What is a Stablecoin#
Stablecoins are a type of cryptocurrency built on blockchain technology. The core difference between stablecoins and traditional virtual cryptocurrencies is that stablecoins maintain a 1:1 peg to fiat currencies. 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, which have existed for 11 years, into a regulatory framework.
So, what are the main functions and application scenarios of stablecoins? Their emergence was driven by the surge in Bitcoin trading volume in 2014, which created a demand for a stable intermediary currency. This is because Bitcoin transactions transfer directly between "wallets" and cannot be traded directly with US dollars. The trading model at that time was relatively primitive, requiring face-to-face operations: buyers transferred Bitcoin, and sellers delivered goods; or relying on platform intermediaries, where buyers transferred Bitcoin into sellers' wallets, and sellers then deposited US dollars into buyers' accounts. This model relied on trusted platforms and was inefficient, leading to the emergence of stablecoins as an intermediary for Bitcoin transactions.
Therefore, stablecoins essentially act as "tokens" for the US dollar in the cryptocurrency market. With stablecoins, the Bitcoin transaction process becomes: buyers first exchange US dollars for Tether at a 1:1 ratio with Tether Limited, and then use Tether to purchase Bitcoin. Tether Limited promises a 1:1 exchange, so after sellers convert Bitcoin to Tether, they can exchange Tether for US dollars with Tether Limited. In short, stablecoins are blockchain-based dollar tokens used for cryptocurrency transactions, serving as a bridge currency, akin to "casino 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 by decoupling the dollar from gold; who can ensure that issuing companies won't abscond with funds or go bankrupt? Moreover, all stablecoin issuing companies (like Tether) do not hold the large amounts of US dollars in third-party accounts but instead invest them to earn returns. Before the Federal Reserve's aggressive interest rate hikes in 2022, these companies invested US dollars in corporate bonds to obtain high interest. However, corporate bonds carry risks, and if a bond defaults, the issuing company could be dragged down. There have been past cases of stablecoin companies facing defaults.
For instance, in May 2022, the world's third-largest stablecoin, TerraUSD (UST), collapsed, with its value plummeting from a 1:1 peg to the dollar to decoupling, dropping from $1 to $0.10 within a week, a decline of over 90%. The price of Luna, which traded using UST, nearly went to zero. This was the largest collapse in stablecoin history, triggered by a bank run: when the Korean company Terra adjusted the UST liquidity pool, it withdrew some liquidity, leading to a decrease in UST liquidity, prompting large investors to exchange UST for US dollars en masse, causing market panic. Many holders joined the bank run, and since UST was linked to Luna, purchasing Luna required exchanging UST for US dollars. During the bank run, holders sold Luna for US dollars, causing Luna to crash, creating a death spiral. Although the issuing company claimed to have asset reserves, no one could quickly liquidate assets during the bank run. After the Federal Reserve's interest rate hikes in 2022, many companies switched to purchasing high-yield US short-term bonds with US dollars, earning 5% interest annually, but this was built on the burden of US fiscal policy.
Thus, stablecoin issuing companies essentially engage in banking activities, earning interest spreads. Compared to banks, their advantage lies in attracting deposits at low or zero interest rates and reinvesting in high-yield US bonds. Even if the Federal Reserve lowers interest rates, the current annual yield on US one-month short-term bonds still reaches 4.3%, providing substantial profit margins. The high interest rates set by the Federal Reserve have allowed stablecoin companies to thrive in recent years, rapidly expanding the market size to about $200 billion, doubling from a year ago. This has prompted countries supporting cryptocurrency trading, including the United States, to call 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 have 100% reserve backing, meaning issuers must ensure that assets are fully redeemable, 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 segregated from operating funds, prohibited from being re-pledged, and can only be temporarily pledged for short-term liquidity. Issuers must disclose the composition of reserve assets monthly and undergo audits by registered accounting firms. Issuers with a market capitalization exceeding $50 billion will face stricter audit and compliance requirements.
