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I think this is somewhat reasonable, but with plenty of asterisks / not the "arbitrage" this would imply.

There is still a "real", regulated money-holder in the loop - it's just Bridge (the manager of the cash reserves backing the coin - and licensed money transmitter etc etc). Or in the case of USDC - Circle, the "money-holder" / manager of reserves (also has tons of licensed / is very regulated). And the ETH network (where the coin itself sits) for much of the tech / logistics of making that held-money usable.

In fact - because neither Bridge nor Circle are banks, they can't do the fractional reserve that banks do, and are only allowed to do the 1:1 backed thing, with super regulated entities like BlackRock. "you can lend out the money you earn from selling someNiceCoin to services with higher yields" is strictly not true - they _cannot_ lend the money out, they have to store the money in ways that the end-consumers could do themselves, directly.

In that frame - the "efficiency" for you as a fintech is that instead of having to work with a bank on a "stored value" program, you can just work with Bridge and Circle, whose technological primitives are leaps / bounds ahead of the bank, but more importantly - who are much more flexible to work with than the median "partner bank", because they are not banks.

The whole "partner bank" ecosystem only really even scales because there are API providers like Increase.com / Unit.co etc to wrap them.

What you describe sounds like the opposite of my perspective.

You make it sound like stablecoins offer a benefit to all sides because of better technology.

My expectation is that they offer a benefit to the borrower because the borrower is less regulated and can lend out the money with higher risk and by doing so generate a higher yield.

You mention "1:1 backed thing, with super regulated entities" as if that means the money is safe. But as we have seen with Silicon Valley Bank, even lending out the money to the government via bonds is not safe enough in all circumstances. And my expectation is that issuers of stablecoins can do even more risky types of lending than Silicon Valley Bank did.

The difference is in the assumption of "higher risk". Most of this borrowing is eventually the US Govt because the stablecoins are backed by T bills. So its not as much of an arbitrage as you say.

But then can you have a world where all the money is only stablecoins and backed by "something"? I think that has interesting implications for monetary supply and central banking

> But then can you have a world where all the money is only stablecoins and backed by "something"? I think that has interesting implications for monetary supply and central banking

This strikes me as among the biggest macro risks, and (IIRC) is one of the reasons banks are fighting to prohibit stablecoins from granting yield (to keep the banking system working).

A different primitive that is related to stablecoin but not the same thing, popular among banks, is the "deposit token" - basically a stablecoin, but backed by bank deposits rather than 1:1 cash reserve, and operated by banks. eg. JPM's "JPMD": https://www.jpmorgan.com/payments/newsroom/kinexys-usd-digit...

Not sure how popular / active they are yet, but I imagine they will become a bigger deal as stablecoins are further regulated / banks push harder on their own interests.

Why would a stablecoin granting yield keep the banking system from working?

The theory, at least, is that everyone would eventually be incentivized to move deposits out of the banking system and into this.

(I am not sufficiently expert here to comment on the odds of an outcome like that)

Considering that stablecoins don't pay interest to the holder, I don't know why anyone would be incentivised to move their funds into stablecoins.

USDC gets me 4% on Coinbase, and USDB and other Bridge-issued custom stablecoins also give the customer rewards that they can pass onto the holder (thanks to MMF/similar cash equivalents behind the scenes etc).

But yes - this is why banks want to prevent stablecoin issuers from being allowed to grant rewards

If I deposit dollars in a savings account I will get paid interest, but that is different from the dollar itself being an interest-bearing asset. I think the same thing applies to stablecoins. Does USDC pay interest to the holder or do I have to make a USDC deposit at Coinbase in order to get paid interest? Also, banks already offer a ton of products that generate yield. I don't see why a product that seems relatively similar to many products that banks already offer would destroy their business... unless such a product is much better than what banks offer, but that doesn't seem to be the case.

>unless such a product is much better than what banks offer, but that doesn't seem to be the case.

I think you're basically correct here. I think the fear of the banks - and why they are insistent on prohibiting stablecoins from generating yield/interest (via the GENIUS act) - is that that doesn't stay true in the long-term, as stablecoins ascend as a cross-border payment/storage rail.

>Does USDC pay interest to the holder or do I have to make a USDC deposit at Coinbase in order to get paid interest?

