Financial Black Hole: Stablecoin is Eating the Bank
Original Article Title: Stablecoins, Narrow Banking, and the Liquidity Blackhole
Original Article Author: @0x_Arcana
Translation: Peggy, BlockBeats
Editor's Note: In the process of the gradual digitization of the global financial system, stablecoins are quietly becoming an undeniable force. They do not belong to banks, money market funds, or the traditional payment system, yet they are reshaping the flow of the dollar, challenging the transmission mechanism of monetary policy, and sparking a deep discussion about the "financial order."
This article starts from the historical evolution of "narrow banking," delving into how stablecoins are replicating this model on-chain and influencing the U.S. Treasury market and global financial liquidity through the "liquidity blackhole effect." In the context of policy regulation that has not been fully clarified, the non-cyclical expansion of stablecoins, systemic risks, and macro impacts are becoming new unavoidable topics in the financial world.
The following is the original article:
Stablecoins Revive "Narrow Banking"
For over a century, currency reformers have continuously proposed various concepts of "narrow banking": namely, financial institutions that issue currency but do not provide credit. From the 1930s Chicago Plan to the modern The Narrow Bank (TNB) proposal, the core idea is to prevent bank runs and systemic risks by requiring currency issuers to hold only safe, liquid assets (such as government bonds).
However, regulatory agencies have always rejected the implementation of narrow banking.
Why? Because despite being theoretically safe, narrow banks would disrupt the core of the modern banking system—the credit creation mechanism. They would extract deposits from commercial banks, hoard risk-free collateral, and break the connection between short-term liabilities and productive loans.
Ironically, the crypto industry has now "revived" the narrow banking model in the form of fiat-backed stablecoins. The behavior of stablecoins is almost entirely consistent with narrow banking liabilities: they have full collateral, are redeemable instantly, and are primarily backed by U.S. Treasury bonds.

During the Great Depression, after a series of bank failures, economists from the Chicago School proposed an idea: to completely separate money creation from credit risk. According to the 1933 "Chicago Plan," banks had to hold 100% reserve against demand deposits, loans could only come from time deposits or equity, and could not use deposits for payments.
The original intent of this concept was to eliminate bank runs and reduce the instability of the financial system. This is because if banks cannot lend out deposits, they would not fail due to liquidity mismatches.
In recent years, this idea has resurfaced in the form of a "narrow bank." Narrow banks accept deposits but only invest in safe, short-term government securities such as Treasury bills or Federal Reserve reserves. A recent example is The Narrow Bank (TNB), which applied in 2018 to access the Federal Reserve's Interest on Excess Reserves (IOER) but was denied. The Federal Reserve was concerned that TNB could become a risk-free, high-yield deposit substitute, thus "weakening the transmission mechanism of monetary policy."
Regulators are genuinely concerned that if narrow banks were to succeed, they might weaken the commercial banking system by siphoning deposits away from traditional banks and hoarding safe collateral. Essentially, narrow banks create money-like instruments but do not support the credit intermediation function.
My personal "conspiracy theory" view is that the modern banking system is fundamentally a leveraged illusion, predicated on no one trying to "find the exit." And narrow banks happen to threaten that model. But upon closer examination, it's not so much a conspiracy—it just exposes the fragility of the existing system.
Central banks do not directly print money but regulate indirectly through commercial banks: encouraging or limiting lending, providing support in crises, and maintaining sovereign debt liquidity by injecting reserves. In exchange, commercial banks receive zero-cost liquidity, regulatory tolerance, and an implicit bailout commitment in times of crisis. In this structure, traditional commercial banks are not neutral market participants but tools of state intervention in the economy.
Now, imagine a bank saying, "We don't want leverage, we just want to offer users a secure currency backed 1:1 by government bonds or Federal Reserve reserves." This would render the existing fractional reserve banking model obsolete and directly challenge the current system.
The Federal Reserve's rejection of TNB's master account application is a manifestation of this threat. The issue is not that TNB would fail, but that it might actually succeed. If people could have a currency that is always liquid, has no credit risk, and still earns interest, why would they keep money in traditional banks?
This is where stablecoins come into play.
Fiat-backed stablecoins almost replicate the narrow bank model: issuing digital liabilities redeemable for U.S. dollars and backed 1:1 by secure, liquid off-chain reserves. Like narrow banks, stablecoin issuers do not use reserve funds for lending. Although issuers like Tether currently do not pay interest to users, that goes beyond the scope of this article. This article focuses on the role of stablecoins in the modern monetary structure.