Stablecoin issuers are considered 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 strict financial compliance, user privacy, and fair competition requirements to prevent monopolies and systemic risks. The core of the act is to strengthen regulation, but against the backdrop of Trump supporting cryptocurrency, it provides an opportunity for large tech companies and powerful figures (like Trump) to issue stablecoins for profit and gain substantial profits through high-yield US bonds.
There is widespread expectation that the stablecoin market will expand rapidly during Trump's presidency. A Standard Chartered report 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 bonds, "sufficient to absorb all new short-term bond issuances during Trump's second term." This indicates that one of the purposes of the US supporting stablecoins is to increase the number of buyers for short-term bonds.
But can the issuance of stablecoins solve the US $36 trillion debt crisis? The answer is no. The act stipulates that issuers can only purchase short-term bonds with maturities of 93 days or less and cannot buy long-term bonds. This is because issuing stablecoins is similar to banks attracting short-term deposits, where funds may be redeemed at any time; if used to purchase long-term bonds, it would lead to a mismatch in maturities, similar to the Silicon Valley Bank issue. Silicon Valley Bank used customer deposits to buy long-term bonds in 2020, and after the Federal Reserve's interest rate hikes in 2022, it faced severe losses on long-term bonds, being forced to sell during a bank run, turning unrealized losses into realized losses, and ultimately going bankrupt in 2023. Therefore, the act cannot address the shortage of long-term bond buyers for US debt.
Issuers of stablecoins purchasing US short-term bonds aim for high yields, which actually exacerbates the fiscal burden on the US and worsens the debt crisis. At the same time, the market's liquidity pool is limited; the issuance of stablecoins merely shifts funds to buy short-term bonds; even without stablecoins, the market (such as Buffett's $300 billion cash) already has plenty of short-term bond buyers. Trump strongly supports stablecoins because he is also involved in issuing them: in addition to personal cryptocurrencies, he has launched the USD1 stablecoin. USD1 is set to launch in March 2025 by a DeFi platform controlled by the Trump family, pegged 1:1 to the US dollar and backed by US short-term bonds and dollar deposits. Trump's son, Eric Trump, is a key figure. By issuing stablecoins for profit and then buying high-yield short-term bonds, it is almost a no-cost profit. The act is being expedited, facilitating profit-making for Trump and other powerful figures.
On May 19, the US stablecoin act passed procedural legislation in the Senate and still requires votes from both the House and Senate before being signed into law by Trump. Given its benefits for tech giants and powerful figures, the difficulty of passage is low. On May 21, Hong Kong passed the "Stablecoin Regulation Draft," similar to the US act but with a greater focus on regulation. Hong Kong often serves as a financial firewall, allowing high-risk new things to pilot, but China will not participate until this round of financial crisis is cleared, as stablecoins, even with 100% reserves, still carry the risk of bank runs.
Risks of Stablecoins#
The Financial Times commented that while stablecoin issuers must operate with 100% reserves, they essentially perform the functions of banks 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 a bank run. Stablecoins are highly correlated with the cryptocurrency market; once the market crashes (as in 2022), stablecoins can easily face bank runs due to the collapse of associated coins (like Luna and UST).
Compared to 2022, current issuers are concentrating large amounts of US dollars to buy US short-term bonds, binding the US bond market closely to stablecoins. In the event of a bank run, this could impact the US bond market. A report from the Bank for International Settlements warns that a bank run on stablecoins could directly drive up US bond yields: a $3.5 billion sell-off could lead to an increase in yields by 6 to 8 basis points, posing risks to financial stability.
Additionally, issuers essentially compete with banks for deposits. A Bank of America Securities report 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, particularly impacting small and medium-sized banks and lowering the valuations of US banks. Over the past decade, US banks have purchased large amounts of long-term bonds, and the Federal Reserve's aggressive interest rate hikes have led to severe unrealized losses. Large banks can still withstand this (unrealized losses do not turn into realized losses unless there is a bank run, and interest rate cuts can eliminate them), but the diversion of depositor funds by stablecoins could increase the risk of unrealized losses turning into realized losses, potentially leading to a repeat of the Silicon Valley Bank bankruptcy case.
