Feasibility of Stablecoins and Banking Integration? In a decentralized ledger system, current USD stablecoins may not necessarily be the answer for banks.

At the end of January, a research team at the Federal Reserve Bank of New York released a scenario analysis on the application of US dollar stablecoins within the banking system and their impact on lending businesses. A week later, another independent research group seemed to have a different perspective, suggesting that the architecture of these US dollar stablecoins may still not be the optimal solution when combined with a decentralized ledger and traditional financial system.

Why Not Tokenize Deposits?

First, these researchers argue that demanding stablecoins to be fully backed by the US dollar or equivalent liquid assets is unreasonable . For example, the largest stablecoin by market capitalization, USDT, is said to have a circulation of $78 billion. If the issuer were a bank instead of Tether, as long as some US dollars could be released, it would greatly benefit the liquidity and currency operations.

The researchers also referenced a paper by Gary B. Gorton and Jeffery Zhang , who believe that existing stablecoins can be analogized to the private banknotes issued during the "free banking" era in mid-19th century America. Individuals using them need to consider whether to accept them in exchange for other specific currencies, which is one of the potential trust issues with stablecoins today.

Regardless of whether distributed ledgers will completely replace the existing banking system, applications derived from smart contracts do bring many new possibilities to traditional finance. Therefore, the research report boldly proposes:

After emphasizing the benefits of banks in the payment system, if central banks can tokenize deposits, why use stablecoins?

This is a rather novel idea, conceptually keeping the US dollar as the US dollar without converting it into a reserve-backed stablecoin that locks up the liquidity that could already be used. However, by utilizing blockchain technology to tokenize US dollars in deposit status and creating a payment system, these assets can flow and settle instantly in distributed ledgers using existing payment infrastructure.

In a sense, it significantly increases liquidity by tokenizing the existing check system and transforms the trusted parties into banks or even central banks. However, this is still a distant goal, with room for improvement in regulations and technology, or other solutions may emerge over time.