I believe USDC from Coinbase is framed as "reward", and is downstream of an agreement Coinbase has with Circle to get that "reward" from Circle for all USDC deposits it holds on platform. Other "rates" you can get on centralized stablecoins tend to be similar AFAICT.

Meanwhile a 4-week T-bill has a 4.16% coupon equivalent with almost no counterparty risk relative to the 4% USDC.

USDC should be paying more than T-bills to compensate for the counterparty risk.

In that case, wouldnt sp500 or vanguard be bigger risks to banks existing?

I think most people think banks make money by holding your money and giving you some interest when they actually make money by bringing money into existance out of nowhere when they issue mortgages.

I don't see why not - I'm sure the banks (or others more expert than me) would argue for stablecoins being somehow distinct in this regard, but yeah don't know why eg. Vanguard wouldn't also be a credible cause of deposit flight.

(I do vaguely remember reading that banks were concerned about people moving to money-market fund products that had bank-like functionality)

> you can lend out the money you earn from selling someNiceCoin to services with higher yields.

> And my expectation is that issuers of stablecoins can do even more risky types of lending than Silicon Valley Bank did.

To be clear - stablecoin issuers are not allowed to "lend" the money out like a bank or a regulated lender _at all_ - much less doing "riskier" lending. Bridge and Circle still have to, by law, maintain 1:1 cash/cash-equivalent [0] reserves, which means the best they can do is things like US treasuries / money-market funds - which are also primitives accessible to consumers and businesses directly (ie. not inherently competitive).

Certainly there is still great benefit to Bridge, Circle, and the customers issuing stablecoins through them - because it gets them MMF/treasury yield without having to do a "stored value" program at a bank etc - but the issuers who are converting user deposits into stablecoins are also only getting user deposits in exchange for doing useful things.

People don't deposit funds into Mercury just because Mercury gives them 4% (there are plenty of places you can get 4%). You put money into Mercury for the software - this is primarily an implementation detail of how Mercury manages that money, affords to give you a competitive (4%) rate, and affords to give you great software.

[0]: https://en.wikipedia.org/wiki/Cash_and_cash_equivalents

    1:1 cash/cash-equivalent reserves, which means the
    best they can do is things like US treasuries /
    money-market funds

Whether US Treasuries are "cash equivalent" is debatable / depends on the specifics. A dollar is worth a dollar tomorrow. A 10-year US treasury might not.

Are you saying the holder of a stable coin is not taking a higher long-tail risk than the holder of a dollar in a checking account of a bank?

Yeah that's a good flag.

To be even more specific though, "cash equivalent" and the sorts of treasuries that implies are specifically short-duration ones (ie. this cash cannot be parked in a 10-year US treasury either)

Cash equivalents are short-term commitments "with temporarily idle cash and easily convertible into a known cash amount"

https://en.wikipedia.org/wiki/Cash_and_cash_equivalents

Everything you're describing makes sense in terms of legal requirements, but none of it seems to require any form of cryptocurrency or stablecoins.

This was also where I initially landed after finding out that the custom stablecoin could not leave my Bridge instance.

I think the role that crypto plays in enabling this is as a neutral, credible storage layer on which this token can be held, that is not my Postgres database as (eg.) Bridge - these tokens still are actual ERC-20s/etc that are present on-chain, as are the wallets that hold them -- but yeah, I'm:

- not sure how instrumental that actually is here

- not sure if that's just incidentally the easiest structure for Bridge, whose primary business revolves around facilitating payments via stablecoin (now, as a part of Stripe)

Blockchain guarantees there is no double spend while not having one controlling entity. Legal requirements are there to do exactly the same thing - not let managers mess with other people money.

But there are 2 separate controlling entities in this scenario. The hypothetical company that wants to issue the stablecoin and Bridge. They have complete and full control over the money anyway, blockchain or not.

Issuing a branded stable coins of this kind lets you earn carry interest on tbills. Fine. Now, why would anyone buy a branded stable coin that explicitly doesn't promise a return?

(Bonus random question: is a UK premium bond a stable coin?)

>Now, why would anyone buy a branded stable coin that explicitly doesn't promise a return?

In practice, you're not even buying these (or at least - that is not the presentation). What you're actually doing is making a deposit into a "stablecoin" account at a place like Stripe (who now offers a Stripe Stablecoin Account, denominated in the USDB custom stable), Slash.com, Dakota.xyz, etc. IIRC Mercury is also a design partner of Stripe's blockchain.

