What is a Stablecoin#
A stablecoin is a cryptocurrency based on blockchain technology. Its core difference from traditional cryptocurrencies lies in its 1:1 peg to fiat currency. For example, the largest stablecoin globally, Tether (USDT), is pegged to the US dollar at a 1:1 ratio. USDT was established by Tether Limited in 2014, indicating that stablecoins are not a new concept and did not emerge only after the passage of the "Stablecoin Act." The act essentially brings the stablecoins that have existed for 11 years into a regulatory framework.
So, what are the main functions and application scenarios of stablecoins? Their emergence stems from the surge in Bitcoin trading volume in 2014, leading to a market demand for a stable intermediary currency. Bitcoin transactions are essentially direct transfers between wallets, which cannot be traded directly with US dollars. Early trading models were relatively backward, relying on face-to-face transactions or platform intermediaries: one party transfers Bitcoin to the other party's wallet, and the other party then transfers US dollars to their account. This model relies on trusted platforms and is inefficient, thus giving rise to stablecoins as an intermediary for Bitcoin transactions.
Therefore, stablecoins essentially act as tokens for US dollars in the cryptocurrency market. After their introduction, the Bitcoin trading model shifted to: buyers first exchange US dollars for Tether at a 1:1 ratio, then use Tether to purchase Bitcoin. Tether Limited promises a 1:1 exchange, so sellers must first convert Bitcoin to Tether before exchanging it back to US dollars. In short, a stablecoin is a US dollar token based on blockchain technology, serving as a bridge currency for cryptocurrency transactions, similar to casino chips. However, the problem lies in the fact that its value relies entirely on the issuer's promise, and the reliability of that promise is questionable.
Even though the United States broke its promise in 1971, decoupling the dollar from gold, who can guarantee that the issuing company won't abscond with funds or go bankrupt? All stablecoin issuers (like Tether) do not hold the exchanged US dollars in third-party accounts but invest them for profit. Before the Federal Reserve's aggressive interest rate hikes in 2022, these companies typically purchased corporate bonds to earn high interest. However, corporate bonds carry risks; if a bond defaults, the issuing company may be dragged down into bankruptcy. There have been historical cases of stablecoin companies facing defaults.
For example, in May 2022, the world's third-largest stablecoin, TerraUSD (UST), collapsed, its value plummeting and decoupling from the US dollar, dropping from $1 to $0.10 within a week, a decline of over 90%. The related Luna coin's price nearly went to zero. The UST collapse stemmed from a bank run: when the Korean company Terra adjusted its liquidity pool, it withdrew some liquidity, prompting large funds to exchange for US dollars en masse, leading to market panic and a run on the stablecoin. UST was linked to Luna, and during the run, the selling pressure on Luna surged, creating a death spiral. Although the issuing company claimed to hold underlying assets, it struggled to manage the asset liquidation process during the run. After the Federal Reserve's interest rate hikes in 2022, many issuers invested funds in high-yield US short-term bonds, with annual returns of 5%, profiting from the weaknesses in US Treasury.
Thus, stablecoin issuers essentially engage in banking activities, profiting from interest rate spreads. Their advantage lies in attracting deposits at low or no interest, then reinvesting 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 still reaches 4.3%, creating enormous interest rate spreads. The high interest rates set by the Federal Reserve have led to the rapid growth of stablecoin companies in recent years, with the market size increasing to about $200 billion, doubling from a year ago. Consequently, countries supporting cryptocurrencies globally are calling for regulation of stablecoins, leading to the introduction of the US "GENIUS Act."
What is the Stablecoin Act#
The act stipulates that only three types of entities can 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 obtain state-level licenses and meet federal "substantive equivalence" standards.
Additionally, the act requires all stablecoins to implement 100% reserve backing: issuers must ensure that assets are sufficient for full redemption, and the US dollars obtained from issuance can only be used to purchase highly liquid assets, such as cash, demand deposits, short-term US Treasury bills (≤93 days), short-term repurchase agreements (≤7 days), and central bank reserves. Customer assets must be strictly separated 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 audit 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. When large tech companies engage in issuance, they must meet stringent financial compliance, user privacy, and fair competition requirements to prevent monopolies and systemic risks. The core provisions of the act aim to strengthen regulation, but against the backdrop of Trump's support for cryptocurrencies, it provides a channel for large tech companies and powerful figures (like Trump) to raise funds through stablecoin issuance and profit from high-yield US Treasury bonds.
