On-chain dollars, off-chain inflation: An analysis of the monetary nature of stablecoins.

In July 2025, the U.S. Congress passed the GENIUS Act, integrating stablecoins into the mainstream financial regulatory system. Many view this as a significant advancement in the "regulation of cryptocurrencies," yet overlook the deeper structural impact behind it: it may be one of the most significant institutional changes in the U.S. monetary system in over 50 years since the collapse of the Bretton Woods system.

To understand the far-reaching impact of this transformation, we must first re-examine what a "stablecoin" actually is.

The Hierarchical Structure of Currency: The Real Position of Stablecoins

In the book "Money and Empire", economic historian Stefan Eich points out that money is not a unified entity, but a hierarchical system with a stratified structure.

In this system:

The top layer is central bank reserves, the ultimate settlement method between sovereign countries, the safest and least elastic; the middle layer consists of deposits in commercial banks and liquid securities, which are the main forms of coin holdings for ordinary people; the bottom layer is the shadow currency created by non-bank financial institutions.

Stablecoins are essentially a type of non-interest-bearing, on-chain bank deposit, positioned in the lower middle of this structure.

Institutions that issue stablecoins typically hold safe assets such as short-term government bonds and commercial paper as collateral, issuing tokens pegged to 1 dollar on the liability side. This mechanism is highly similar to the "asset-liability matching" in the banking system, but does not assume the credit intermediation function of traditional banks. Therefore, from the perspective of monetary function, stablecoins are a form of "digital offshore dollars," circumventing traditional regulation and creating new monetary liabilities through technological means.

Does stablecoin constitute "currency issuance"?

The answer is yes.

In traditional systems, commercial banks create deposits by issuing loans, thereby expanding the money supply. Similarly, stablecoin issuers create a layer of "payable digital dollars" on-chain by issuing tokens and absorbing dollar assets.

There are two key impacts of this behavior:

1. Stablecoins circumvent the traditional banking system, creating a "shadow expansion" of the US dollar money supply. Although their collateral assets exist in reality, their circulation speed and payment functionality are no different from fiat currency;

2. This newly added currency unit is not directly controlled by monetary policy and is difficult to constrain through the Federal Reserve's interest rate tools. It effectively constitutes a channel for currency supply outside of the central bank.

How do stablecoins affect inflation?

1. Increase in structural currency supply → Inflation risk

As the market value of stablecoins expands, its total amount is already equivalent to the M2 of a medium-sized country. If this form of currency floods into the consumer payment sector, it will undoubtedly increase the velocity of money, and under the effect of the money multiplier, push up actual prices.

Particularly in non-U.S. economies, stablecoins often replace local fiat currencies in transactions, becoming another form of "dollarization." This phenomenon may reinforce the dominance of the dollar while undermining the ability of central banks to control domestic currency inflation.

2. Changing the structure of the government bond market → Debt costs rise

Stablecoin assets are heavily purchasing short-term US Treasury bonds, forming a structure similar to "money market funds" or "shadow banking." If they absorb liquidity from the money market, causing short-term interest rates to rise, the yield curve of US Treasuries may steepen, which in turn increases fiscal financing costs, especially evident during the Biden administration's significant issuance of short-term debt.

This is highly similar to the mechanism of the Money Market Fund attracting a large amount of capital in 2023 and the Federal Reserve's reverse repurchase agreements (RRP) occupying liquidity. On the surface, it seems harmless, but in reality, it alters the structure of funds.

3. Long-term Impact: The Competition Between Stablecoins and Traditional Banks

As stablecoins begin to offer payment, transfer, and even yield functions, they will gradually erode the deposit base of commercial banks. In the modern monetary system, bank deposits are the main channel for credit expansion.

Once large-scale funds are migrated on-chain, the traditional monetary transmission mechanism of "bank → central bank → market" will be weakened. Although payment efficiency will improve, it may also increase the consumption tendency of excess currency in the economy, leading to structural inflation.

In summary, inflation may be a side effect of the institutionalization of stablecoins.

The rise of stablecoins marks the emergence of a new form of currency. It combines the "speed of digital currency" with the "stability of dollar assets," representing a typical financial innovation. However, this innovation is not without its costs.

The "GENIUS Act" brings stablecoins under regulation, paving the way for their legalization. But at the same time, it opens up a space of unknown variables:

Are we building a "parallel dollar system" that a central bank cannot precisely regulate?

Will stablecoins become the driving force behind the next round of global inflation? Is the United States offloading the "cost of inflation" onto the entire world?

These questions do not have immediate answers, but they are gradually becoming unavoidable.

We are in an unprecedented monetary experiment, and inflation may just be one of its earliest side effects.

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