ARK Invest: Will stablecoins become the cornerstone of the next generation of monetary system?

Author: Lorenzo Valente, Director of Digital Asset Research, ARK Invest; Translator: Chopper, Foresight News

In 2025, stablecoin supply, trading volume, and active users all reached all-time highs, thanks to the enactment of the GENIUS Act, which legalized stablecoins as privately issued digital currencies.

This article's perspective stems from an interview on Ark Investment's Bitcoin Brainstorm podcast, featuring guests including Tether CEO Paolo Ardoino, renowned economist Dr. Arthur Laffer, and Ark Investment CEO and Cathie Wood. In the interview, we explored the similarities between stablecoins and privately issued currencies before 1913 (when the US government designated the Federal Reserve as the sole issuer of the dollar). Arthur Laffer compared the explosive growth of today's blockchain-based privately issued dollars to the monetary system before the Federal Reserve ended "free banking."

While the underlying technological infrastructure of stablecoins is entirely new, privately issued currencies are not a novel concept. In fact, private currencies were a crucial foundation of the American economy. Against this backdrop, this article will answer three core questions: How were stablecoins born? What is the underlying technology of stablecoins? What is the future trajectory of stablecoin development? How were stablecoins born? In 2014, Giancarlo Devasini launched USDT and the Tether platform. At that time, the digital asset industry was still in its infancy. The crypto ecosystem was in a "wild west" phase, lacking industry regulation, posing security risks, and having fragile infrastructure. The global trading market was dominated by a few exchanges such as Kraken, Bitfinex, Coinbase, Poloniex, and Bitstamp. The bankruptcy of Mt. Gox, then the world's largest Bitcoin exchange, in February 2014 further highlighted the industry's fragility. At that time, other exchanges were located in different jurisdictions and only traded Bitcoin, the only mainstream token at the time. Although Bitcoin trading had become globalized, arbitrageurs could not quickly and cheaply transfer US dollars between banks, brokers, and countries when conducting Bitcoin arbitrage between exchanges, making it difficult to seize arbitrage opportunities. For example, when Bitcoin was priced at $115 on Kraken and $112 on Bitfinex, arbitrageurs should have sold Bitcoin on Kraken, transferred US dollars to Bitfinex, and then bought back Bitcoin at $112. However, in practice, this fund transfer often took one to two days. It was the efforts of Giancarlo and Paolo that made USDT a solution to this problem, enabling the internet-speed transfer of the US dollar equivalent. In July 2014, USDT was initially launched under the name "Realcoin," developed based on the Omni Layer protocol of the Bitcoin network, before the advent of smart contract chains like Ethereum. In November 2014, the project was officially renamed Tether, and three tokens pegged to fiat currencies were launched: USDT (pegged to the US dollar), EURT (pegged to the euro), and JPYT (pegged to the Japanese yen). In 2015, Bitfinex, one of the world's leading exchanges, began supporting USDT and established the first deep liquidity pool. From 2017 to 2019, Tether expanded the issuance network of USDT from Omni to Ethereum, and subsequently to public chains such as Tron, Solana, and Avalanche, while continuously improving transaction speed, reducing fees, and enhancing cross-chain interoperability. In 2019, USDT became the world's most traded cryptocurrency, with daily trading volume even exceeding that of Bitcoin. In late 2019, when competitors claimed their stablecoins were backed by 100% cash or cash equivalent reserves, Tether disclosed for the first time that its reserve assets included A1 and A2 rated commercial paper and announced plans to gradually shift its reserve assets towards short-term U.S. Treasury bonds and cash. The outbreak of the COVID-19 pandemic propelled USDT into a period of rapid growth. Between 2020 and March 2022, the global financial system faced immense pressure, while the supply of USDT surged 25 times from $3.3 billion to $80 billion, primarily driven by emerging markets. USDT's core use also shifted from a speculative and arbitrage tool in the crypto market to a "lifeline" against currency depreciation. From 2020 to 2023, the currencies of emerging market countries such as Venezuela, Lebanon, and Argentina depreciated sharply against the U.S. dollar, leading many local residents to choose USDT to preserve their assets. For many, USDT functions as a savings account, a payment tool, and a store of value. As countries restrict offline transactions and access to black market dollars decreases, young people are beginning to teach their parents and grandparents how to use this "digital dollar." People can hold dollar assets through USDT in a faster, safer, and more scalable way without leaving home, without relying on a fragile banking system and highly volatile local currencies.

