantor Fitzgerald.

So, why don't stablecoin issuers directly apply for a Federal Reserve account?

After all, this would be like a "cheat code" for them to:

· Gain direct access to 100% risk-free Treasury yields without needing to hold reserves through a bank intermediary;

· Solve liquidity issues for faster settlements.

The request for stablecoin issuers to obtain a Federal Reserve account is likely to be rejected, similar to how The Narrow Bank's application was denied. Additionally, crypto banks like Custodia have also struggled to secure such accounts. However, Circle may have close enough banking relationships that even without a primary account, its liquidity flow may not be significantly impacted.

The reason the Federal Reserve does not approve stablecoin issuer accounts is that the dollar system relies on a fractional reserve banking system—the entire economy is built on banks holding only a small portion of reserves.

Banks create new money through debt and loans, and if anyone can access 90% or 100% interest rates risk-free (without lending funds to mortgages, businesses, etc.), who would then want to use traditional banks? If nobody deposits funds, banks can't issue loans or create money, leading to an economic standstill.

When evaluating account eligibility, the Federal Reserve primarily considers two core principles:

· Not introducing excessive network security risks;

· Not disrupting the Fed's monetary policy execution.

For these reasons, current stablecoin issuers are unlikely to obtain primary accounts.

The only potential scenario would be for stablecoin issuers to "become" banks (though they may be unwilling to do so). The "GENIUS Act" proposes bank-like regulation for stablecoin issuers with a market cap over $100 billion. In other words, if stablecoin issuers eventually have to accept bank-level oversight, they might operate more like banks over the long term. However, due to the 1:1 reserve requirements, they still cannot engage in fractional reserve banking activities.

So far, stablecoins have not been regulated out of existence, mainly because most stablecoins (such as Tether) are domiciled overseas. The U.S. dollar's global dominance by the Federal Reserve has thus been perpetuated — even if not via a fractional reserve banking model — as this helps solidify the dollar's status as a reserve currency. However, if a large institution like Circle (or even a narrow bank) were to widely offer deposit accounts in the U.S., the Fed and Treasury might be concerned as this would draw funds away from banks operating on a fractional reserve model, which are key to the Fed's implementation of monetary policy.

This mirrors the core issue stablecoin banks face: to lend, you need a banking license. But if a stablecoin is not backed by "real dollars," it ceases to be a stablecoin, losing its raison d'être. This is precisely the "break" point of the fractional reserve model. However, in theory, a stablecoin issued by a licensed bank holding a master account could operate under a fractional reserve model.

Banking vs. Shadow Banking vs. Stablecoin

The only advantage of becoming a bank is access to a Federal Reserve master account and FDIC insurance. These privileges allow banks to assure depositors that their deposits are "real dollars" (backed by the U.S. government), even though these deposits have effectively been lent out.

However, lending does not necessarily require becoming a bank (shadow banks often do this). The key difference between banks and shadow banks is that the "deposit certificate" provided by a bank is considered actual dollars and can be swapped with deposit certificates from other banks. Hence, despite a bank's assets being entirely illiquid (locked up in loans), these deposit certificates remain fully liquid. This mechanism of converting deposits into illiquid assets (loans) while maintaining the perception of deposit value is at the core of money creation.

In the shadow banking system, the value of deposit certificates is pegged to the value of underlying loan assets. Therefore, shadow banking does not create new money, and you cannot effectively transact with shadow banking's deposit certificates.

Using Aave to analogize how banking and shadow banking operate in the crypto world:

Shadow Banking: In the current system, you can deposit USDC into Aave and receive aUSDC. aUSDC is not always 100% backed by USDC, as some deposits have been lent out to users in collateralized loans. Just as merchants would not accept shadow banking certificates, you cannot directly transact with aUSDC.

However, if economic actors were willing to accept aUSDC just like they accept USDC, then Aave functionally becomes equivalent to a bank, and aUSDC is akin to the "dollar" promised by a bank to depositors, with all the underlying assets (USDC) lent out.

A Simple Example: Addison provides a $1,000 tokenized private loan to Bridget Fund, which can be spent just like dollars. Subsequently, Bridget lends this $1,000 to others, creating $2,000 in value in the system (a $1,000 loan + a $1,000 Bridget Fund token). In this scenario, the lent $1,000 is merely debt, essentially similar to a bond, representing a claim on the $1,000 lent by Bridget.

Stablecoins: Have They Created "Net New Money"?

If we apply the above logic to stablecoins, stablecoins have indeed created "net new money" in function. To elaborate further:

Imagine you spend $100 to purchase a U.S. Treasury bond. You now own a bond, which cannot be directly used as currency; you can only sell it at the market price. In the background, the U.S. government is effectively spending this $100 (as essentially it is a loan).

Now, if you deposit $100 into Circle, and Circle uses this money to buy a bond, the government is still spending this $100—yet you are also spending this $100 because you receive 100 USDC and can use it anywhere.

In the first case, you merely hold a bond that cannot be directly used. In the second case, Circle has created a "mapping" of the bond to make it usable like dollars.

From the standpoint of money supply for each dollar deposited, the impact of stablecoins is limited as most stablecoins' reserve assets are short-term bonds, which are less affected by interest rate fluctuations. In contrast, bank money supply far exceeds stablecoin supply, as banks have longer liability terms and higher loan risks. When you redeem a bond, the government pays you by selling another bond—this cycle continues.

Ironically, although cryptocurrency is rooted in Cypherpunk values, issuing new stablecoins essentially just lowers the government's borrowing costs and fuels inflation (as demand for bonds increases, essentially supporting government spending).

If stablecoins reach a significant scale (e.g., if Circle represents 30% of the M2 money supply—currently stablecoins only represent 1% of M2), they could pose a threat to the U.S. economy. This is because every dollar flowing from the banking system to stablecoins would result in a net decrease in money supply (since bank-created money exceeds the money created by stablecoin issuance) and controlling money supply has always been the exclusive function of the Federal Reserve. Additionally, stablecoins would weaken the Fed's ability to implement monetary policy through the fractional reserve banking system.

Nevertheless, the advantages of stablecoins on a global scale are undeniable: they expand the influence of the US dollar, reinforce the dollar's status as a reserve currency, improve cross-border payment efficiency, and greatly assist non-US residents in need of a stable currency.

When the supply of stablecoins reaches trillions of dollars, stablecoin issuers like Circle may become deeply integrated into the US economy, at which point regulators will have to find a way to balance monetary policy needs with programmable money.

「Original Article Link」