What is a Stablecoin#
A stablecoin is a type of cryptocurrency that is also based on blockchain technology. The main difference between stablecoins and traditional virtual cryptocurrencies is that stablecoins are pegged to fiat currencies at a 1:1 ratio. For example, the largest stablecoin globally, Tether (USDT), is pegged to the US dollar at a 1:1 ratio. USDT was created by Tether Limited in 2014, so stablecoins are not a new concept and did not emerge only after the passage of the "Stablecoin Act." The act actually brings stablecoins that have existed for 11 years into a regulatory framework.
So, what is the role of stablecoins? What are their main application scenarios?
The birth of stablecoins stemmed from the surge in Bitcoin trading volume in 2014, which created a demand for a stable intermediary currency. This is because Bitcoin transactions are transferred directly between "wallets" and cannot be traded directly with US dollars. The trading model at that time was relatively outdated, for example, requiring face-to-face transactions: the buyer would transfer Bitcoin, and only then would the seller deliver the goods; or relying on platform intermediaries: the buyer would transfer Bitcoin to the seller's wallet, and the seller would then deposit US dollars into the buyer's account. This model relied on reputable platforms and was inefficient, thus giving rise to stablecoins as an intermediary for Bitcoin transactions.
Therefore, stablecoins are essentially "tokens" of the US dollar in the cryptocurrency market. After the introduction of stablecoins, the Bitcoin trading process became: the buyer first exchanges US dollars for Tether at a 1:1 ratio, and then uses Tether to purchase Bitcoin. Tether Limited promises a 1:1 exchange, so the seller must first exchange Bitcoin for Tether before redeeming US dollars from Tether Limited. In short, stablecoins are blockchain-based US dollar tokens that act as a bridge currency for cryptocurrency transactions, similar to "tokens" in the cryptocurrency market. However, the problem is that the value of stablecoins entirely depends on the promises made by the issuing company. Who can guarantee that these promises are reliable?
Even the United States once broke its promise in 1971, decoupling the dollar from gold; who can ensure that the issuing company won't abscond with funds or go bankrupt? Moreover, all stablecoin issuing companies (like Tether) do not deposit the large amounts of US dollars they receive into third-party custodial accounts but instead invest them to earn returns. Before the Federal Reserve's aggressive interest rate hikes in 2022, these companies typically purchased corporate bonds to obtain high interest. However, corporate bonds carry risks; if the bonds purchased default, the stablecoin company could be dragged down and go bankrupt. In recent years, there have been cases of stablecoin companies collapsing.
For example, in May 2022, the world's third-largest stablecoin, TerraUSD (UST), collapsed, with its value plummeting and decoupling from the US dollar, dropping from $1 to $0.10 within a week, a decline of over 90%. The price of Luna, which traded using UST, also nearly went to zero within a week. This was the largest collapse of a stablecoin, stemming from a bank run: the Korean company Terra temporarily adjusted the liquidity of the UST pool, leading to a decrease in UST liquidity, prompting large funds to exchange UST for US dollars on a large scale, causing market panic. UST was linked to Luna; users needed to use UST to purchase Luna. During the bank run, UST holders sold Luna for US dollars, causing Luna's price to plummet, which in turn triggered UST sell-offs, creating a death spiral. Although the issuing company claimed to hold underlying assets, no one could quickly liquidate those assets during a bank run. However, after the Federal Reserve raised interest rates in 2022, many issuing companies invested US dollars into high-yield short-term US Treasury bonds, achieving annual returns of 5%, enjoying stable high interest (although this is based on the US fiscal predicament).
Stablecoin issuing companies essentially engage in banking activities, earning interest spreads. Compared to banks, their advantage lies in being able to attract deposits at low or no interest and then reinvest in high-yield US Treasury bonds. Even if the Federal Reserve lowers interest rates, the current annual yield on US one-month short-term bonds is still 4.3%, providing substantial interest spread profits. The Federal Reserve's high interest rates have allowed stablecoin companies to thrive in recent years, rapidly expanding the market size. Currently, the stablecoin market size is approximately $200 billion, doubling from a year ago. Therefore, countries supporting cryptocurrencies, including the United States, are calling for regulations on stablecoins, which has led to the introduction of the US "GENIUS Act."
What is the Stablecoin Act#
The act stipulates that only three types of entities are allowed to issue payment stablecoins:
- First, subsidiaries of banks or credit unions;
- Second, non-bank financial institutions approved by federal regulators (such as institutions regulated by the OCC);
- Third, state-level issuers that have obtained state-level licenses and meet federal "substantive equivalence" standards.
Additionally, the act requires all stablecoins to implement 100% reserve backing: issuers must ensure that their assets are sufficient for full redemption, and the US dollars raised can only be used to purchase highly liquid assets, such as cash, demand deposits, short-term US Treasury bonds (≤93 days), short-term repurchase agreements (≤7 days), and central bank reserves. Customer assets must be strictly segregated from operational funds, and re-pledging is prohibited, only allowing temporary pledging for short-term liquidity purposes. Issuers must disclose the composition of reserve assets monthly and are subject to audits by registered accounting firms. Issuers with a market capitalization exceeding $50 billion must comply with stricter auditing and compliance requirements.
