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The Development of Stablecoins in the Context of U.S. Banking History: From Simple Deposits to Diversified Innovations
The Development and Future of Stablecoins: Learning from the History of the American Banking Industry
Stablecoins, as an innovative payment method, greatly simplify value transfer. They create a market parallel to traditional financial infrastructure, with an annual trading volume that has even surpassed major payment networks.
To gain a deeper understanding of the design limitations and scalability of stablecoins, the development history of the banking industry provides a useful perspective. This helps us insight into which practices are feasible, which are not, and the reasons behind them. Similar to many products in the cryptocurrency space, stablecoins may replicate the trajectory of banking development, starting with simple deposits and notes, and gradually achieving more complex credit to expand the money supply.
This article will explore the future development direction of stablecoins from the perspective of the history of American banking development. First, it will review the development process of stablecoins in recent years, and then compare it with the evolution of the American banking industry, in order to make an effective comparison between stablecoins and traditional banking. In this process, the article will discuss three recently emerged forms of stablecoins: fiat-backed stablecoins, asset-backed stablecoins, and strategy-backed synthetic dollars, to anticipate future development trends.
1. The Development History of Stablecoins
Since Circle launched USDC in 2018, the development of stablecoins has accumulated sufficient experience, clearly showing which paths are feasible and which are not.
Early users of stablecoins primarily used fiat-backed stablecoins for remittances and savings. Although stablecoins generated by decentralized over-collateralized lending protocols are also practical and reliable, the actual demand is not strong. So far, users clearly prefer stablecoins priced in US dollars rather than stablecoins of other denominations.
Certain types of stablecoins have completely failed. For example, decentralized, low-collateral stablecoins like Luna-Terra, which seem to offer more capital efficiency than fiat-backed or over-collateralized stablecoins, ultimately ended in disaster. Other categories of stablecoins are still to be observed: while yield-bearing stablecoins are theoretically very attractive, they face obstacles in user experience and regulation.
With the current successful market fit of stablecoin products, other types of dollar-denominated tokens have also emerged. For example, strategy-supported synthetic dollars like Ethena represent an emerging product category. Although similar to stablecoins, they have not yet reached the safety standards and maturity required for fiat-backed stablecoins, and are currently mainly adopted by DeFi users, taking on higher risks for potentially higher returns.
We have also witnessed the rapid popularity of fiat-supported stablecoins such as Tether-USDT and Circle-USDC, which are favored for their simplicity and security. In contrast, the adoption of asset-backed stablecoins has lagged behind, despite this asset class accounting for the largest share of deposits and investments in the traditional banking system.
Analyzing stablecoins from the perspective of the traditional banking system helps to explain these development trends.
II. History of Development of the Banking Industry in the United States: Bank Deposits and US Currency
To understand how current stablecoins mimic the development of the banking system, the history of the American banking industry provides a good reference.
Before the Federal Reserve Act was enacted in 1913, especially prior to the National Bank Act of 1863-1864, different forms of currency had varying levels of risk, and thus their actual values were also different.
The "actual" value of bank notes ( cash ), deposits, and checks can vary greatly, depending on the issuer, the ease of redemption, and the issuer's creditworthiness. Especially before the establishment of the Federal Deposit Insurance Corporation ( FDIC ) in 1933, deposits had to be specially underwritten against bank risk.
During this period, one dollar does not equal one dollar.
The reason lies in the fact that banks are facing the contradiction between maintaining deposit investment profitability and ensuring deposit security, as they are still confronted with (. To achieve deposit investment profitability, banks need to lend and take on investment risks, but to ensure deposit security, they also need to manage risks and hold positions.
It was not until the passage of the Federal Reserve Act in 1913 that, in most cases, one dollar was equivalent to one dollar.
Today, banks use dollar deposits to purchase government bonds and stocks, issue loans, and participate in simple strategies such as market making or hedging according to the Volcker Rule. The Volcker Rule was introduced in the context of the 2008 financial crisis to limit banks from engaging in high-risk proprietary trading activities, reduce speculative behavior in retail banking, and lower bankruptcy risks.
Although retail banking customers may think that all their money is safely stored in their accounts, this is not the case. The collapse of Silicon Valley Bank in 2023 due to a mismatch of funds leading to liquidity depletion gave the market a bloody lesson.
Banks earn profit from the interest rate spread by lending out deposits invested ), balancing profit and risk behind the scenes, while users mostly do not understand how banks handle their deposits, even though banks can essentially guarantee the safety of deposits during turbulent times.
Credit is a particularly important part of banking operations and a way for banks to increase the money supply and the efficiency of economic capital. Although consumers can view deposits as a relatively risk-free unified balance due to federal regulation, consumer protection, widespread adoption, and improvements in risk management.
Returning to stablecoins, they provide users with many experiences similar to bank deposits and notes—convenient and reliable value storage, exchange medium, and lending, but in a non-custodial "self-custody" form. Stablecoins will emulate their fiat currency predecessors, starting from simple bank deposits and notes, but as on-chain decentralized lending protocols mature, asset-backed stablecoins will become increasingly popular.
3. Looking at stablecoins from the perspective of bank deposits
Against this background, we can evaluate three types of stablecoins from the perspective of retail banking: fiat-backed stablecoins, asset-backed stablecoins, and strategy-backed synthetic dollars.
