I work in financial regulation. I think you're under-rating how dangerous these can be in a liquidity crunch. They're not FDIC ensured and it's basically an unregulated Money Market Fund.
Huge opportunities down the line. But the regulatory framework isn't there yet. Like we don't even know what's in Tether for instance.
Obviously if you're in Venezuela you don't care. You have no alternatives. But no one in a developed economy should be using these over traditional alternatives yet.
I hear you and it's a very reasonable take, which does not contradict the article.
I'd go further: It's likely that many people will lose a lot of money in stablecoins.
The counterpoint would be:
• Yeah but this is broadly true of most innovation, especially financial innovation. For example, in the 19th Century, so many people lost their savings in bank runs and the like
• Bank regulation can quickly reduce risk in the short term
• But free markets are quite good at it too, and unlike bank regulation, it doesn't cap financial innovation
• It's unclear what the balance of these forces is. It might be that faster innovation (so lots of people losing a lot of money fast) might be painful in the short term, but might bring better outcomes in the long term (because more, faster innovation)
I thought that in the US, stablecoins were now regulated, to require that they maintain a backup by holding actual dollars for every stablecoin. Is that not true? Or is it not sufficiently monitored?
The linked GENIUS Act is in very small print which does not flow, so I didn’t get far, but line three is: “Permitted issuers must maintain reserves backing the stablecoin on a one-to-one basis using U.S. currency or other similarly liquid assets, as specified. Permitted issuers must also publicly disclose their redemption policy and publish monthly the details of their reserves.”
I find this comparison interesting, especially because Bitcoin and stablecoins can serve quite different purposes despite both being part of the crypto world. It makes me wonder whether the real distinction is between an asset people hold as a store of value and one they use to move money. How far does the gold-and-silver analogy actually hold?
Why does Tether accept an inflationary currency in exchange for its stablecoins? How do they turn it into dollars without losing too much? Do they charge about premium?
It only sometimes does #1, for approved currencies (usually not extrainflationary).
For the other currencies, an intermediary usually does #1, and they do that by charging a premium over the market exchange rate (for example, if 1000 pesos are $1 USD in the open market, it means people are already willing to exchange the currencies at that level. It might ask you for 1020 pesos for that USD, and then turn around and sell these pesos in the market to get 1.02 USD.
Good question that I was wondering about as well. Asked Gemini and here were the key points in the response (the very short answer is that a big premium IS charged but not by Tether):
"The short answer is: Tether itself never touches those local inflationary currencies. Local users and local crypto markets bear that burden through a decentralized process...
Summary:
- Tether doesn't accept inflationary currencies and doesn't lose money on them because they only deal in institutional-grade US dollars and T-bills.
- Local users pay a premium on P2P markets to acquire USDT because demand for dollars is sky-high.
- Local brokers and intermediaries absorb the local currency, managing the risk by charging wide spreads and converting the cash through parallel local exchange networks."
Interesting combination of the two concepts in your Substack post, namely stablecoins and gold: There are two tokenized versions of gold, where each token represents one ounce: Paxos Gold (PAXG) and Tether Gold (XAUT).
Gives you the value of gold with the convenience of a stablecoin token
Some of those points are interesting, especially for foreign transactions and quicker transfers but why would I buy stablecoins when I can make that 4 percent they're making on my money in my own savings account?
"If you’re American, how confident are you that your government won’t become more seizure prone? Think civil asset forfeiture for example."
If I own stablecoin backed by US Treasuries, how are my assets secure from seizure by the US government? Perhaps at the moment there are loopholes to avoid "know your customer" laws. But surely those won't continue. The US government likely will refuse to honor and redeem US Treasuries from stablecoins that don't obey US demands. The fundamental issue is the US government weaponized use of the USD. Restrictions on free flow of USD grew a lot with the US global war on terror banking stuff (e.g. Banco Delta Asia) and then later by forcing SWIFT to "obey" US demands. Is there any chance the US will let stablecoins be exempt from those controls for long? What happens when the US government tells Black Rock "you may not sell any of Circle's US treasuries until further notice, because Circle is not abiding our demands"? If I own a lot of USDC, how much is it worth after that?
