Circle Chief Economist Gordon Liao: Overseas stablecoins are evolving in three key directions

Introduction

In recent years, the evolution of digital currencies has taken the world down several distinctly different paths. China has firmly chosen a sovereign digital currency directly issued by the central bank ------ Digital Renminbi (e-CNY), and will transition from the 1.0 version of digital cash to the 2.0 version of digital deposit currency starting from 2026. Meanwhile, across the ocean, another model is growing wildly amidst regulatory battles: "stablecoins" issued by private entities like Tether and Circle, which aim to anchor the value of the dollar. Understanding the different attempts at digital currencies in other parts of the world not only helps us draw broad lessons but also aids in better constructing a path for digital currency development with Chinese characteristics, and facilitates discussions with multiple parties on the infrastructure of the future global financial system.

At the forefront dialogue event at Luohan Academy titled "The On-chain Future of Financial Systems and Intelligent Economy", Gordon Liao, Chief Economist of Circle, provided us with insights into the overseas stablecoin sector. As a macroeconomist who previously worked at the Federal Reserve, he did not emphasize the market noise of price fluctuations but attempted to analyze and reconstruct this emerging form from the principles of monetary banking.

In Gordon's view, after experiencing an early frenzy of speculation, overseas stablecoins are evolving in three key directions, which involve both improvements to traditional financial pain points and bold assumptions about the future intelligent economy:

1. Return to "Narrow Banking": Compliance stablecoins represented by USTC (Circle) are gradually becoming full-reserve currencies, separating payment functions from credit risks to avoid systemic risks similar to those triggered by the collapse of Silicon Valley Bank. He pointed out that this is essentially reviving the classic "narrow banking" theory in the digital currency era, with the potential to achieve a singular currency.

2. Addressing Cross-Border Payment Pain Points: One of the most direct applications of stablecoins today is to bypass the traditional correspondent banking system and SWIFT chain relied upon for cross-border transfers, solving the efficiency problem of global payments in an almost instantaneous manner.

3. Rewriting the Internet Business Gene: The existing internet, lacking a native payment layer, is forced to rely on a "traffic for ads" business model. He believes that emerging payment methods based on blockchain can not only become the machine language for high-frequency collaboration between future on-chain AI agents but also fundamentally reconstruct the logic of value realization on the internet.

For domestic financial observers and practitioners, this serves as a valuable "stone from another mountain," echoing some considerations in the transition of the digital renminbi to version 2.0. Through Gordon's analysis, we gain a close-up view of another attempt at digital currency. However, we must also be aware of the risks of financial "disintermediation," shadow banking, and the issues surrounding the status of digital currency issuers related to monetary sovereignty. Below is the full translation of Gordon Liao's speech:

Thank you for the invitation. I am very pleased to gather here today with so many familiar faces to share some of my thoughts, and I look forward to the discussion session later.

First, let me briefly introduce myself. My professional background is primarily in finance: from being a trader to moving into academia, and then joining the Federal Reserve Board. In recent years, I have served as Chief Economist at Circle, the issuer of USDC, which is generally regarded as the most widely used regulated stablecoin. Additionally, Circle is committed to providing a range of platform services, including blockchain infrastructure, such as the Layer-1 blockchain Arc built specifically for stablecoins, as well as interoperability solutions.

In today's presentation, I will first explain the development of stablecoins in the overseas market from a financial perspective and the underlying concepts, and then discuss some technical issues.

Digital "Narrow Banking"

What is a stablecoin? From a balance sheet perspective, it can be a form of "narrow banking." As early as the 1920s, American economist Irving Fisher proposed the concept of "100% money," which requires commercial bank deposits to be backed by 100% reserves. In this case, the assets on the balance sheet of commercial banks are entirely composed of government liabilities.

Over the past decade, overseas stablecoins have undergone significant evolution. Initially, stablecoin issuers issued coins on public blockchains (creating liabilities), and the corresponding assets on their balance sheets were a hodgepodge of combinations, including everything from short-term U.S. Treasury bills to slightly riskier assets like commercial paper and short-term loans.