( 3.1 fiat-supported stablecoin
Fiat-backed stablecoins are similar to the banknotes of the National Bank era in the United States from 1865 to 1913. During that time, banknotes were bearer instruments issued by banks; federal regulations required that customers could redeem them for an equivalent amount of dollars, such as special U.S. Treasury bonds or other fiat "coins". Therefore, although the value of banknotes might vary based on the issuer's reputation, accessibility, and solvency, most people trusted banknotes.
Fiat-backed stablecoins follow the same principles. They are tokens that users can directly exchange for easily understood and trusted fiat currencies, but there are similar warnings: while banknotes are bearer instruments that anyone can redeem, holders may not live near the issuing bank, making redemption difficult. Over time, people have accepted the fact that they can find someone willing to trade, and then exchange banknotes for dollars or coins. Similarly, fiat-backed stablecoin users are increasingly confident that they can reliably find high-quality stablecoin redeeming merchants through certain exchanges.
Today, the combination of regulatory pressure and user preferences seems to be attracting an increasing number of users to fiat-backed stablecoins, which account for over 94% of the total supply of stablecoins. Certain companies dominate the issuance of fiat-backed stablecoins, having issued over $150 billion of USD-dominated fiat-backed stablecoins.
But why should users trust the fiat-backed stablecoin issuers?
After all, fiat-backed stablecoins are centrally issued, and it is easy to imagine the "bank run" risk when redeeming stablecoins. To address these risks, fiat-backed stablecoins undergo audits by well-known accounting firms and obtain local licensing qualifications as well as compliance with regulatory requirements. These audits aim to ensure that the stablecoin issuers have sufficient reserves of fiat currency or short-term treasury bills to meet any short-term redemptions, and that the issuers have a sufficient total amount of legal collateral to support the redemption of each stablecoin at a 1:1 ratio.
Verifiable reserve proof and the issuance of decentralized fiat stablecoins is a viable path, but there has not been much adoption.
Verifiable reserve proof will enhance auditability and can currently be achieved through zkTLS) zero-knowledge transport layer security, also known as network proof ### and similar methods, although it still relies on trusted centralized authorities.
Decentralized issuance of fiat-backed stablecoins may be feasible, but there are significant regulatory issues. For example, to issue decentralized fiat-backed stablecoins, the issuer needs to hold U.S. Treasury bonds on-chain that have a risk profile similar to traditional government bonds. This is not possible today, but it would make it easier for users to trust fiat-backed stablecoins.
( 3.2 asset-backed stablecoin
Asset-backed stablecoins are products of on-chain lending protocols, mimicking the way banks create new currency through credit. Some decentralized over-collateralized lending protocols have issued new stablecoins, which are supported by highly liquid on-chain collateral.
To understand how it works, imagine a checking account where the funds in the account are part of the creation of new funds, achieved through a complex system of lending, regulation, and risk management.
In fact, most of the currency in circulation, known as the M2 money supply, is created by banks through credit. Banks create money using mortgages, auto loans, business loans, inventory financing, etc. Similarly, on-chain lending protocols use on-chain assets as collateral to create asset-backed stablecoins.
The system that enables credit to create new money is called the fractional reserve banking system, which originated from the Federal Reserve Act of 1913. Since then, the fractional reserve banking system has gradually matured and undergone significant updates with the establishment of the Federal Deposit Insurance Corporation in 1933, the end of the gold standard in 1971, and the reduction of the reserve requirement to zero in 2020.
With each transformation, consumers and regulators are increasingly confident in the system that creates new money through credit. First, bank deposits are protected by federal deposit insurance. Second, despite major crises like those in 1929 and 2008, banks and regulators have steadily improved their practices and processes to reduce risk. For 110 years, the proportion of credit in the U.S. money supply has been growing larger, and now it accounts for the vast majority.
Traditional financial institutions use three methods to securely issue loans:
Margin loans for assets with liquid markets and fast settlement practices );
Conduct a large-scale statistical analysis on a set of loans ( mortgage loans );
Provide thoughtful and tailored underwriting services ( commercial loans ).
On-chain decentralized lending protocols still only account for a small portion of stablecoin supply, as they are just getting started and have a long way to go.
The most famous decentralized over-collateralized lending protocols are transparent, thoroughly tested, and conservative. For example, some well-known collateralized lending protocols issue asset-backed stablecoins against the following assets: on-chain, exogenous, low volatility, and high liquidity ( easy to sell ). These protocols also have strict requirements regarding collateralization ratios as well as effective governance and liquidation protocols. These properties ensure that even if market conditions change, the collateral can be safely sold, thereby protecting the redemption value of the asset-backed stablecoins.
Users can evaluate mortgage agreements based on four criteria:
Governance Transparency;
The proportion, quality, and volatility of assets that support stablecoins;
The security of smart contracts;
The ability to maintain the loan-to-collateral ratio in real time.
Like the funds in a demand deposit account, asset-backed stablecoins are new funds created through asset-backed loans, but their lending practices are more transparent, auditable, and easier to understand. Users can audit the collateral of asset-backed stablecoins, which is different from the traditional banking system where one can only entrust their deposits to bank executives for investment decisions.
In addition, the decentralization and transparency achieved by blockchain can mitigate the risks that securities laws aim to address. This is important for stablecoins, as it means that truly decentralized assets supporting stablecoins may fall outside the scope of securities laws—this analysis may