Beyond Crypto Trading: How Stablecoins Are Building a Shadow Dollar System

Exploring how dollar-backed digital tokens have evolved from crypto trading tools into a parallel financial infrastructure enabling global dollar access, cross-border payments, and challenges to traditional banking systems.

Key Takeaways

• Post-2022, correlation between crypto trading volumes and stablecoin settlement volumes has significantly broken down, indicating real-world usage beyond speculation
• Stablecoins enable "bifurcation of rights" where dollar reserves remain stationary while ownership tokens move freely across blockchain networks
• Three main backing models exist: Tether's opaque Swiss bank approach, Circle's BlackRock-managed fund structure, and Paxos's transparent multi-custodian system
• Primary real-world use cases include peer-to-peer payments and dollar access for people in countries with unstable currencies or restrictive financial systems
• Stablecoins can depeg both downward (during issuer solvency fears) and upward (during crisis flight-to-safety periods when people pay premiums for dollar access)
• Banks face structural barriers to creating competitive stablecoin products due to non-fungible balance sheets and regulatory constraints around settlement networks
• The stablecoin business model is extraordinarily profitable as issuers typically retain all yield from Treasury bill holdings while providing zero interest to users
• Regulatory frameworks are emerging globally but face challenges around jurisdiction shopping and defining what constitutes a legitimate "stable" coin
• Public blockchain transparency creates both surveillance advantages for governments and privacy risks for users compared to traditional banking

Timeline Overview

• 00:00–08:30 — Crypto Market Context: Bitcoin's decline from $72,000 to $56,000, discussion of shifting narratives in crypto, and the stability of major stablecoins like Tether and USDC
• 08:30–18:15 — Austin Campbell's Background: Introduction to guest's experience spanning traditional finance (JP Morgan, Citi) and crypto (Paxos, Zero Knowledge Consulting), plus academic role at Columbia
• 18:15–28:45 — Stablecoin Mechanics Explained: How stablecoins create "bifurcation of rights" between static reserves and mobile tokens, enabling instant transfers without traditional correspondent banking friction
• 28:45–38:20 — Real-World Usage Beyond Trading: Post-2022 breakdown of correlation between crypto trading and stablecoin volumes, indicating genuine peer-to-peer payments and dollar access use cases
• 38:20–48:30 — Three Backing Models: Comparison of Tether's opaque approach, Circle's BlackRock partnership, and Paxos's transparent multi-custodian model for reserve management
• 48:30–58:15 — Depegging Dynamics: How stablecoins can trade above or below $1 during crisis periods, including SVB impact on Circle and flight-to-safety premiums during market stress
• 58:15–01:08:45 — Banking Industry Structural Barriers: Why traditional banks struggle to compete in stablecoins due to balance sheet constraints and settlement network limitations
• 01:08:45–01:18:30 — Regulatory Landscape: Who regulates stablecoins across jurisdictions, proposed US legislation like McHenry-Waters bill, and enforcement challenges with offshore issuers
• 01:18:30–01:28:15 — Financial Stability Implications: How stablecoin collapses could affect traditional markets, differentiation between reserve liquidation and asset value destruction scenarios
• 01:28:15–01:35:00 — Future Evolution: Atomic settlement advantages, potential for institutional consortium blockchains, and competition from asset managers like BlackRock entering the space directly

The Stablecoin Revolution: Bifurcating Money and Movement

Stablecoins represent a fundamental innovation in how digital money can be structured, separating the storage and investment of reserves from the transfer mechanisms that enable instant global transactions.

• Austin Campbell explains the concept as "bifurcation of rights" where "the big contrast by putting them on a blockchain is if I have a bank account at say JP Morgan and I want to send money to somebody at Bank of America" the traditional system requires actual money movement
• With stablecoins, the underlying reserves "just sort of sits at rest being invested the whole time and the token represents an ownership interest in that moves around on a blockchain" eliminating settlement friction
• The technological advantage becomes clear when comparing international transfers: "if you're in the United States and you just want to pay people through regular channels" the existing system works well, but "if I am a supplier in Thailand who needs to receive a payment from somebody in Finland for goods and it's denominated in dollars sending that through the traditional infrastructure will take days and have relatively large fees"
• Campbell uses the analogy that stablecoin transfers are "almost as if everybody Banks a JP Morgan right so that everything is just an internal Ledger transfer" where the movement becomes instantaneous
• The system enables what amounts to transferring "the password to your account" rather than moving actual dollars, where users transfer redemption rights against centralized issuers
• This innovation addresses core inefficiencies in correspondent banking while maintaining dollar backing through traditional financial institutions

Beyond Crypto Trading: Real-World Adoption Evidence

The most significant development in stablecoins has been the emergence of genuine utility beyond cryptocurrency speculation, with clear evidence of adoption for practical payments and dollar access.

