Stablecoins are not just money
Stablecoins are no longer just payments tools. They collapse banking, settlement, yield, and compliance into a single object — turning regulation into a design problem. This issue explains why stablecoins keep breaking regulatory consensus.
Last week’s regulatory blowup made one thing clear: crypto’s hardest problems don’t show up where people expect them to.
This week’s headlines suggest a different story entirely. Stablecoins are everywhere. At Davos, the IMF is warning they could pressure national monetary frameworks. In Washington, lawmakers are racing to finalize stablecoin rules. Banks are buying fintechs that specialize in stablecoin payments. A ruble-linked token has quietly processed more than $100 billion in transactions despite sanctions.
On the surface, this looks like progress, or adoption maybe.
But the reason stablecoins keep pulling regulators, banks, and governments into conflict is because stablecoins are not a single thing regulators know how to classify. They are like a new species of money that don't fit into existing taxonomies.
And that turns regulation into a design problem before it ever becomes a policy one.
Daniel McGlynn
The temptation to treat stablecoins as a category
Every serious regulatory conversation about stablecoins eventually circles the same question: what are they, exactly?
Are stablecoins deposits that should live under banking supervision? Are they payment instruments that should be regulated like money transmitters? Are they securities, money market funds, settlement assets, or some new class of financial product entirely?
Legal frameworks in the U.S., Europe, the U.K., and Asia are increasingly aligned on high-level principles. Issuers should be identifiable. Reserves should be transparent or at least vettable, and redemption should be reliable. And of course, stablecoins are as useful to criminals as they are to the rest of us, so curbing illicit stablecoin use is also a major priority.
But alignment on principles does not resolve the harder issue of figuring out the best way to regulate stablecoins given their role in the financial system.
What stablecoins actually collapse
In the legacy financial system, key functions are intentionally separated.
Banks issue deposits, custodians hold assets, payment networks move money, markets generate yield, and compliance is enforced at institutional chokepoints.
Stablecoins collapse (or combine) these layers.
Issuance happens in software, custody can be self-managed or delegated, settlement is near-instant globally, yield can be embedded or excluded by design, and compliance is negotiated across code, interfaces, and counterparties.
This compression creates capital efficiency, which is the innovation. But as stablecoins grow in use and importance, the efficiency is starting to cause problems.
When lawmakers debate whether stablecoins should be allowed to offer yield, the lens is less about consumer protection and more about making a decision about whether software is allowed to behave like a balance sheet.
When regulators extend AML and KYC requirements deeper into stablecoin ecosystems, they are reintroducing intermediaries into systems designed to minimize them.
Once these decisions are written into law, they don’t just regulate behavior. They constrain what kinds of systems can be built at all.
That is why stablecoin legislation keeps attracting so much friction. It is not because the industry is allergic to oversight. It is because the rules are being asked to answer design questions the technology itself is still exploring.
Daniel McGlynn
The signal beneath this week’s headlines
Several developments this week are worth reading as signals, not news.
An IMF official warned that stablecoins could put competitive pressure on domestic monetary frameworks, particularly in fiscally weak economies. Reading between the lines, this signals that stablecoins are now macro-relevant.
Capital One’s move to acquire a fintech active in stablecoin-enabled payments is another signal. Banks are no longer treating stablecoins as external threats. They are integrating them into existing infrastructure before the regulatory shape is fully settled.
A politically connected, dollar-pegged stablecoin overtaking PayPal’s PYUSD in market capitalization shows how distribution, exchanges, and regulatory posture shape outcomes faster than product differentiation.
And the most uncomfortable signal of all: a Russia-linked stablecoin processing more than $100 billion in transactions in under a year. Whatever stablecoins are, they are already functioning as geopolitical financial infrastructure, well outside traditional capital controls.
Each of these developments points to the same conclusion. Stablecoins are infrastructure forcing institutions to react before definitions are clear.
The contradiction regulators can’t avoid
Regulators are trying to square an impossible circle.
On one side, there is pressure to treat stablecoins like banks: Limit yield, protect deposits, prevent runs, and preserve monetary control.
On the other, there is reluctance to grant stablecoin issuers bank privileges: No deposit insurance and no central bank backstop.
The result is a system that imports the constraints of banking without its protections, and the risks of software without fully accepting its properties.
This contradiction shows up everywhere.
Stablecoin yield is treated as dangerous competition with bank deposits, even when it is mechanically different. Stablecoin settlement is embraced for efficiency, but feared for how quickly capital can move. Compliance is demanded, but enforcement surfaces are fragmented across issuers, wallets, interfaces, and protocols.
To summarize this is a predictable result of trying to map a compressed system onto frameworks built for separation.
Stablecoins as the first real open money stress test
Stablecoins are not the end state of Open Money. They are the first object that forces every unresolved tension into the open.
They sit at the intersection of regulation and software, custody and control, programmability and predictability, and decentralization and legitimacy.
That is why they attract adoption and resistance at the same time. It's also why they are used for everyday payments, institutional settlement, and sanctions evasion.
What to watch
As this arc develops, a few questions matter more than the daily noise.
- Will stablecoin regulation converge on banking logic, payment logic, or something else, and what gets lost in that choice.
- Is yield ultimately treated as a systemic risk to be constrained or a design feature to be governed.
- Do geopolitical use cases accelerate harder regulatory lines or force pragmatic accommodation.
- Will institutions finish integrating stablecoins before their legal definitions stabilize.
Each of these will shape what kinds of financial systems are allowed to exist at scale.
Research backlog
Questions we are actively tracking:
- Under what conditions do stablecoins meaningfully displace bank deposits rather than complement them?
- Where does compliance migrate when settlement becomes programmable and global by default?
- Which stablecoin models survive across multiple jurisdictions without fragmenting into incompatible variants?
As these questions get resolved, they will determine whether stablecoins become narrow payment tools or foundational infrastructure.
Closing thought
Stablecoins are often described as boring crypto. That misses the point.
They are boring only if you look at them as money. If you look at them as compressed financial systems, they are actually one of crypto's most interesting innovations.
Stablecoins are the first widespread test of whether software can absorb roles once reserved for banks, markets, and states.
Put differently, stablecoins are like a stress test to the financial system.
If this framing is useful, subscribe or reply. I’m especially interested in where you think stablecoins are already reshaping financial design in ways regulators haven’t fully reckoned with yet.