In what could be a seismic shift in global finance, the rise of stablecoins is nudging the world toward a new era of monetary policy—a dream long held by economists. With the U.S. political landscape evolving, stablecoins are emerging as a potential catalyst for this financial revolution, drawing the attention of industry experts and policymakers alike.
Stablecoins: The Game-Changer
Stablecoins, often pegged to fiat currencies like the U.S. dollar, are rapidly becoming the backbone of decentralized finance (DeFi). Unlike traditional cryptocurrencies, which are notorious for their volatility, stablecoins offer a steadier alternative, facilitating smoother transactions in the digital economy. According to recent data, the transaction volume for stablecoins soared to an impressive $35 trillion over the past year, with over 30 million users globally.
“Stablecoins are bridging the gap between traditional finance and the burgeoning DeFi ecosystem,” says crypto analyst Laura Cheng. “Their ability to provide a stable unit of account is transforming how we approach digital transactions.” This follows a pattern of institutional adoption, which we detailed in a recent survey showing that 49% of global institutions now use stablecoins.
The momentum behind stablecoins is not just theoretical. Countries with unstable local currencies, such as Argentina and Nigeria, are increasingly using stablecoins for everyday transactions, demonstrating their practical utility. Meanwhile, in the U.S., political tides are shifting. The Trump Administration, along with Congress, is moving to formalize stablecoins as an alternative payments system, signaling a significant policy shift.
The Historical Context of Narrow Banking
To understand the potential of stablecoins, it’s essential to revisit the concept of narrow banking, an idea that has tantalized economists for decades. Narrow banking separates the functions of money creation and credit, aiming to eliminate the instability inherent in fractional reserve banking. This system, where banks hold only a fraction of their deposit liabilities in reserve, has historically been prone to crises, as seen in the 2008 financial meltdown.
The Chicago Plan, conceived during the Great Depression, proposed splitting banking functions to enhance stability. Narrow banks would back deposits with safe assets like Treasury bills, while merchant banks would manage lending with equity capital. This separation, advocates argue, would safeguard the financial system against runs and defaults.
The Road Ahead: Challenges and Opportunities
Despite its promise, transitioning to a narrow banking system has been fraught with challenges. The existing financial infrastructure is deeply entrenched, with banks wielding substantial political influence—often cited as a barrier to reform. “The transition to narrow banking would be disruptive,” warns financial historian Mark Roberts. “It would require a massive overhaul of the current system, which could lead to short-term credit shortages.”
Yet, stablecoins might just hold the key to overcoming these hurdles. The recent legislative push in the U.S. to define high-quality liquid assets (HQLA) and mandate one-for-one backing of stablecoin deposits reveals a growing appetite for reform. While the GENIUS and STABLE Acts stop short of granting stablecoin issuers access to the Federal Reserve, they lay the groundwork for a potential future where stablecoins play a central role in the financial landscape.
A New Financial Architecture
The implications of this shift are profound. Should the U.S. fully embrace stablecoin-based narrow banking, it could reshape the global financial order. The move would likely attract significant investment in U.S. Treasury bills, reinforcing the dollar’s dominance in international markets. Moreover, as Treasury Secretary Scott Bessent has pointed out, a stablecoin-based system could provide a strategic counterbalance to China’s ambitions to replace U.S. payment systems, as explored in our recent coverage of Bessent’s remarks on stablecoins bolstering US dollar supremacy.
“The geopolitical stakes are high,” says economist Rachel Kim. “A U.S.-led stablecoin model could offer an independent payment system that aligns with national interests, especially in the face of growing global tensions.”
As stablecoins continue to gain traction, the world watches closely. Will this digital currency revolution usher in the era of narrow banking that economists have long envisioned? It’s a question that remains unanswered, but one that could redefine the future of finance. The stakes are immense, and the journey has only just begun.
Source
This article is based on: Stablecoins Are a Monetary Revolution in the Making
Further Reading
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Steve Gregory is a lawyer in the United States who specializes in licensing for cryptocurrency companies and products. Steve began his career as an attorney in 2015 but made the switch to working in cryptocurrency full time shortly after joining the original team at Gemini Trust Company, an early cryptocurrency exchange based in New York City. Steve then joined CEX.io and was able to launch their regulated US-based cryptocurrency. Steve then went on to become the CEO at currency.com when he ran for four years and was able to lead currency.com to being fully acquired in 2025.