In recent years, the standards for issuing stablecoins overseas ------ especially fiat-backed stablecoins ------ have significantly increased. This is due to both issuers strengthening self-regulation and the overall progress of regulatory frameworks within various jurisdictions. With the passage of the U.S. GENIUS Act in 2025, the implementation of the MiCA (Markets in Crypto-Assets Regulation) in Europe in 2024, and other related rules being formulated in multiple jurisdictions, we see a fundamental change in the asset reserve structure of stablecoins.

Now, if we look at dominant stablecoins like USDC overseas, we find that their fiat assets are almost entirely composed of relatively low-risk financial instruments, with very short conversion periods and minimal credit risk exposure. Typically, these assets include short-term U.S. Treasury bills with maturities of less than 90 days, reverse repos collateralized by Treasury securities, and a certain proportion of commercial bank deposits.

Therefore, in terms of asset composition, today's overseas stablecoins are very close to the "100% money" concept described by Fisher in his early years. Whenever a financial crisis occurs, economists often reiterate the idea of full-reserve money ------ that is, abandoning the "fractional reserve" system, and banks no longer lend. However, historically, this concept has never been fully realized. Today, through stablecoins as a digital channel, we are actually seeing for the first time how "narrow banking" operates as a form of currency.

Achieving Monetary Singleness

As mentioned earlier, the U.S. GENIUS Act is set to be passed in 2025, and the Federal Reserve has recently released a consultation on "settlement accounts." These accounts are essentially interest-free accounts opened by the Federal Reserve, originally not intended for non-bank institutions to hold reserves, but this is crucial for non-bank institutions to access the real-time gross settlement system (RTGS) ------ in the U.S., this refers to the FedWire system. These settlement accounts allow non-bank institutions to hold short-term U.S. Treasury securities as 100% reserve assets while gaining access to FedWire. Previously, FedWire could only be accessed through traditional master accounts or deposit accounts, meaning that the accessing parties had to be commercial banks or deposit institutions, which typically carry significant credit risk.

Coincidentally, the European Central Bank's TARGET2 system also has a set of access plans for non-bank institutions. This enables the concept of "100% pass-through government liability," allowing stablecoin issuers to strip away various credit risks, including those associated with deposit institutions.

This will be a significant transformation in the history of monetary banking, reflecting the idea of "singleness of money." In the early 19th century, the U.S. experienced a "wildcat banking" era where banks were sprouting everywhere. At that time, different private institutions issued their own currencies, which traded at different prices in the market. To some extent, the current overseas stablecoin sector faces a similar situation: although they can be exchanged for fiat currency at par 1:1 in the primary market, their trading prices in the secondary market often exhibit premiums or discounts, slightly deviating from par. If funds can ultimately be settled through FedWire in Federal Reserve settlement accounts, it means that monetary singleness could potentially be achieved through a unified settlement mechanism.

Separation of Payments and Credit

From a balance sheet perspective, a key point of overseas stablecoins is that they separate the "credit creation" function of financial intermediaries from their "payment" function. Payment services aim to facilitate high-value and high-frequency transactions, which are fundamentally different from the lending involved in credit services. If payment activities can be separated from the credit activities of these banks, this risk contagion will not occur. You may recall that a few years ago, when large regional banks like Silicon Valley Bank collapsed, there was a small-scale panic in the payment system because many fintech companies had significant deposits in Silicon Valley Bank.

As a full-reserve currency, stablecoins mean that end users can truly use them as a payment tool without worrying about the inherent credit risk of the liability party. This will also significantly reduce the leverage of financial intermediaries. History has repeatedly shown that the leverage effect of financial intermediaries often leads to the accumulation of balance sheet risks, further triggering financial turmoil. It is precisely this risk, arising from the accumulation of financial intermediary leverage, that led to the 2008 financial crisis and the Great Depression of the 1930s.

We can also see that this trend is being realized through new technological architectures. Some traditional businesses of financial intermediaries ------ such as lending, trading, and brokerage services ------ are being completely transformed by programmable protocols based on the blockchain. In many decentralized finance (DeFi) scenarios, stablecoins are increasingly being used as "money LEGOs," serving as foundational modules to efficiently execute financial services through protocols. For example, "Automated Market Making (AMM)" services essentially facilitate the liquidity of crypto assets. They are directly programmed into smart contracts, no longer relying on traditional exchanges, central limit order books (CLOB), or traditional market makers.