Assets are risk-free, liabilities can be redeemed instantly, and they have the characteristics of fiat currency; there is no credit creation, no maturity mismatch, and no leverage.
Although narrow banks were "strangled" by regulatory authorities in the budding stage, stablecoins have not faced similar restrictions. Many stablecoin issuers operate outside the traditional banking system, especially in high-inflation countries and emerging markets, where there is a growing demand for stablecoins—regions that often struggle to access USD banking services.
From this perspective, stablecoins have evolved into a "digitally native Eurodollar," circulating outside the U.S. banking system.
However, this has also raised a key question: What impact will stablecoins absorbing a sufficient amount of U.S. Treasury bonds have on systemic liquidity?
Liquidity Blackhole Thesis
As stablecoins expand in scale, they are increasingly resembling global liquidity "islands": absorbing USD inflows while locking up secure collateral in a closed loop that cannot re-enter the traditional financial cycle.
This could lead to a "liquidity blackhole" in the U.S. Treasury market—where a significant amount of Treasury bonds are absorbed by the stablecoin system but cannot circulate in the traditional interbank market, thus affecting the overall financial system's liquidity supply.

Stablecoin issuers are long-term net buyers of short-term U.S. Treasury bonds. For every dollar of stablecoin issuance, there must be equivalent asset backing on the balance sheet—usually Treasury securities or reverse repo positions. However, unlike traditional banks, stablecoin issuers do not sell these Treasury bonds for lending or to shift to risk assets.
As long as stablecoins remain in circulation, their reserves must be continuously held. Redemption only occurs when users exit the stablecoin system, which is very rare because on-chain users typically only swap between different tokens or use stablecoins as a long-term cash equivalent.
This makes stablecoin issuers a unidirectional liquidity "blackhole": they absorb Treasury bonds but rarely release them. When these Treasury bonds are locked in custody reserve accounts, they exit the traditional collateral loop—unable to be re-pledged and not usable in the repo market, effectively removed from the currency circulation system.
This results in a "Sterilization Effect." Just as the Federal Reserve's Quantitative Tightening (QT) tightens liquidity by removing high-quality collateral, stablecoins are also doing the same thing—but without any policy coordination or macroeconomic objectives.

Even more potentially disruptive is the concept of so-called "Shadow Quantitative Tightening" (Shadow QT) alongside a continuous feedback loop. It is non-cyclical, not adjusted based on macroeconomic conditions, but rather expands as demand for stablecoins grows. Moreover, since many stablecoin reserves are held in offshore, less transparent legal jurisdictions outside the United States, regulatory visibility and coordination challenges are heightened.
What's worse, this mechanism may become pro-cyclical in certain situations. When market risk aversion sentiment rises, demand for on-chain USD often increases, driving stablecoin issuance up, further withdrawing more US treasuries from the market—exactly when the market needs liquidity the most, intensifying the black hole effect.
Although the scale of stablecoins is still much smaller compared to the Fed's Quantitative Tightening (QT), their mechanisms are highly similar, and the macro impact is also strikingly similar: reduced circulating treasuries in the market; tightening liquidity; and upward pressure on interest rates.
Moreover, this growth trend shows no signs of slowing down, but rather has significantly accelerated in the past few years.

Policy Tensions and Systemic Risks
Stablecoins are at a unique crossroads: they are neither banks nor money market funds, nor are they traditional payment service providers in the conventional sense. This identity ambiguity creates structural tensions for policymakers: too small to be considered a systemic risk for regulation; too important to be simply banned; too useful yet too risky to be allowed to develop freely in an unregulated state.
A key function of traditional banks is to transmit monetary policy to the real economy. When the Federal Reserve raises interest rates, banks tighten credit, adjust deposit rates, and alter credit conditions. However, stablecoin issuers do not lend, so they cannot transmit interest rate changes to a broader credit market. Instead, they absorb high-yield US treasuries, do not offer credit or investment products, and many stablecoins do not even pay interest to holders.
The Federal Reserve's rejection of The Narrow Bank's (TNB) access to a master account is not due to credit risk concerns but rather a fear of financial disintermediation. The Fed is concerned that if a risk-free bank offers an interest-bearing account backed by reserves, it could attract a significant amount of funds out of commercial banks, potentially disrupting the banking system, squeezing credit space, and concentrating monetary power in a "liquidity-sterilized vault."
The systemic risk brought about by stablecoins is similar—except this time, they don't even require access to the Fed.
Furthermore, financial disintermediation is not the only risk. Even if stablecoins do not offer a yield, there is still a "bank run risk": once the market loses confidence in the reserve quality or regulatory stance, it could trigger a large-scale redemption frenzy. In such a scenario, the issuer may be forced to sell government bonds under market pressure, similar to the 2008 money market fund crisis, or the 2022 UK LDI crisis.