The marketing for stablecoins seems to be "we can let you use USD (by renaming it) without the usual US government oversight or restrictions". There is plenty of historical precedent to question that business model.
I dunno, Tomas... On this one, it feels like you missed the mark and drank the crypto Kool-Aid.
Speaking as an American, unless I'm involved in illicit transactions, debit and credit cards seem magical and dominate compared to a crypto wallet. They're friction and cost-free (for the consumer, at least), offer lots of consumer protections, offer fraud protection for the merchant, etc.
I cannot think of one application where crypto is better suited than a debit or credit card.
The problem is with ‘your’ money. All money is government money including crypto if it is backed by the state. And if it is not, it is what it is but it is but what it is is not money.
Private financial assets are government created assets that have been accumulated by private entities (individuals and corporations). There is nothing wrong in this except it is mostly done by financial engineering, including tax avoidance and corruption.
And if your concern for government taking what is yours is in any way sincere and well founded, you may want to consider government (ICE) agents shooting you in the chest without due (or any) process.
Or do you think your money is indeed more precious than your life?
I think all this displays a profound misunderstanding of money. We do count money but in a special way called double entry. The basic point is that money is not a commodity, it is a ledger. You can create as many accounts as you like but the simplest is to imagine an open book. On the LH page is government (or public sector) and on the RH page is non-government (or private sector). The next step is creation. The government says, ‘let there be money’. By act of government (by fiat) a financial liability is entered on the LH page and an exactly equal financial asset on the RH page. Money has been created out of debt. And all the laws of government and its institutions are created to undergird this foundational government institution we call money. Financial instruments can be different (coins, notes, bonds) but they appear on both sides of the ledger as state liabilities (the national debt) and private assets (broadly, the money supply).
The system is remarkably subtle and sophisticated. It operates through a state controlled banking system that allows banks to create (private) money, too. The fact that banks can create money (when they make loans) as well as government introduces an inherent ‘boom-and-bust’ instability into the system. Crashes are caused within the system (an AI crash is pending) not from exogenous ‘shocks’.
Enter crypto, which is largely nonsense, whether ‘bit’ or ‘stable’. Blockchain is a cute technology but doesn’t fundamentally change anything. What does change is that money is created outside of the state and nineteenth century bank crashes should instruct us that no good will come of it. Unless, of course, the state backs it (stable coin) as it did bank money when the FED was created.
Now imagine the ruler of the state personally creating our money and legislating that it will be backed by the ‘Full Faith and Credit of the) state. Go back to Good King John and the Magna Carta and you will see said ruler has just done an end-run around the fundamental tenet that only the People can create money. Gentlemen, we have a tyranny.
There is a silver lining. As said ruler uses the international currency (USD) to throttle trade and investment through sanctions, thereby destroying trust in the system, other ways must be found. For crooks and criminals stable coin will work well. For serious trade in real commodities we will need something else. I believe China and Russia are working on something as we speak. All we need is the Great Charlatan in his gilded palace to hand it over on a silver (whoops, I meant golden) platter.
And then there is Central Bank Digital Currency using blockchain.
Money is MANY things. Lots of different lenses, each sheding a different light on it.
You can see that currencies are a commodity because if you supply too much of it, its price tanks with respect to other commodities. That's just called inflation. The fact that the latest instantiation can be created out of thin air through double entry doesn't change that.
So your description of the system is broadly right, thanks for sharing! But it doesn't actually attack the lens that I'm using.
It's also not fully right, this claim is wrong: "National debt and the money supply are opposite sides of the same ledger." A bank deposit is a commercial bank’s liability, not national debt. Government bonds are financial assets, but are generally not counted as money. You conflate money, debt, and financial wealth.
Your point on Blockchain misses the central thesis of the argument.
I first experienced your work on Covid - efficacy of masks, which I thought was beyond excellent. And your explanations based on physical geography are unique and always thought provoking. You do great work.