When you make that deposit - either from your regular bank account via ACH/wire, or via USDC - it settles into the account as the branded stablecoin. When you send funds out - you're either sending as fiat or as USDC.

In short - you're not proactively "buying" the coin, and in fact - Stripe describes [0] the USDB coin as closed-loop & "not for public sale", and I think the others are the same. You're just depositing your funds into a platform, in order to use them on-platform - and the platform is holding them as a "custom stablecoin."

[0]: https://docs.stripe.com/crypto/stablecoin-financial-accounts...

Yes but two other considerations:

1) Assume the buyer/seller holds capital from sources that the majority of the market considers “illicit” and/or is legally sanctioned and/or physically frozen or restricted. Aka the capital can never be called (or at a discount that is unknowable) or the transaction could be later legally reversed or nullified by one or more legal entities. But of course the StableCoin market maker fails to communicate this risk. Therefore the real value of either side of the trade could be zero despite the non-zero StableCoins being transferred. Thus that’s not really a “trade” because there are hidden substantial risks.

2) Along the lines of Matt Levine “Stablecoin treasury strategy?” Consider that the buyer is a publicly listed company, and they fundraise based upon purchase of the digital asset. Then you are doing what most banks consider is not trading but fueling speculation (and normally you can’t expose average retail investors to these risks).

The innovation of StableCoins is much less about Capitalism and much more about re-packaging fraud. And given how lax the prosecution of fraud was during the Financial Crisis, there’s a big meta-bet that StableCoin “traders” will never face losses.

>Assume the buyer/seller holds capital from sources that the majority of the market considers “illicit” and/or is legally sanctioned and/or physically frozen or restricted

This is not feasible legally, and is where your claim falls apart.

From the now-passed GENIUS act [0] which regulates the stablecoin issuer:

- "Permitted payment stablecoin issuers must maintain reserves backing outstanding payment stablecoins on at least a one-to-one basis, consisting only of certain specified assets, including US dollars and short-term Treasuries."

[0]: https://www.lw.com/en/insights/the-genius-act-of-2025-stable...

Their point is that if the money held in reserve are proceeds from criminal activity, it is possible for the assets to be seized or frozen by the feds (which would render them no longer backed 1-to-1 even if they were before then). The text of the law you quoted doesn't really change anything.

I see, I misread: that’s interesting. I would assume the issuer would still be liable to resolve the backing, but yeah I could see how that poses systemic risk.

I also don’t think such a risk could realistically remain hidden - this is still going to be heavily regulated and audited, and industry will wise up to the sorts of risk that emerge.

“At no cost”

Actually there is a lot of cost, in terms of bank reputation, loan underwriting, and finding consumers and businesses to lend to. There is an entire loan servicing department etc.

Banks are allowed to keep fractional reserves and lend out money they create out of thin air.

Stablecoins are not. (Hi, Terra Luna!) Stablecoin issuers like DAI even overcollateralized. That money is sitting there doing nothing. Enter… banks.

USDT rebuffed the EU’s push to get them to deposit into European banks. They prefer US treasuries (and the current admin is lucky they’re doing it because the treasuries are taking a dive… and some of them are even looking into forcing partners to buy US treasuries and issue stablecoins).

The GENIUS act requires stablecoin issuers essentially to keep 100% of the money in deposits and to work with US banks, and prop up the US treasuries and dollar.

https://www.forbes.com/sites/ninabambysheva/2025/05/06/why-s...

You see, originally, Tether (issuers of USDT, the original stablecoin) kept a lot of their collateral in Bitcoin, which was essentially creating an asset bubble / ponzi scheme where newly printed USDT propped up BTC and vice versa. But since the US government started running multi-trillion-dollar deficits every year, it has also become a ponzi scheme, just a sovereign-debt-based ponzi scheme.

That’s the real play here, for a country that’s $35 trillion in debt and needs to keep demand for its treasuries going… because printing money as UBI — to trickle up, get taxed and service the debt properly — just aint in its overton window. The link below goes over exactly how a UBI could solve multiple problems at once over a few decades (help cushion the demand shocks for human labor, help make taxes on pollution and fossil fuels popular, and help the government actually pay off its debt)… but since USA probably isn’t going to do this on a federal level, it might make sense to go bottom-up, town by town:

https://community.intercoin.app/t/ubi-is-not-socialism-but-i...