Stablecoin issuers are regarded as financial institutions under the Bank Secrecy Act and must establish anti-money laundering (AML) and sanctions compliance systems. If large technology companies engage in issuance, they must meet financial compliance, user privacy, and fair competition requirements to prevent monopolistic and systemic risks. The core of the act is to strengthen regulation, but Trump strongly supports cryptocurrencies, and the act provides an entry point for large tech companies, facilitating them and powerful figures like Trump to raise funds through stablecoin issuance and profit from high-yield US Treasury bonds.
It is widely expected that the stablecoin market will grow dramatically during Trump's presidency. A report by Standard Chartered predicts that by the end of 2028, the issuance of stablecoins will reach $2 trillion, creating an additional $1.6 trillion demand for US short-term Treasury bonds, "sufficient to absorb all new short-term Treasury bond issuance during Trump's second term." This indicates that one of the purposes of US support for stablecoins is to increase buyers of short-term bonds.
But can the issuance of stablecoins solve the $36 trillion debt crisis in the US? Analysis shows it cannot. The act stipulates that issuers can only purchase short-term Treasury bonds with maturities of 93 days or less and cannot buy long-term Treasury bonds. The reason is that issuing stablecoins is equivalent to banks attracting short-term deposits, with funds that can be redeemed at any time; if used to purchase long-term US Treasury bonds, it would lead to a mismatch of maturities similar to that of Silicon Valley Bank. Silicon Valley Bank invested customer deposits into long-term Treasury bonds in 2020, and after the Federal Reserve raised interest rates in 2022, it faced severe unrealized losses, leading to a bank run and bankruptcy in 2023. Therefore, the act cannot solve the shortage of long-term bond buyers in the US. The purchase of short-term bonds by stablecoin issuers is for high-yield returns, which actually exacerbates the US Treasury bond crisis. Furthermore, the issuance of stablecoins merely shifts market funds to short-term bonds rather than creating new buyers (for example, Buffett's $300 billion cash is also invested in short-term bonds); the market does not lack short-term bond buyers, only long-term bond buyers.
Trump strongly supports stablecoins because he himself has issued the USD1 stablecoin. USD1 was launched by a DeFi platform controlled by the Trump family in March 2025, pegged to the US dollar at a 1:1 ratio, supported by US short-term Treasury bonds, dollar deposits, and cash equivalents. Trump's son, Eric Trump, is a key figure. By issuing stablecoins to raise funds and reinvest in high-yield short-term bonds, it is almost a risk-free profit. The rapid advancement of the act is related to facilitating profits for powerful figures like Trump.
On May 19, the US stablecoin act passed procedural legislation in the Senate and still requires a vote in both the House and Senate before being signed into law by Trump. Given that the act is favorable for tech giants' financing and for the powerful class to raise money, the passage is likely to be smooth. On May 21, Hong Kong passed the "Stablecoin Regulation Draft," which is similar to the US act but focuses more on regulation. Hong Kong often serves as a financial firewall, allowing high-risk new things to pilot, but China will not get involved until the risks of this financial crisis are cleared. Because when a financial crisis erupts, even stablecoins operating with 100% reserves still face the risk of bank runs.
Risks of Stablecoins#
The Financial Times commented that although stablecoin issuers must operate with 100% reserves, they essentially perform the functions of banks absorbing public liquidity and promising redemption, yet lack the capital adequacy ratios, liquidity regulations, or deposit insurance constraints of traditional banks, making them more vulnerable during a bank run. Stablecoins are highly correlated with the cryptocurrency market; if the market crashes (as in 2022), it can easily trigger a bank run due to correlated tokens (like Luna and UST).
Compared to 2022, current issuers have invested large amounts of US dollars into short-term US Treasury bonds, tightly linking the US Treasury market with stablecoins. Once a bank run occurs, it can easily impact the US Treasury market. A report from the Bank for International Settlements warns that a bank run on stablecoins could lead to an increase in US Treasury bond yields: a $3.5 billion sell-off could cause yields to rise by 6 to 8 basis points, triggering financial stability risks.
Additionally, stablecoin issuers compete with banks for deposits. A research report from Bank of America on May 27 pointed out that the efficient payment and DeFi lending services of stablecoins could lead to $6.6 trillion in deposits flowing out of the traditional banking system, weakening their ability to attract deposits and extend credit, especially impacting small and medium-sized banks, and lowering the overall valuation of US banks. The US banking industry has purchased large amounts of long-term bonds over the past decade and is facing severe unrealized losses in recent years due to the Federal Reserve's interest rate hikes. Large banks can still sustain themselves (unrealized losses can disappear in a rate-cutting cycle), but if stablecoins divert depositors' funds, it could turn unrealized losses into realized losses, potentially repeating the bankruptcy case of Silicon Valley Bank.
Another issue is that before the act was introduced, the international stablecoin market grew wildly without regulation, with 100% redemption relying solely on the promises of issuers. It is questionable how many issuers currently meet regulatory requirements. The 5% high-yield profits still do not satisfy the greedy, and the actual redemption holes are unknown. Although the implementation of the act is beneficial for long-term development, it may expose non-compliant issuers in the short term, bringing short-term shocks and risks to the cryptocurrency and global financial markets.
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