But not on money! I’m thinking MMT - 30 years of scholarship on what money is and where it comes from. I recommend anything written by Randy Wray. You’re a (very) smart man and you will come to your own conclusions. If you decide to engage it will turn almost everything you ‘know’ on its head.
Supply already exceeds demand for US treasuries, forcing the Fed and US gov into creative accounting. In this context, that's quite some confidence that Tether will find always find buyers for its bonds when people want to redeem their coins.
The aggressivity of the US gov in trying to shut down Brazil's Pix strongly suggests that's the actual future: central banks finally using modern IT for transactions and settlements - walking over the dead bodies of established banks. In the end, centralised ledger is ridiculously cheaper than crypto, and IT makes it inescapable. And of course, states will always require that their taxes be paid in a currency they control.
Some would love to see the US monopoly on credit cards be replaced by a new US monopoly via crypto, but that's a dangerous overreach. Even if it worked, it would only delay working out the deficit problem - making it worse further down the line.
Tomas, I think the argument needs a more complete accounting of transaction costs. A stablecoin maintaining a $1 peg does not mean that delivering $1 to someone costs only $1. Processing and securing blockchain transactions consumes real resources, and someone has to pay—through network fees, intermediary charges, or subsidies.
The relevant comparison is therefore the total cost of completing the same payment through alternative systems: buying the stablecoin, transferring it, and converting it into spendable local currency where necessary, including fees and spreads at both ends. Comparing the blockchain transfer alone with the full cost of a conventional remittance risks comparing different services.
In the long run, competition should favor the payment mechanism that minimizes real resource costs for a comparable service, although government regulation can also shape those costs and the competitive landscape. From that perspective, I am skeptical that stablecoins have a durable cost advantage over well-designed conventional payment systems. Their current appeal may owe more to barriers and inefficiencies in existing systems than to an inherent technological advantage.
The Tether number explains the corporate scramble: $10B of profit on roughly 200 employees means the float is the business. That makes me think the bigger fight is over who distributes stablecoins rather than who issues them, which is how I read Stripe buying Bridge and wallet infrastructure like Privy. If issuers keep the Treasury income and distributors own the user, which side do you think the GENIUS Act ends up favoring?
In the US, from about ~1865 until 1913 we had "nationally chartered" banks. These were privates banks that issued federally standardized paper currency. They bought US Treasuries and would be issued US currency they could circulate. The currencies all had the uniform greenback look, but each bank's currency had the name of the issuing bank.
That was a solution to the problem of how to move money around the nation when communication was slow and people didn't know whether a payment from a bank in some distant city was good. It was solving essentially the same problem stablecoins claim to solve - how to move money between parties that don't know each other. The currency was backed by US Treasuries not by bank customer deposits, just like stablecoins. If a bank failed, the currency was still good and could be redeemed at face value through the US Treasury. That meant bank notes from different banks all had the same value - $1 was $1 no matter which bank issued the notes.
Another benefit of this system, to the US government, was it created a demand for US bonds. (Needed to pay for the Civil War.)
Since the stablecoin system is so similar to the old National Bank Note system it is worth learning why that system was abandoned in 1913 and replaced by the Federal Reserve system.
IIRC, Friedman and Schwarz cover this history in "A Monetary History of the United States". My take is, proponents of stablecoins are ignoring relevant historical information.
ur so close to getting it lmao. like you’re right to be suspicious of tether, but you should have realized at least half a decade ago that both usdc and t are major fed honeypots. why was brock pierce such good buddies with epstein? doesn’t take a genius
I work in financial regulation. I think you're under-rating how dangerous these can be in a liquidity crunch. They're not FDIC ensured and it's basically an unregulated Money Market Fund.
Huge opportunities down the line. But the regulatory framework isn't there yet. Like we don't even know what's in Tether for instance.
Obviously if you're in Venezuela you don't care. You have no alternatives. But no one in a developed economy should be using these over traditional alternatives yet.
I hear you and it's a very reasonable take, which does not contradict the article.