• Campbell notes that "post the 2022 crash we saw a very interesting phenomenon" where "the correlation between crypto trading volumes and stable coin settlement volumes has really broken down significantly"
• Usage now appears to fall into "two forms one is a lot of peer-to-peer transfers of stable coins so that's people probably using it for things like business payments individual payments like settlement of call it real world activity"
• The second major use case involves "dollar access because something we take for granted in the United States because our banking system for all our criticisms is pretty good and largely works it's easy for us to get dollars"
• Geographic distribution reveals the global nature of adoption: "when I was at paxos and we were looking at our stable coins there I would estimate probably 95% of our holders Were non- Us persons and many of them seem to just buy the coins and hold them"
• This creates what amounts to "a shadow dollar system almost like a Euro dollars type thing" serving populations in countries like "Argentina if you live in Venezuela if you live in like southeast Asia" where local currency access to dollars faces restrictions
• The adoption pattern suggests stablecoins are fulfilling genuine economic needs rather than purely speculative demand, representing a fundamental shift in the crypto ecosystem's real-world utility

Three Models for Dollar Backing: Trust, Transparency, and Professional Management

The stablecoin ecosystem has developed three distinct approaches to reserve management, each representing different tradeoffs between transparency, professional management, and regulatory compliance.

• Tether operates with minimal transparency, following "the Swiss bank style if we're going to be very private you just have to trust us we have the money" while providing only general guidance about reserve composition
• Recent revelations show "Howard lutnick from caner Fitzgerald gave a talk about how they manage a significant portion of tether's Reserve so now we know a significant portion of it probably an overnight reverse repo in the United States likely secured by mostly treasuries"
• Circle has evolved toward professional asset management, with their "current model is basically hey we're largely going to Outsource this to Black Rock" through "a captive fund with Black Rock black rock is actually doing largely overnight reverse repo"
• The Circle model "should look like some sort of tokenized government money market fund type construct so we're just going to have a professional do that" after learning from earlier "Misadventures in the bank deposit world"
• Paxos implemented full transparency by "running the thing internally like a traditional cash stability product" and "started disclosing everything down to the qip so you could see what we hold and it was a mix of insured Bank deposits t- bills and overnight reverse repos spread across a number of different custodians"
• Campbell suggests that future safe stablecoins will resemble "that model or maybe what circle is doing now not what they have done in the past" emphasizing diversification and transparency over opacity

Crisis Dynamics: When Stablecoins Depeg

Stablecoin price stability faces two distinct types of pressure that reveal both the strengths and vulnerabilities of these digital dollar systems during market stress periods.

• Traditional depegging occurs due to "fears about the balance sheet and solvency of the issuer so tether has had multiple periods in the past where they've deeg for moments in time Circle certainly had a very large dpeg around the Silicon Valley Bank incident"
• These situations create "Echoes of 2008" as investors question "can we trust you if we come to redeem our deposits with you" leading to classic bank run dynamics
• More uniquely, stablecoins can also "deeg to the upside in times of Crisis" where they "serve the opposite function which is the flight to safety especially if that happens during off hours"
• Campbell describes how "we had BD trading at like a bucko six on binance when Tera went down" because stablecoins provide dollar access during "an entire weekend of people trying to flee to safety and willing to pay a premium for that"
• The upward depegging phenomenon occurs because stablecoins attempt to "weld essentially New York banking hours to the 247 nness of crypto so if something blows up at oh I don't know 3:00 a.m. on a Friday" traditional dollar access becomes unavailable
• These crisis behaviors demonstrate both the systemic integration of stablecoins with traditional finance and their unique role as 24/7 dollar access vehicles during market turmoil

Banking Industry Structural Barriers: Why Traditional Finance Struggles to Compete

Traditional banks face fundamental structural challenges in creating competitive stablecoin products due to balance sheet constraints and the non-fungible nature of bank deposits.

• The core problem stems from how "stable coins are trying to be this thing that everybody can transfer between everybody and the reserves over time have trended towards being incredibly simplistic and call it mutually acceptable to everybody that's not typically true of bank balance sheets"
• Campbell explains that "Bank deposits are not fungible you would feel very differently last year owning a deposit at say Bank of America versus Silicon Valley Bank these will not be priced identically"
• Traditional banking transfers require actual asset movement because "Banks moving money around between them back to our earlier example if they actually have to net settle are like deines out of things and then reinvesting in other things this is not really the same as moving a token around"
• For banks to compete effectively, they would need "a pretty radical transformation of bank balance sheets like if all the banks set up call it bankruptcy remote trusts that represent a stable coin where they're just doing t- bills yeah this will work fine"
• The fundamental difference appears in fungibility: "the degree of difference between those things is going to be much larger than if we go look at like Fidelity's government money market fund versus vanguard's government money fund which may not be perfectly identical but will be way closer"
• This structural barrier explains why innovation comes from specialized stablecoin issuers rather than traditional banks retrofitting existing infrastructure

The Profitability Paradise: Stablecoin Business Economics

The stablecoin business model represents one of the most profitable enterprises in the financial world, as issuers typically retain all investment returns while providing zero yield to token holders.

• Campbell notes that "especially in the last couple years I mean the stable coin business is like the best business coin the best the best business in the entire world because you you're getting all this yield on your t- bill Holdings"
• The profit structure works because "for the most part none of them I think there are some like theoretically yielding stable coins but for the most part they're just keeping all that yield and the end owner you know so it's like do not use these as a money market mutual fund"
• Users effectively "giving up the Y you're giving up that yield" compared to direct money market fund ownership, creating enormous profit margins for issuers
• With Circle managing approximately "$34 billion" and similar scales across major issuers, the aggregate yield capture represents billions in annual revenue from Treasury bill returns
• This business model creates strong incentives for financial institutions to enter the space, as Campbell notes regarding companies like PayPal: "oh yeah they're very interested" in building competitive offerings
• The extraordinary profitability also explains why "asset managers they're the ones probably with the biggest incentive to disintermediate the banks I would say black Rock's interest in blockchain is not a coincidence"

Regulatory Challenges: Jurisdiction Shopping and Definitional Problems

Stablecoin regulation faces complex challenges around jurisdictional authority, varying international standards, and fundamental definitional questions about what constitutes legitimate stability.

• The regulatory framework follows traditional finance patterns where "for issuers It's usually the local jurisdiction and in particular for things that are stable coins usually the banking regulators and local jurisdictions that would look at these sorts of things"
• International coordination requires trust between regulators: "in your local area if the issuer is from a foreign jurisdiction are they permitted do you give them equivalency for their regimes do you trust them"
• US legislation like "McKenry Waters right which is one of the stable coin Bills running around in front of the US legislature right now they are trying to Define in their words what a stable coin actually is"
• Enforcement mechanisms include "either bans on stable coins that are outside of that box so that probably means both issuers and people using them for payments" or "prohibitions on like calling them stable coins representing them as safe using them for payments"
• Campbell advocates for transparency over prohibition: "people should be able to experiment and try things they just need to be honest about it not lie about stability or get special treatment unless they've actually done the right things"
• The definitional challenge becomes clear when considering that "both Circle and the terraluna coin were both called stable coins on the internet but were radically different Financial products"

Government Concerns: Dollar Dominance and National Security

Stablecoins create both opportunities and threats for monetary sovereignty, with particular implications for US dollar dominance and national security considerations.

• Campbell identifies two key policy concerns, starting with competitive currency risks: "we restrict these things so much that something other than the dollar becomes the dominant currency on a blockchain because if this process essentially continues to run of people getting access to other Financial systems but they prefer like the Euro or the Yen"
• The national security dimension involves surveillance capabilities: "there are a lot of National Security implications to Dollar stable coins working properly back to what I just said about public blockchains if you have all the kyc information and you know where the reserves are you are in very good shape to interdict Bad actors"
• Proper regulation enables "enforce dollar Norms in a more effective targeted and quite frankly transparent way" compared to completely offshore alternatives
• For countries experiencing stablecoin adoption, Campbell notes they face a stark choice: "you could just run your currency better and cut it with the inflation right if you look at places like Switzerland and Singapore they're not seeing massive outflows into dollars"
• Extreme enforcement requires dramatic measures: "the only country where we were totally certain nobody owned a stable coin was North Korea right and the answer is you have to take the internet away from your people"
• The policy choice becomes "being able to call it enforce dollar Norms" through regulated stablecoins "or having that break down even further" if everything moves offshore beyond regulatory reach

Future Evolution: Atomic Settlement and Institutional Infrastructure

The stablecoin ecosystem is evolving toward more sophisticated financial infrastructure that could address longstanding problems in traditional finance while maintaining regulatory oversight.

• Campbell highlights two major improvements: "Atomic settlement right which is to say the ability to pay for Something Completely perfectly simultaneously onchain using a smart contract so that I don't have counterparty credit risk in my trades"
• The systemic stability benefits include "having these very bankruptcy stable vehicles that can be held in self- custody because what that does is eliminates a lot of the Run risk of the large Banks and the systemic there right like in 2008"
• Institutional blockchain development appears likely through consortiums: "if you get a large Consortium of I would suggest in the US this will not work with just Banks so let's say Banks asset managers and maybe insurance companies"
• Global coordination would require expanding beyond US institutions: "how do we get Europe to use it how do we get Asia to use it okay so now you're incorporating those entities as as well"
• Campbell envisions "a Consortium of call it the 500 largest financial entities globally that actually seems viable to me like that is decentralized in a slightly different way"
• Examples like JP Morgan's Onyx platform demonstrate real implementation: "JPM has a project called Onyx and a thing called JPM coin and back to using it for financial purposes now you have a 247 platform that can do atomic settlement largely of things like repo"

Conclusion

Stablecoins have evolved from crypto trading tools into a parallel dollar infrastructure that serves genuine economic needs while challenging traditional banking monopolies on payments and dollar access. The post-2022 breakdown in correlation between crypto trading and stablecoin usage reveals that these instruments now function as legitimate financial infrastructure for cross-border payments and dollar access in countries with unstable currencies or restrictive financial systems. While three distinct models for reserve backing have emerged—ranging from Tether's opacity to Circle's professional management to Paxos's full transparency—all face the fundamental challenge of bridging decentralized blockchain technology with centralized dollar backing.

The extraordinary profitability of retaining Treasury yields while providing zero interest to users has attracted traditional financial institutions, though structural barriers around balance sheet fungibility limit banks' ability to compete directly. Regulatory frameworks are developing globally but must balance innovation with stability concerns, particularly around systemic risk and monetary sovereignty. Looking forward, stablecoins appear positioned to enable atomic settlement and reduce systemic banking risks while potentially evolving toward institutional consortium blockchains that combine regulatory oversight with technological efficiency.

Practical Implications

• For Crypto Investors: Understand that stablecoin growth may not necessarily accrue value to blockchain token holders, as high throughput with low fees may not translate to meaningful token appreciation
• For International Businesses: Stablecoins offer significant advantages for cross-border dollar-denominated transactions, providing speed and cost savings over traditional correspondent banking networks
• For Individuals in Unstable Currency Regions: Stablecoins provide dollar access but come with surveillance risks due to blockchain transparency and potential government enforcement actions
• For Traditional Financial Institutions: The stablecoin business model's extraordinary profitability creates incentives to enter the space, but structural balance sheet constraints may require innovative approaches
• For Regulators: Focus on transparency and reserve quality rather than prohibition, as overly restrictive policies risk pushing activity offshore and undermining dollar dominance
• For Central Banks: Stablecoins represent both competitive threats and potential tools for extending monetary influence, requiring careful balance between restriction and accommodation
• For Asset Managers: Direct stablecoin issuance offers opportunities to disintermediate banks and capture yield spread profits while serving client demand for blockchain-based dollar access
• For Technology Companies: Payment firms like PayPal face both competitive threats and opportunities from stablecoin technology, requiring strategic decisions about integration versus competition