The depreciation of some national currencies against the US dollar. Data source: rwa.xyz, as of December 31, 2025

How far have stablecoins developed now?

Currently, Tether's USDT supply reaches $187 billion, accounting for 60% of the market share, making it the largest stablecoin in the digital asset industry. Its only competitor is Circle's USDC, with a supply of $75 billion. USDT has over 450 million users globally, with approximately 30 million new users added each quarter. Tether is headquartered in El Salvador and regulated there, with its reserve assets held by Cantor Fitzgerald. The US government has shown strategic interest in Tether. The vast majority of Tether's balance sheet consists of short-term US Treasury bonds, a scale comparable to that of some developed countries, making it one of the largest and fastest-growing demanders of US Treasury bonds.

Tether's reserve assets, data source: Tether, as of December 31, 2025

As of January 2026, Tether's reserve assets, excluding corporate bonds, gold, Bitcoin, and secured loans, have over-collateralized assets exceeding $5 billion, far exceeding the total liabilities of circulating USDT.

With the continued growth in stablecoin supply, Tether's consolidation of its dominance in emerging markets, and the enactment of the GENIUS Act, some observers have pointed out that the current banking landscape bears a striking resemblance to the era of free banking in the late 19th century; critics often cite this period as an example when discussing the risks of privately issued currencies. In an interview, Dr. Arthur Laffer argued that stablecoins will introduce a new and more efficient model of free banking to the United States, and that negative perceptions of them are unfounded. Critics claim that the issuance of stablecoins by private institutions like Tether and Circle will recreate the chaos of the "wildcat banks" of the 19th century. Dr. Laffer explained that 19th-century private banknotes were often traded at a discount because users needed to assess the creditworthiness of the issuing institution themselves, and the US government did not guarantee these banknotes; they were essentially liabilities of the banks, and could only be redeemed with hard currencies such as gold and silver if the issuing bank had the ability to pay. Both Brian Domitrovic and Dr. Laffer, historians at the Laffer Center, point out that before the establishment of the Federal Reserve in 1913, various currencies in the United States were in competition with each other. Dr. Laffer further explains that in 1834, the U.S. government set the price of gold at $20.67 per ounce, establishing the gold standard, but it did not guarantee the redemption of every banknote in circulation. The redemption of banknotes depended entirely on the issuing bank's balance sheet and market reputation. This mechanism violated the principle of "unconditional redemption" of currency. Even so, prices remained remarkably stable over the long term: in the 137 years from 1776 to the establishment of the Federal Reserve in 1913, the cumulative inflation rate in the United States was 0, and prices fluctuated slightly around their fixed face value without showing a long-term upward or downward trend. Outside the United States, some free banking systems performed even better, particularly in Scotland (1716–1845) and Canada (1817–1914). These systems achieved low inflation and extremely low bank failure rates, with banknotes circulating primarily at face value. This success was partly due to the establishment of competitive redemption mechanisms and clearinghouses, both of which used market forces to constrain banks. In contrast, in the United States (1837–1861), restrictive state regulations hindered industry development, such as prohibiting banks from establishing branches and requiring them to use high-risk state bonds as collateral. After a period of turmoil in the early 1840s, the average discount rate for U.S. "bankrupt banknotes" (currency issued by banks unable to pay up) fell below 2%. Interestingly, this figure is precisely the current inflation target of the Federal Reserve. During this period, the U.S. economy experienced strong growth, laying the financial foundation for the full-blown Industrial Revolution that followed the Civil War in 1865. Stablecoins share many similarities with currencies of this era. Both are privately issued liabilities backed by reserve assets. However, modern technology and regulatory oversight have addressed many of the drawbacks of the "wildcat banking" era. Stablecoins are not bound by the rules of bank branches because they are essentially global digital currencies. Today, clearinghouse-like functions exist in the form of highly liquid secondary markets, exchanges, and arbitrage mechanisms, which ensure stablecoins are stably pegged to market prices. Compared to the illiquid Treasury bonds held by the U.S. Free Banks of the late 19th century, the collateral quality of regulated issuers (such as cash and short-term Treasury bonds under the GENIUS framework) and some non-regulated issuers (such as Tether) is much higher. The risk of fraud by large issuers is also significantly reduced due to regular audits, on-chain transparency, and federal regulation. Just as the free banking system arose when the central bank system was weak or nonexistent, stablecoins emerged from the market gaps left by inefficient, strictly regulated, and costly banking and payment