I'd go further: It's likely that many people will lose a lot of money in stablecoins.
The counterpoint would be:
• Yeah but this is broadly true of most innovation, especially financial innovation. For example, in the 19th Century, so many people lost their savings in bank runs and the like
• Bank regulation can quickly reduce risk in the short term
• But free markets are quite good at it too, and unlike bank regulation, it doesn't cap financial innovation
• It's unclear what the balance of these forces is. It might be that faster innovation (so lots of people losing a lot of money fast) might be painful in the short term, but might bring better outcomes in the long term (because more, faster innovation)
Unless one cares about privacy and not having his funds seized for some reason, then the risk is worth taking even in developed economies.
I thought that in the US, stablecoins were now regulated, to require that they maintain a backup by holding actual dollars for every stablecoin. Is that not true? Or is it not sufficiently monitored?
The linked GENIUS Act is in very small print which does not flow, so I didn’t get far, but line three is: “Permitted issuers must maintain reserves backing the stablecoin on a one-to-one basis using U.S. currency or other similarly liquid assets, as specified. Permitted issuers must also publicly disclose their redemption policy and publish monthly the details of their reserves.”
I find this comparison interesting, especially because Bitcoin and stablecoins can serve quite different purposes despite both being part of the crypto world. It makes me wonder whether the real distinction is between an asset people hold as a store of value and one they use to move money. How far does the gold-and-silver analogy actually hold?
Why does Tether accept an inflationary currency in exchange for its stablecoins? How do they turn it into dollars without losing too much? Do they charge about premium?
There are 2 steps:
1. Buy USD
2. Change USD for USDT or USDC
Tether always does #2
It only sometimes does #1, for approved currencies (usually not extrainflationary).
For the other currencies, an intermediary usually does #1, and they do that by charging a premium over the market exchange rate (for example, if 1000 pesos are $1 USD in the open market, it means people are already willing to exchange the currencies at that level. It might ask you for 1020 pesos for that USD, and then turn around and sell these pesos in the market to get 1.02 USD.
Good question that I was wondering about as well. Asked Gemini and here were the key points in the response (the very short answer is that a big premium IS charged but not by Tether):
"The short answer is: Tether itself never touches those local inflationary currencies. Local users and local crypto markets bear that burden through a decentralized process...
Summary:
- Tether doesn't accept inflationary currencies and doesn't lose money on them because they only deal in institutional-grade US dollars and T-bills.
- Local users pay a premium on P2P markets to acquire USDT because demand for dollars is sky-high.
- Local brokers and intermediaries absorb the local currency, managing the risk by charging wide spreads and converting the cash through parallel local exchange networks."
Speaking of Venezuela, very cool usage here of stablecoin and financial services by a charity organization to convert from USD -> USDC -> bolívares, helping out people impacted by the earthquakes... It's a great organization, my favorite charity... https://www.givedirectly.org/https-docs-google-com-document-d-1gyd01gttwq9uyp56y-tlt5lmcvtdgj6vm9aogqnkwpq-edittabt-0
Give Directly is great!
Interesting combination of the two concepts in your Substack post, namely stablecoins and gold: There are two tokenized versions of gold, where each token represents one ounce: Paxos Gold (PAXG) and Tether Gold (XAUT).
Gives you the value of gold with the convenience of a stablecoin token
Some of those points are interesting, especially for foreign transactions and quicker transfers but why would I buy stablecoins when I can make that 4 percent they're making on my money in my own savings account?
If you’re Zambian, the answer is obvious.
If you’re American, how confident are you that your government won’t become more seizure prone? Think civil asset forfeiture for example.
What if you want to spend dollars anywhere in the world?
Without fees or waiting 5 days?
"If you’re American, how confident are you that your government won’t become more seizure prone? Think civil asset forfeiture for example."