Unlike banks, stablecoin issuers do not have a "lender of last resort." Their shadow banking nature means they can quickly grow into a systemic role but could also unravel just as rapidly.
However, like Bitcoin, there is also a small number of cases of "seed phrase loss." In the context of stablecoins, this means that some funds will be permanently locked in U.S. Treasuries, unable to be redeemed, effectively becoming a liquidity black hole.

The issuance of stablecoins was initially just a fringe financial product in the crypto trading venue, but has now become a major conduit of dollar liquidity, running through exchanges, DeFi protocols, and even extending to cross-border remittances and global business payments. Stablecoins are no longer on the fringes of the infrastructure; they are gradually becoming the underlying architecture for conducting dollar transactions outside the banking system.
Their growth involves "sterilizing" collateral by locking up secure assets in cold storage reserves. This is a form of off-balance sheet contraction outside central bank control—an "ambient QT" (quantitative tightening).
While policymakers and the traditional banking system are still striving to maintain the old order, stablecoins have quietly begun reshaping it.
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Debunking the AI Doomsday Myth: Why Establishment Inertia and the Software Wasteland Will Save Us
Editor's Note: Citrini7's cyberpunk-themed AI doomsday prophecy has sparked widespread discussion across the internet. However, this article presents a more pragmatic counter perspective. If Citrini envisions a digital tsunami instantly engulfing civilization, this author sees the resilient resistance of the human bureaucratic system, the profoundly flawed existing software ecosystem, and the long-overlooked cornerstone of heavy industry. This is a frontal clash between Silicon Valley fantasy and the iron law of reality, reminding us that the singularity may come, but it will never happen overnight.
The following is the original content:
Renowned market commentator Citrini7 recently published a captivating and widely circulated AI doomsday novel. While he acknowledges that the probability of some scenes occurring is extremely low, as someone who has witnessed multiple economic collapse prophecies, I want to challenge his views and present a more deterministic and optimistic future.
In 2007, people thought that against the backdrop of "peak oil," the United States' geopolitical status had come to an end; in 2008, they believed the dollar system was on the brink of collapse; in 2014, everyone thought AMD and NVIDIA were done for. Then ChatGPT emerged, and people thought Google was toast... Yet every time, existing institutions with deep-rooted inertia have proven to be far more resilient than onlookers imagined.
When Citrini talks about the fear of institutional turnover and rapid workforce displacement, he writes, "Even in fields we think rely on interpersonal relationships, cracks are showing. Take the real estate industry, where buyers have tolerated 5%-6% commissions for decades due to the information asymmetry between brokers and consumers..."
Seeing this, I couldn't help but chuckle. People have been proclaiming the "death of real estate agents" for 20 years now! This hardly requires any superintelligence; with Zillow, Redfin, or Opendoor, it's enough. But this example precisely proves the opposite of Citrini's view: although this workforce has long been deemed obsolete in the eyes of most, due to market inertia and regulatory capture, real estate agents' vitality is more tenacious than anyone's expectations a decade ago.
A few months ago, I just bought a house. The transaction process mandated that we hire a real estate agent, with lofty justifications. My buyer's agent made about $50,000 in this transaction, while his actual work — filling out forms and coordinating between multiple parties — amounted to no more than 10 hours, something I could have easily handled myself. The market will eventually move towards efficiency, providing fair pricing for labor, but this will be a long process.
I deeply understand the ways of inertia and change management: I once founded and sold a company whose core business was driving insurance brokerages from "manual service" to "software-driven." The iron rule I learned is: human societies in the real world are extremely complex, and things always take longer than you imagine — even when you account for this rule. This doesn't mean that the world won't undergo drastic changes, but rather that change will be more gradual, allowing us time to respond and adapt.
Recently, the software sector has seen a downturn as investors worry about the lack of moats in the backend systems of companies like Monday, Salesforce, Asana, making them easily replicable. Citrini and others believe that AI programming heralds the end of SaaS companies: one, products become homogenized, with zero profits, and two, jobs disappear.
But everyone overlooks one thing: the current state of these software products is simply terrible.
I'm qualified to say this because I've spent hundreds of thousands of dollars on Salesforce and Monday. Indeed, AI can enable competitors to replicate these products, but more importantly, AI can enable competitors to build better products. Stock price declines are not surprising: an industry relying on long-term lock-ins, lacking competitiveness, and filled with low-quality legacy incumbents is finally facing competition again.