There is widespread expectation that the stablecoin market will grow dramatically during Trump's presidency. A report from Standard Chartered predicts that by the end of 2028, the issuance of stablecoins will reach $2 trillion, generating an additional $1.6 trillion demand for US short-term bonds, "sufficient to absorb all new short-term bond issuance during Trump's second term." This reveals one of the purposes of the US's support for stablecoins: to increase buyers of short-term bonds.
But can stablecoins solve the $36 trillion debt crisis in the US? Analysis indicates that they cannot. The act stipulates that issuers can only purchase short-term bonds maturing within 93 days and cannot buy long-term bonds. The reason is that issuing stablecoins is similar to banks attracting short-term deposits, with funds readily available for redemption; if they misallocate funds to purchase long-term bonds, it will lead to a mismatch of maturities similar to that of Silicon Valley Bank. In 2020, Silicon Valley Bank invested deposits in long-term bonds, and after the Federal Reserve's interest rate hikes in 2022, it faced severe losses on long-term bonds, leading to forced sales and bankruptcy during the run in 2023.
Therefore, the US stablecoin act cannot solve the shortage of long-term bond buyers. Issuers' large-scale purchases of short-term bonds are for high-yield profits, exacerbating the US fiscal burden and worsening the debt crisis. Furthermore, stablecoin issuance merely shifts market funds to short-term bonds rather than creating new buyers. For example, Buffett's $300 billion cash is primarily invested in short-term bonds. The market does not lack buyers for short-term bonds; it lacks buyers for long-term bonds, and the act cannot resolve this structural contradiction.
Trump strongly supports stablecoins because he himself is issuing Trump coins. USD1 is a US dollar stablecoin launched by the Trump family's DeFi platform in March 2025, pegged 1:1 to the US dollar and backed by US short-term bonds, deposits, and cash equivalents. Trump's son, Eric Trump, is a key figure. By issuing stablecoins to raise funds and reinvesting in high-yield US Treasury bonds, it creates a profit without capital. The rapid advancement of the act partly stems from facilitating profit for the powerful class.
On May 19, the US stablecoin act passed procedural legislation in the Senate and still requires voting in both the House and Senate before being signed by Trump. Given that the act benefits tech giants in financing and allows the powerful class to raise funds, it is expected to pass with low difficulty. On May 21, Hong Kong passed the "Stablecoin Regulation Draft," which is similar to the US act but focuses more on regulation. Hong Kong positions itself as a financial firewall, allowing high-risk new things to pilot, but China will not implement it until the current round of financial crisis risks are cleared, as stablecoins still carry the risk of runs even with 100% reserves.
Risks of Stablecoins#
The Financial Times commented that although stablecoin issuers must operate with 100% reserves, they essentially perform the functions of banks in absorbing liquidity and promising redemption, yet lack the capital adequacy ratios, liquidity regulations, or deposit insurance constraints of traditional banks, making them more vulnerable during runs. Stablecoins are highly correlated with the cryptocurrency market; if the market crashes (as in 2022), it can easily trigger runs due to related cryptocurrencies (like Luna and UST).
Compared to 2022, current issuers have concentrated funds in US short-term bonds, closely linking the bond market with stablecoins. Once a run occurs, it can easily impact the US Treasury market. A report from the Bank for International Settlements warns that a run on stablecoins can directly affect US Treasury yields: a $3.5 billion sell-off could cause yields to rise by 6 to 8 basis points, posing risks to financial stability.
Moreover, issuers essentially 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 a large amount of long-term bonds over the past decade, and after the Federal Reserve's aggressive interest rate hikes, they faced severe losses. While large banks can withstand this (as losses can disappear in a rate-cutting cycle), if stablecoins divert depositors' funds, it could increase the risk of unrealized losses turning into realized losses, repeating the bankruptcy of Silicon Valley Bank.
Another issue is that before the act's introduction, the international stablecoin market was in a phase of wild growth, lacking regulation, and the 100% redemption relied solely on the issuer's promise. It is questionable how many issuers currently meet regulatory requirements. The 5% high-interest profit is still difficult to satisfy greed, and the actual loopholes in 100% redemption are unknown. Although the act's implementation is beneficial for long-term development, it may expose non-compliant issuers in the short term, bringing unknown shocks to the cryptocurrency and global financial markets.
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