If I own stablecoin backed by US Treasuries, how are my assets secure from seizure by the US government? Perhaps at the moment there are loopholes to avoid "know your customer" laws. But surely those won't continue. The US government likely will refuse to honor and redeem US Treasuries from stablecoins that don't obey US demands. The fundamental issue is the US government weaponized use of the USD. Restrictions on free flow of USD grew a lot with the US global war on terror banking stuff (e.g. Banco Delta Asia) and then later by forcing SWIFT to "obey" US demands. Is there any chance the US will let stablecoins be exempt from those controls for long? What happens when the US government tells Black Rock "you may not sell any of Circle's US treasuries until further notice, because Circle is not abiding our demands"? If I own a lot of USDC, how much is it worth after that?
The marketing for stablecoins seems to be "we can let you use USD (by renaming it) without the usual US government oversight or restrictions". There is plenty of historical precedent to question that business model.
I dunno, Tomas... On this one, it feels like you missed the mark and drank the crypto Kool-Aid.
Speaking as an American, unless I'm involved in illicit transactions, debit and credit cards seem magical and dominate compared to a crypto wallet. They're friction and cost-free (for the consumer, at least), offer lots of consumer protections, offer fraud protection for the merchant, etc.
I cannot think of one application where crypto is better suited than a debit or credit card.
There are few if you are in the US, remain in the US, transact only with the US, and trust the government to never take your money.
The problem is with ‘your’ money. All money is government money including crypto if it is backed by the state. And if it is not, it is what it is but it is but what it is is not money.
Private financial assets are government created assets that have been accumulated by private entities (individuals and corporations). There is nothing wrong in this except it is mostly done by financial engineering, including tax avoidance and corruption.
And if your concern for government taking what is yours is in any way sincere and well founded, you may want to consider government (ICE) agents shooting you in the chest without due (or any) process.
Or do you think your money is indeed more precious than your life?
I think all this displays a profound misunderstanding of money. We do count money but in a special way called double entry. The basic point is that money is not a commodity, it is a ledger. You can create as many accounts as you like but the simplest is to imagine an open book. On the LH page is government (or public sector) and on the RH page is non-government (or private sector). The next step is creation. The government says, ‘let there be money’. By act of government (by fiat) a financial liability is entered on the LH page and an exactly equal financial asset on the RH page. Money has been created out of debt. And all the laws of government and its institutions are created to undergird this foundational government institution we call money. Financial instruments can be different (coins, notes, bonds) but they appear on both sides of the ledger as state liabilities (the national debt) and private assets (broadly, the money supply).
The system is remarkably subtle and sophisticated. It operates through a state controlled banking system that allows banks to create (private) money, too. The fact that banks can create money (when they make loans) as well as government introduces an inherent ‘boom-and-bust’ instability into the system. Crashes are caused within the system (an AI crash is pending) not from exogenous ‘shocks’.
Enter crypto, which is largely nonsense, whether ‘bit’ or ‘stable’. Blockchain is a cute technology but doesn’t fundamentally change anything. What does change is that money is created outside of the state and nineteenth century bank crashes should instruct us that no good will come of it. Unless, of course, the state backs it (stable coin) as it did bank money when the FED was created.
Now imagine the ruler of the state personally creating our money and legislating that it will be backed by the ‘Full Faith and Credit of the) state. Go back to Good King John and the Magna Carta and you will see said ruler has just done an end-run around the fundamental tenet that only the People can create money. Gentlemen, we have a tyranny.
There is a silver lining. As said ruler uses the international currency (USD) to throttle trade and investment through sanctions, thereby destroying trust in the system, other ways must be found. For crooks and criminals stable coin will work well. For serious trade in real commodities we will need something else. I believe China and Russia are working on something as we speak. All we need is the Great Charlatan in his gilded palace to hand it over on a silver (whoops, I meant golden) platter.
And then there is Central Bank Digital Currency using blockchain.
Money is MANY things. Lots of different lenses, each sheding a different light on it.
You can see that currencies are a commodity because if you supply too much of it, its price tanks with respect to other commodities. That's just called inflation. The fact that the latest instantiation can be created out of thin air through double entry doesn't change that.
So your description of the system is broadly right, thanks for sharing! But it doesn't actually attack the lens that I'm using.