From a broader perspective, almost all existing software is garbage, which is an undeniable fact. Every tool I've paid for is riddled with bugs; some software is so bad that I can't even pay for it (I've been unable to use Citibank's online transfer for the past three years); most web apps can't even get mobile and desktop responsiveness right; not a single product can fully deliver what you want. Silicon Valley darlings like Stripe and Linear only garner massive followings because they are not as disgustingly unusable as their competitors. If you ask a seasoned engineer, "Show me a truly perfect piece of software," all you'll get is prolonged silence and blank stares.
Here lies a profound truth: even as we approach a "software singularity," the human demand for software labor is nearly infinite. It's well known that the final few percentage points of perfection often require the most work. By this standard, almost every software product has at least a 100x improvement in complexity and features before reaching demand saturation.
I believe that most commentators who claim that the software industry is on the brink of extinction lack an intuitive understanding of software development. The software industry has been around for 50 years, and despite tremendous progress, it is always in a state of "not enough." As a programmer in 2020, my productivity matches that of hundreds of people in 1970, which is incredibly impressive leverage. However, there is still significant room for improvement. People underestimate the "Jevons Paradox": Efficiency improvements often lead to explosive growth in overall demand.
This does not mean that software engineering is an invincible job, but the industry's ability to absorb labor and its inertia far exceed imagination. The saturation process will be very slow, giving us enough time to adapt.
Of course, labor reallocation is inevitable, such as in the driving sector. As Citrini pointed out, many white-collar jobs will experience disruptions. For positions like real estate brokers that have long lost tangible value and rely solely on momentum for income, AI may be the final straw.
But our lifesaver lies in the fact that the United States has almost infinite potential and demand for reindustrialization. You may have heard of "reshoring," but it goes far beyond that. We have essentially lost the ability to manufacture the core building blocks of modern life: batteries, motors, small-scale semiconductors—the entire electricity supply chain is almost entirely dependent on overseas sources. What if there is a military conflict? What's even worse, did you know that China produces 90% of the world's synthetic ammonia? Once the supply is cut off, we can't even produce fertilizer and will face famine.
As long as you look to the physical world, you will find endless job opportunities that will benefit the country, create employment, and build essential infrastructure, all of which can receive bipartisan political support.
We have seen the economic and political winds shifting in this direction—discussions on reshoring, deep tech, and "American vitality." My prediction is that when AI impacts the white-collar sector, the path of least political resistance will be to fund large-scale reindustrialization, absorbing labor through a "giant employment project." Fortunately, the physical world does not have a "singularity"; it is constrained by friction.
We will rebuild bridges and roads. People will find that seeing tangible labor results is more fulfilling than spinning in the digital abstract world. The Salesforce senior product manager who lost a $180,000 salary may find a new job at the "California Seawater Desalination Plant" to end the 25-year drought. These facilities not only need to be built but also pursued with excellence and require long-term maintenance. As long as we are willing, the "Jevons Paradox" also applies to the physical world.
The goal of large-scale industrial engineering is abundance. The United States will once again achieve self-sufficiency, enabling large-scale, low-cost production. Moving beyond material scarcity is crucial: in the long run, if we do indeed lose a significant portion of white-collar jobs to AI, we must be able to maintain a high quality of life for the public. And as AI drives profit margins to zero, consumer goods will become extremely affordable, automatically fulfilling this objective.
My view is that different sectors of the economy will "take off" at different speeds, and the transformation in almost all areas will be slower than Citrini anticipates. To be clear, I am extremely bullish on AI and foresee a day when my own labor will be obsolete. But this will take time, and time gives us the opportunity to devise sound strategies.
At this point, preventing the kind of market collapse Citrini imagines is actually not difficult. The U.S. government's performance during the pandemic has demonstrated its proactive and decisive crisis response. If necessary, massive stimulus policies will quickly intervene. Although I am somewhat displeased by its inefficiency, that is not the focus. The focus is on safeguarding material prosperity in people's lives—a universal well-being that gives legitimacy to a nation and upholds the social contract, rather than stubbornly adhering to past accounting metrics or economic dogma.
If we can maintain sharpness and responsiveness in this slow but sure technological transformation, we will eventually emerge unscathed.
Source: Original Post Link

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