Another significantly growing area in decentralized finance is collateralized lending. This is similar to repo loans or securities lending in traditional finance: end users (usually hedge funds) use these loans secured by securities for trading or leveraging. Today's decentralized finance can replicate this model: loans created based on fully collateralized digital securities, assets, or stablecoins are settled and cleared on-chain. This enhances transparency to some extent, making systemic risks more visible, and achieves higher automation while drawing on traditional repo markets. With automation, we may avoid the freezing issues that have repeatedly occurred in the repo market.

Cross-Border Payments and Settlements

In terms of application scenarios, I believe cross-border payments represent a huge market for overseas stablecoins, as they address current pain points. Originally, to remit money globally, one had to go through a series of correspondent banks, handling information transmission (via SWIFT) and settlements (by updating the ledgers of various associated banks in different jurisdictions). With stablecoins, end users ------ whether merchants, exporters, or digital asset traders ------ can transfer value from one currency or jurisdiction to another on the blockchain, almost instantaneously.

At the same time, although currently over 90% of overseas stablecoins are denominated in dollars, this situation is rapidly changing, with many local currency-denominated stablecoins experiencing rapid growth. Circle has issued a euro stablecoin named EURC, which, although its circulation volume is currently small (about 300 million euros), has far outpaced dollar stablecoins in terms of growth rate. With the popularization of the tokenization of securities, I expect the growth of these local currency stablecoins to accelerate further. When securities themselves are denominated and traded in local currencies, it will be a natural logic to use local currency stablecoins ------ rather than dollar stablecoins ------ to trade these digitized securities.

Moreover, this also provides opportunities for different currencies to be used for international settlements. For instance, about 25% of global trade is related to China, but the proportion settled in renminbi is only about 5%. Therefore, there is significant room for using currencies other than the dollar for cross-border settlements. Considering the synchronous development of securities digitization, people will not only be able to use local currencies for payments but also store and invest through local currency stablecoins. Thus, allowing the digitization of assets and securities will also help promote local currency stablecoins.

Development of Market Design

In terms of market design, I believe the digitization of various risks will become increasingly important. The previously mentioned provision of digitized collateralized credit on decentralized finance platforms is such a growth point, as providing credit against collateral is relatively easy. However, we also see that under-collateralized loans are accelerating in growth. These loans occur on-chain but need to combine off-chain information (such as credit scores), primarily utilizing blockchain technology as backend settlement services. Overall, I believe the digitization of credit instruments (including sovereign and private credit) will show a growth trend.

Additionally, in the past year or two, the attention and usage of prediction markets have surged, which is a new phenomenon. In these markets, end users can predict the outcomes of specific events. For example, through weather contracts, people can predict the weather in specific regions, receiving payouts if rainfall exceeds a certain threshold. These predictions can also relate to elections or global situations. The growth of these markets is astonishing, with annual growth rates reaching several times.

This is largely a market design issue. From an economic perspective, prediction markets are similar to Arrow-Debreu securities, which pay a certain unit return under specific world states. This, to some extent, completes the market, making the trading of Arrow-Debreu securities possible and providing opportunities for hedging risks. At the same time, this also relates to another core topic of this seminar: agentic payments. I believe that trading specific states of the world as a prediction outcome will push the applications of agents on the blockchain in more interesting directions.

Potential Transformation of Internet Business Models

Finally, I would like to discuss technical issues. Overseas stablecoins represent another upgrade evolution of internet payment technology. It is well known that internet payments have always been a challenge. One could even say that the lack of an embedded native payment mechanism is one of the "original sins" of the internet. This deficiency has led internet companies to focus their business models primarily on capturing user attention and data, with advertising as the main source of revenue. This has also given rise to internet giants represented by search engines and social media, resulting in various outcomes, both good and bad.

As micropayments and streaming payments can be realized through blockchain and stablecoins, I believe we may be able to solve the core problem of the internet: the inability to directly compensate content creators. The business models of large internet companies may shift from data and advertising-centric monetization to content and actual usage-centric monetization. As AI rapidly changes the way users interact with the internet, we will see more transformations in internet payment methods ------ for example, the popularization of micropayments, where users pay fractions of a cent for each question posed to AI. Perhaps this will also drive the rise of "agentic payments," where each autonomous agent pays for services from other agents through blockchain technology in a micropayment manner. This will usher in a whole new era.

Thank you all.

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