It's also not fully right, this claim is wrong: "National debt and the money supply are opposite sides of the same ledger." A bank deposit is a commercial bank’s liability, not national debt. Government bonds are financial assets, but are generally not counted as money. You conflate money, debt, and financial wealth.
Your point on Blockchain misses the central thesis of the argument.
I first experienced your work on Covid - efficacy of masks, which I thought was beyond excellent. And your explanations based on physical geography are unique and always thought provoking. You do great work.
But not on money! I’m thinking MMT - 30 years of scholarship on what money is and where it comes from. I recommend anything written by Randy Wray. You’re a (very) smart man and you will come to your own conclusions. If you decide to engage it will turn almost everything you ‘know’ on its head.
Best wishes Tomas.
Supply already exceeds demand for US treasuries, forcing the Fed and US gov into creative accounting. In this context, that's quite some confidence that Tether will find always find buyers for its bonds when people want to redeem their coins.
The aggressivity of the US gov in trying to shut down Brazil's Pix strongly suggests that's the actual future: central banks finally using modern IT for transactions and settlements - walking over the dead bodies of established banks. In the end, centralised ledger is ridiculously cheaper than crypto, and IT makes it inescapable. And of course, states will always require that their taxes be paid in a currency they control.
Some would love to see the US monopoly on credit cards be replaced by a new US monopoly via crypto, but that's a dangerous overreach. Even if it worked, it would only delay working out the deficit problem - making it worse further down the line.
Tomas, I think the argument needs a more complete accounting of transaction costs. A stablecoin maintaining a $1 peg does not mean that delivering $1 to someone costs only $1. Processing and securing blockchain transactions consumes real resources, and someone has to pay—through network fees, intermediary charges, or subsidies.
The relevant comparison is therefore the total cost of completing the same payment through alternative systems: buying the stablecoin, transferring it, and converting it into spendable local currency where necessary, including fees and spreads at both ends. Comparing the blockchain transfer alone with the full cost of a conventional remittance risks comparing different services.
In the long run, competition should favor the payment mechanism that minimizes real resource costs for a comparable service, although government regulation can also shape those costs and the competitive landscape. From that perspective, I am skeptical that stablecoins have a durable cost advantage over well-designed conventional payment systems. Their current appeal may owe more to barriers and inefficiencies in existing systems than to an inherent technological advantage.
The Tether number explains the corporate scramble: $10B of profit on roughly 200 employees means the float is the business. That makes me think the bigger fight is over who distributes stablecoins rather than who issues them, which is how I read Stripe buying Bridge and wallet infrastructure like Privy. If issuers keep the Treasury income and distributors own the user, which side do you think the GENIUS Act ends up favoring?
In the US, from about ~1865 until 1913 we had "nationally chartered" banks. These were privates banks that issued federally standardized paper currency. They bought US Treasuries and would be issued US currency they could circulate. The currencies all had the uniform greenback look, but each bank's currency had the name of the issuing bank.
That was a solution to the problem of how to move money around the nation when communication was slow and people didn't know whether a payment from a bank in some distant city was good. It was solving essentially the same problem stablecoins claim to solve - how to move money between parties that don't know each other. The currency was backed by US Treasuries not by bank customer deposits, just like stablecoins. If a bank failed, the currency was still good and could be redeemed at face value through the US Treasury. That meant bank notes from different banks all had the same value - $1 was $1 no matter which bank issued the notes.
Another benefit of this system, to the US government, was it created a demand for US bonds. (Needed to pay for the Civil War.)
Since the stablecoin system is so similar to the old National Bank Note system it is worth learning why that system was abandoned in 1913 and replaced by the Federal Reserve system.
IIRC, Friedman and Schwarz cover this history in "A Monetary History of the United States". My take is, proponents of stablecoins are ignoring relevant historical information.
ur so close to getting it lmao. like you’re right to be suspicious of tether, but you should have realized at least half a decade ago that both usdc and t are major fed honeypots. why was brock pierce such good buddies with epstein? doesn’t take a genius