Original Title: Rethinking ownership, stablecoins, and tokenization (with Addison)
Original Author: @bridge__harris, a member of @foundersfund
Original Translation: Luffy, Foresight News
Addison and I have been discussing the trend and core use cases of traditional finance and cryptocurrency integration. In this article, we will engage in a series of conversations around the U.S. financial system and explore how cryptocurrencies can be integrated from first principles.
There is a current view that tokenization will solve many problems in the financial field, which may or may not be correct.
Stablecoins, like banks, involve new money issuance. The current development trajectory of stablecoins raises significant questions, such as how they integrate with the traditional fractional reserve banking system. In this system, banks only retain a small portion of deposits as reserves, with the remainder used for lending, which effectively creates new money.
I. Tokenization Fever
The mainstream narrative is "tokenize everything," from publicly traded stocks to private market shares and U.S. Treasury bonds. This is generally beneficial for the crypto realm and the entire world. Thinking about tokenization market dynamics from first principles, the following points are crucial:
How the current asset ownership system operates;
How tokenization will change this system;
Why initial tokenization scenarios are necessary;
What "real dollars" are and how new money is created.
Currently in the U.S., large asset issuers (such as publicly listed stocks) grant custody of securities to the Depository Trust & Clearing Corporation (DTCC). DTCC then tracks ownership for about 6,000 interacting accounts, each managing its own ledger to track end-user ownership. For private companies, the model is slightly different: companies like Carta simply manage ledgers for enterprises.
Both models are highly centralized accounting methods. The DTCC model is like a "nested doll" accounting system, where individual investors might need to go through 1-4 different entities before accessing DTCC's actual ledger records. These entities may include brokerage firms or banks where investors open accounts, custodians or clearing companies for brokers, and DTCC itself. Although retail investors are typically not affected by this hierarchy, it creates substantial due diligence work and legal risks for financial institutions.
... [rest of the text continues in the same manner]The Federal Reserve considers two core principles when assessing main account eligibility: 1) Granting a main account to an institution must not introduce inappropriate network risks; 2) It must not interfere with the implementation of monetary policy. Based on these reasons, stablecoin issuers are unlikely to obtain main accounts, at least in the current situation.
Stablecoin issuers can only potentially access main accounts by "becoming" a bank. The GENIUS Act will establish bank-like regulatory provisions for issuers with a market value exceeding $10 billion. Essentially, the argument is that since they will be subject to bank-like regulation anyway, they can operate more like banks in the long term. However, under the GENIUS Act, stablecoin issuers still cannot operate like fractional reserve banks due to 1:1 reserve requirements.
So far, stablecoins have not disappeared due to regulation because most stablecoins are issued by Tether overseas. The Federal Reserve is happy to see the US dollar dominate globally in this way, as it reinforces the dollar's status as a reserve currency. However, if entities like Circle (or even Narrow Bank) significantly expand in scale and are widely used for deposit-type accounts in the US, the Federal Reserve and Treasury might become concerned. This would cause funds to flow out of banks operating on a fractional reserve model, through which the Federal Reserve implements monetary policy.
This is essentially the problem stablecoin banks will face: to issue loans, they need a banking license. But if stablecoins are not backed by real dollars, they are no longer true stablecoins and would contradict their original intent. This is where the fractional reserve model "fails". However, theoretically, stablecoins could be created and issued by a chartered bank with a main account operating on a fractional reserve model.
III. Banks, Private Credit, and Stablecoins
The only benefit of becoming a bank is obtaining a Federal Reserve main account and FDIC insurance. These two characteristics allow banks to guarantee depositors that their deposits are safe "real dollars" (backed by the US government), even though these deposits have actually been lent out.
Issuing loans does not necessarily require becoming a bank, as private credit companies have always done this. However, the difference between banks and private credit is that banks issue a "receipt" considered actual dollars, which is interchangeable with receipts issued by all other banks. The backing assets of bank receipts lack liquidity; however, the receipts themselves are fully liquid. This understanding of converting deposits into illiquid assets (loans) while maintaining deposit value is the core of money creation.
In private credit, your receipt value is tied to the underlying loan. Therefore, no new money is created; you cannot actually use your private credit receipt for spending.
Let's use Aave as an example to explain concepts similar to banks and private credit in the crypto realm. Private credit: In the real world, you deposit USDC into Aave and receive aUSDC. aUSDC is not always fully backed by USDC because part of the deposit has been lent out as collateral. Just as merchants won't accept private credit receipts, you cannot use aUSDC for spending.
However, if economic participants are willing to accept aUSDC in exactly the same way as USDC, then Aave functions essentially like a bank, where aUSDC tells depositors about their dollars, while all backing assets (USDC) have been lent out.