systems. In the 18th and 19th centuries, railroads, telegraphs, and advanced printing technology propelled the development of free banking systems; today, blockchain and global internet infrastructure are becoming the core driving forces behind the development of stablecoins. The era of free banking in the United States ended after the Civil War and the enactment of the National Bank Act, with the power to issue currency being centralized under federal government control. The US suspended the gold standard at the beginning of the Civil War. During the Civil War (1861-1865), states required banks to hold state government bonds as reserve assets, thereby creating market demand for these bonds. Simultaneously, the US government taxed all banks issuing currency that did not hold high-quality federal government bonds as reserves, ultimately forcing freely issued currency out of the market. In 1879, the US restored the gold standard, and the 1870s and 1880s became the fastest-growing period in US history. Given that the US economy's growth rate far exceeded government development, requiring monetary institutions to hold large amounts of federal bonds as reserves was practically meaningless. Because the supply of federal bonds could not meet reserve requirements, banks were forced to frequently reduce the scale of currency issuance, leading to deflation and bank panics. Ultimately, the U.S. Congress passed the Federal Reserve Act in 1913, nationalizing the reserve system and establishing the Federal Reserve. Before 1913, during bank panics, the private clearinghouse system and interbank temporary instrument agreements provided ample liquidity, but federal regulation tied currency issuance to federal bond reserves, limiting the money supply. After the establishment of the Federal Reserve in 1913, the United States began to experience sustained inflation: the consumer price index soared more than 30 times. In stark contrast, in the century before the establishment of the Federal Reserve, the gold standard, bimetallism, and competitive currency issuance coexisted, and even with the full-scale Industrial Revolution, the cumulative inflation rate in the United States remained at 0. The Future Development Direction of Stablecoins Stablecoin issuers such as Tether and Circle cannot maintain their pegged exchange rates by actively issuing or redeeming tokens. Only institutions on the whitelist that meet anti-money laundering customer identification requirements can issue new USDT by depositing cash or redeeming tokens and returning them to Tether. The pegged exchange rate of stablecoins is maintained by institutions through arbitrage mechanisms, while Tether and Circle promise that every USDT or USDC in circulation can be exchanged for 1 US dollar. Dr. Laffer believes that this model has significant value in emerging markets and high-inflation economies, but for widespread adoption in developed countries, a more advanced stablecoin model is needed: one that can maintain a pegged exchange rate to the US dollar while also appreciating in tandem with inflation, thereby maintaining purchasing power for goods and services. Based on the recently enacted GENIUS Act, Tether co-founder Paolo Ardoino believes that any stablecoin that directly distributes returns to users should be classified as a security and subject to regulation by the U.S. Securities and Exchange Commission. Currently, interest-bearing tokenized money market funds are only open to accredited investors. Dr. Laffer believes that future stablecoins will be pegged to a basket of goods and services indices and backed by reserves of long-term assets such as Bitcoin and gold. In fact, Tether has already launched the gold-backed stablecoin Alloy Coin (AUSDT) and the tokenized gold product XAUT. As Ardoino stated, this structure allows users to hold long positions in Bitcoin and gold while using these value-stable instruments for trading; and as the collateral assets appreciate, users' borrowing capacity also increases. It is worth noting that this model is not the first of its kind in the crypto space. One of the earliest and most successful experiments in decentralized finance (DeFi), the Sky protocol (formerly MakerDao), pioneered the use of crypto assets as collateral for stablecoins. Sky, acting as a decentralized bank, issues the USDS stablecoin, allowing users to deposit assets such as Ethereum into smart contracts to borrow USDS. To ensure solvency, all loans employ an over-collateralized model, triggering automatic liquidation when the collateral value falls below a safety threshold. Currently, USDS is introducing a diversified portfolio of collateral assets to maximize efficiency and returns while minimizing risk.

The Composition of Collateral Assets Behind USDS

To further solidify the pegged exchange rate, Sky launched the Peg Stable Module (PSM), supporting direct exchange between USDC and USDS. Arbitrageurs can use this module to maintain the price of USDS around $1, while providing liquidity and redemption capabilities for stablecoins, compensating for the price volatility of crypto collateral. In addition to trading functionality, Sky also launched a savings mechanism through its interest-bearing token sUSDS. The token's returns come from interest paid by borrowers, tokenized money market funds, US Treasury bonds, and returns from decentralized finance investments. In other words, USDS is both a medium of payment and a global savings tool.