How Stablecoins Become (an Even Inferior) Form of Money

The crypto fund of a16z (Andreessen Horowitz), the world’s largest VC, called a16z crypto, is once again repeating flawed arguments, so I want to take some time to lay out the reasons why stablecoins cannot become money. For reference, CBDCs (Central Bank Digital Currencies) are not stablecoins, and I am very much in favor of introducing CBDCs.

In the following section, I summarize the arguments of the author, Sam Broner (partner at a16z crypto).

As usage and adoption of stablecoins grow rapidly, they are drawing attention as a new financial instrument that is fast, cheap, and programmable. However, to replace or complement existing money, they must overcome structural limitations. This article proposes solutions around three core challenges:

In the traditional financial system, one dollar is always accepted as one dollar, regardless of who issues or holds it. Stablecoins, however, have not yet secured this kind of “one-to-one convertibility.” This is because stablecoins trade in the market. In large transactions, slippage can cause the exchange rate of a stablecoin to fall, which undermines its reliability as a currency.

Sam Broner’s proposed solutions:

In high-inflation countries or financially excluded regions, dollar-based stablecoins effectively function as money. However, they conflict with the principle of the impossible trinity (you can only choose two of free capital mobility, fixed exchange rates, and independent monetary policy), and therefore clash with local monetary policy.

Sam Broner’s proposed solutions:

Most stablecoins are issued against U.S. Treasuries (T-bills) as collateral, but as this structure grows, side effects can emerge. For example, if stablecoin issuance reaches $2 trillion, it would account for about one-third of the U.S. short-term Treasury market, potentially reducing Treasury liquidity and shrinking the repo market. It also leads to a narrow banking structure without lending functions, which can reduce credit creation.

Sam Broner’s proposed solutions:

Because this piece uses a great deal of financial terminology, it may be difficult to follow without basic knowledge of the subject. Even so, it is clear that Sam Broner is making deeply self-contradictory claims, even without a detailed understanding of the monetary system.

For example, to address the third challenge—the limits of Treasury-backed stablecoins—Sam Broner argues that we should adopt decentralized stablecoins based on collateralized debt positions (CDPs), while at the same time insisting, in order to preserve the singleness of money (the first challenge), on the need to create a common collateral pool that multiple issuers can use. This is akin to our company issuing an AWARE Coin that claims to be decentralized, while saying, “But you still might not trust it,” and therefore choosing U.S. Treasuries—assets trusted by the majority, in other words, backed by centralized trust—as its underlying collateral.

Common sense alone tells me that I cannot understand the very idea of “decentralizing” a currency that is supposedly based on “the trust of all users.” Yet even people who claim stablecoins are necessary keep making these logically inconsistent arguments, which suggests they are either deeply mired in cognitive dissonance, have very strong financial incentives tied to stablecoin businesses and investments, or both.

He also argues that in non-dollar economies, instead of fully integrating dollar stablecoins into the traditional financial system, governments could impose “a bit of taxation” on their use as a way to “avoid completely undermining local monetary policy,” thereby addressing the side effects (the impossible trinity) of indiscriminate dollar stablecoin use. But there is only one reason people in non-dollar economies turn to the dollar and dollar stablecoins: trust in their own local currency has already collapsed, so they use them as an informal substitute. Would a local government whose leadership cannot even properly manage its own currency, and has already failed at monetary policy, really have the will or intention to acknowledge that failure and officially adopt the dollar? In short, the dollar and dollar stablecoins only have value locally when they function as “unofficial money.”

In a Financial Times article titled “Still more on stablecoins”, Alistair Milne, professor of financial economics at Loughborough Business School, points out that “stablecoins are being dressed up as a solution to problems in the current payments system.”

These ancillary operations include chargebacks and refunds for erroneous payments or overpayments, integration with accounting and finance systems such as automated payroll distribution, “pull payment” arrangements that allow service providers like ride-hailing apps to automatically debit customer accounts with their consent, and payments to companies and government agencies that, for tax and accounting reasons, only accept legal tender at exact face value.

They also include customer service functions provided to some extent by card-issuing banks and firms like PayPal, as well as identity verification to comply with know-your-customer (KYC) and anti-money laundering (AML) regulations. Finally, there is fraud prevention. Milne asks, “Banks are not particularly good at this, but are stablecoins really going to do it better?” and sums up his view as follows: