[ArtTimeInvestor]

What you describe sounds like the opposite of my perspective.

You make it sound like stablecoins offer a benefit to all sides because of better technology.

My expectation is that they offer a benefit to the borrower because the borrower is less regulated and can lend out the money with higher risk and by doing so generate a higher yield.

You mention "1:1 backed thing, with super regulated entities" as if that means the money is safe. But as we have seen with Silicon Valley Bank, even lending out the money to the government via bonds is not safe enough in all circumstances. And my expectation is that issuers of stablecoins can do even more risky types of lending than Silicon Valley Bank did.

[ubjp]

The difference is in the assumption of "higher risk". Most of this borrowing is eventually the US Govt because the stablecoins are backed by T bills. So its not as much of an arbitrage as you say.

But then can you have a world where all the money is only stablecoins and backed by "something"? I think that has interesting implications for monetary supply and central banking

[krrishd]

> But then can you have a world where all the money is only stablecoins and backed by "something"? I think that has interesting implications for monetary supply and central banking

This strikes me as among the biggest macro risks, and (IIRC) is one of the reasons banks are fighting to prohibit stablecoins from granting yield (to keep the banking system working).

A different primitive that is related to stablecoin but not the same thing, popular among banks, is the "deposit token" - basically a stablecoin, but backed by bank deposits rather than 1:1 cash reserve, and operated by banks. eg. JPM's "JPMD": https://www.jpmorgan.com/payments/newsroom/kinexys-usd-digit...

Not sure how popular / active they are yet, but I imagine they will become a bigger deal as stablecoins are further regulated / banks push harder on their own interests.

[lottin]

Why would a stablecoin granting yield keep the banking system from working?

[krrishd]

The theory, at least, is that everyone would eventually be incentivized to move deposits out of the banking system and into this.

(I am not sufficiently expert here to comment on the odds of an outcome like that)

[lottin]

Considering that stablecoins don't pay interest to the holder, I don't know why anyone would be incentivised to move their funds into stablecoins.

[krrishd]

USDC gets me 4% on Coinbase, and USDB and other Bridge-issued custom stablecoins also give the customer rewards that they can pass onto the holder (thanks to MMF/similar cash equivalents behind the scenes etc).

But yes - this is why banks want to prevent stablecoin issuers from being allowed to grant rewards

[mejutoco]

In that case, wouldnt sp500 or vanguard be bigger risks to banks existing?

I think most people think banks make money by holding your money and giving you some interest when they actually make money by bringing money into existance out of nowhere when they issue mortgages.

[krrishd]

I don't see why not - I'm sure the banks (or others more expert than me) would argue for stablecoins being somehow distinct in this regard, but yeah don't know why eg. Vanguard wouldn't also be a credible cause of deposit flight.

(I do vaguely remember reading that banks were concerned about people moving to money-market fund products that had bank-like functionality)

[krrishd]

> you can lend out the money you earn from selling someNiceCoin to services with higher yields.

> And my expectation is that issuers of stablecoins can do even more risky types of lending than Silicon Valley Bank did.

To be clear - stablecoin issuers are not allowed to "lend" the money out like a bank or a regulated lender _at all_ - much less doing "riskier" lending. Bridge and Circle still have to, by law, maintain 1:1 cash/cash-equivalent [0] reserves, which means the best they can do is things like US treasuries / money-market funds - which are also primitives accessible to consumers and businesses directly (ie. not inherently competitive).

Certainly there is still great benefit to Bridge, Circle, and the customers issuing stablecoins through them - because it gets them MMF/treasury yield without having to do a "stored value" program at a bank etc - but the issuers who are converting user deposits into stablecoins are also only getting user deposits in exchange for doing useful things.

People don't deposit funds into Mercury just because Mercury gives them 4% (there are plenty of places you can get 4%). You put money into Mercury for the software - this is primarily an implementation detail of how Mercury manages that money, affords to give you a competitive (4%) rate, and affords to give you great software.

[0]: https://en.wikipedia.org/wiki/Cash_and_cash_equivalents

[ArtTimeInvestor]

    1:1 cash/cash-equivalent reserves, which means the
    best they can do is things like US treasuries /
    money-market funds

Whether US Treasuries are "cash equivalent" is debatable / depends on the specifics. A dollar is worth a dollar tomorrow. A 10-year US treasury might not.

Are you saying the holder of a stable coin is not taking a higher long-tail risk than the holder of a dollar in a checking account of a bank?

[krrishd]

Yeah that's a good flag.

To be even more specific though, "cash equivalent" and the sorts of treasuries that implies are specifically short-duration ones (ie. this cash cannot be parked in a 10-year US treasury either)

Cash equivalents are short-term commitments "with temporarily idle cash and easily convertible into a known cash amount"

https://en.wikipedia.org/wiki/Cash_and_cash_equivalents