Another issue is that before the act was introduced, the international stablecoin market grew wildly, with a lack of regulation, and the 100% redemption relied solely on the promises of issuers. It is questionable how many existing issuers meet the standards. The 5% high-yield profits are still insufficient to satisfy greed, and the actual holes in 100% redemption are unknown. While the act's implementation may benefit long-term development, it could expose non-compliant issuers in the short term, bringing unknown shocks to the cryptocurrency and global financial markets.
Limited-Time Benefit - New Users Register to Receive a Guaranteed 20+ U Bitcoin Blind Box 🎁#
🎁 Register on mainstream exchanges such as OKX, Binance, Huobi, Bitget, Bybit, Gate, Backpack, and collect all mainstream exchanges' latest anti-loss domain names on one webpage 👉🏻: https://vlink.cc
🔥 Solving the Issue of Inaccessibility to OKX, Binance, Huobi, and Other Exchanges in Mainland China#
Many exchanges' original domain names may be restricted, or overseas servers affect access speed. Ordinary users often mistakenly believe that platform services are interrupted, which is actually due to the network environment. To address this, exchanges like OKX and Binance regularly update backup domain names to ensure users can access the official website through alternative addresses.
Can't open the link? Try other domestic mirror lines! 👉🏻 OKX Domestic Backup Domain Line No VPN No Proxy
-
- OKX Backup Domain Overseas OKX - Requires VPN or Backup Link
-
- Binance Backup Domain Binance
-
- Bitget Backup Domain Bitget
-
- Bybit Backup Domain Bybit/Bybitglobal
-
- Huobi Backup Domain Huobi/HTX
-
- Gate Backup Domain Gate.io (Open Sesame)
🔥 Related Reading#
🔥 Useful Tools for Alpha Finding Gold Dogs#
1️⃣ Axiom Dog-Charging Tool https://axiom.trade
2️⃣ Gmgn Dog-Charging Tool https://gmgn.ai
3️⃣ dbot Dog-Charging Tool https://app.debot.ai
4️⃣ Morelogin Multi-Account Fingerprint Browser www.morelogin.com
Everyone is Searching For#
Stablecoin usd1, Trump usd1, alpha coin, how to buy Trump coin, WeChat buy Trump coin, buy Trump coin in China, how to buy Bitcoin with RMB, tutorial for buying Trump coin on exchanges, how to buy presidential coins, how to buy Bitcoin, Bitcoin, presidential coins, Trump coins, buying Bitcoin in China, trading exchanges, OKX download registration, domestic OKX recharge, Binance App registration, Binance App download, tutorial for buying coins on Binance platform, Binance registration, Binance airdrop registration, Binance iPhone download, how to buy presidential coins, how to buy Dogecoin, how to buy Bitcoin with RMB, how to download OKX, web3 airdrop, web3 zero airdrop, Bitget mainland download registration, OKX passport registration, OKX download, Binance download, cryptocurrency side business, OKX contracts, how to recharge RMB on OKX, how to recharge OKX, how to set up an NFT wallet, how to recharge RMB on Huobi, cryptocurrency beginner tutorial, btc8848.com, trading contracts Tony's insights, contract leverage bit wave, DeFi mining, cryptocurrency airdrop, can cryptocurrency airdrops still be played, what to do if contracts are liquidated, how to buy presidential coins on OKX and Binance, how to buy Ethereum on OKX and Binance, how to play DeFi staking and mining, can NFTs still be played, how to play web3 airdrop, how to inscribe, how to rune, cryptocurrency beginner's guide, how to trade cryptocurrencies, can trading cryptocurrencies make money, cryptocurrency beginner tutorial btc8848.com, can trading cryptocurrencies make money, what is contract leverage, DeFi mining, how to play cryptocurrency airdrop, OKX Binance airdrop, node staking, liquidation, financial freedom, night investment heiyetouzi.xyz