In 2025, the supply, trading volume, and number of active users of stablecoins all reached record highs, thanks to the enactment of the GENIUS Act, which legalized stablecoins as privately issued digital currencies.
This article draws its perspective from an interview on Ark Capital's Bitcoin Brainstorm podcast, featuring guests including Tether CEO Paolo Ardoino, renowned economist Dr. Arthur Laffer, and Ark Capital 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 once a crucial foundation of the American economy.
Against this backdrop, this article will answer three core questions: How were stablecoins created? What is the underlying technology of stablecoins? What is the future development trajectory of stablecoins?
How were stablecoins created?
In 2014, Giancarlo Devasini launched the USDT and Tether platforms, at a time when the digital asset industry was still in its infancy. The crypto ecosystem was then in a "wild west" phase, lacking regulation, fraught with security risks, and suffering from 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 vulnerability.
At that time, other trading platforms 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 across different trading platforms, 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 internet-speed transfers of the dollar equivalent. Initially launched in July 2014 as "Realcoin," USDT was 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 launched three tokens pegged to fiat currencies: 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 trading platforms, 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. At the end of 2019, when competitors claimed that 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 US short-term Treasury bonds and cash.
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-fold 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 devaluation.
From 2020 to 2023, the currencies of emerging market countries such as Venezuela, Lebanon, and Argentina depreciated significantly against the US dollar, prompting many locals to choose USDT to preserve their assets. For many, USDT serves as a savings account, a payment tool, and a store of value. As countries restricted offline transactions, people's access to black market dollars decreased, and young people began teaching 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.
How far have stablecoins developed to now?
Currently, Tether's USDT has a supply of $187 billion, accounting for 60% of the market share, making it the largest stablecoin in the digital asset industry. Its only competitor is USDC, issued by Circle, with a supply of $75 billion. USDT has over 450 million users worldwide, 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 taken a strategic stance towards Tether. The vast majority of Tether's balance sheet consists of short-term US Treasury bonds, with holdings comparable to those of some developed countries, making it one of the largest and fastest-growing demanders of US Treasury bonds.
As of January 2026, Tether's reserve assets, excluding corporate bonds, gold, Bitcoin, and secured loans, included over $5 billion in over-collateralized assets, far exceeding the total liabilities of circulating USDT. With the continued growth in stablecoin supply, Tether's consolidation of its dominant position 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 a case study when discussing the risks of privately issued currencies.
In the 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 stablecoins issued by private institutions like Tether and Circle will recreate the chaos of the 19th-century "wildcat banking" phenomenon. Dr. Laffer explained that 19th-century private banknotes were often traded at a discount because users had 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 for hard currencies like gold and silver if the issuing bank was solvent. Both Dr. Laffer and Brian Domitrovic, historians at the Laffer Center, pointed 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 explained that in 1834, the U.S. government set the price of gold at $20.67 per ounce, establishing the gold standard. However, 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 1913, when the Federal Reserve was established, 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.
Free banking systems outside the United States 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, trading platforms, and arbitrage mechanisms that 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 far higher. The risk of fraud for large issuers is also significantly reduced due to regular audits, on-chain transparency, and federal regulation.
Just as free banking systems arose when central bank systems were weak or nonexistent, stablecoins emerged from market gaps left by inefficient, strictly regulated, and costly banking and payment systems. In the 18th and 19th centuries, railways, 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 with the Civil War and the enactment of the National Bank Act, with the power to issue currency being centralized under federal government control. The gold standard was suspended at the beginning of the Civil War. During the war (1861-1865), states required banks to hold state government bonds as reserve assets, thereby creating market demand for these bonds. Simultaneously, the U.S. government taxed all currency issued by banks that did not hold high-quality federal government bonds as reserves, ultimately forcing freely issued currency out of the market. In 1879, the United States restored the gold standard, and the 1870s and 1880s became the period of the fastest economic growth in U.S. history.
Given that the US economy was growing far faster than the government, requiring monetary authorities 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 size of their money supply, leading to deflation and bank panic. Ultimately, the US Congress passed the Federal Reserve Act in 1913, nationalizing the reserve system and establishing the Federal Reserve.
Before 1913, during banking panics, the private clearinghouse system and interbank temporary instrument agreements provided ample liquidity, but federal regulation, which tied currency issuance to the federal bond reserve, limited 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 Fed's formation, the gold standard, bimetallism, and competitive currency issuance coexisted, and even with the full-blown Industrial Revolution, the cumulative inflation rate in the United States remained at zero.
The future development direction of stablecoins
Stablecoin issuers like Tether and Circle cannot maintain their pegged exchange rates by actively issuing or redeeming tokens. Only institutions on a whitelist that meet anti-money laundering customer identification requirements can issue new USDT by depositing cash or redeem tokens and return 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 it to be widely adopted in developed countries, a more advanced stablecoin model is needed: one that can maintain a peg to the US dollar and appreciate in line with inflation, thereby preserving 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 provided by long-term assets such as Bitcoin and gold.
In fact, Tether has already launched the gold-backed stablecoin Alloy (AUSDT) and the tokenized gold product XAUT. As Ardoino stated, this structure allows users to trade using these value-stable instruments while holding long positions in Bitcoin and gold; and as the collateral assets appreciate, users' borrowing capacity also increases.
It's worth noting that this model isn't new to 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, issued the USDS stablecoin, allowing users to deposit assets like Ethereum into smart contracts to borrow USDS. To ensure solvency, all loans employed an over-collateralized model, triggering automatic liquidation when the collateral value fell below a safety threshold. Currently, USDS is introducing a diversified portfolio of collateral assets to maximize efficiency and returns while minimizing risk.
To further solidify its 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 simultaneously providing liquidity and redemption capabilities for stablecoins, compensating for the volatility of crypto collateral prices. In addition to trading functionality, Sky also offers a savings mechanism through its interest-bearing token, sUSDS. The token's returns come from interest payments by borrowers, tokenized money market funds, US Treasury bonds, and returns from decentralized finance investments. In other words, USDS serves as both a medium of payment and a global savings tool.
Following the enactment of the GENIUS Act, many observers are focused on how Tether will enter the US market. According to Ardoino, one of the fastest-growing application scenarios for stablecoins is commodity trading settlement, with more and more commodity traders realizing that stablecoins are the most efficient settlement tool. In 2025, Tether began providing settlement services for oil transactions, driving a significant surge in demand for USDT in the global commodity market.
Ardoino stated that if stablecoins are not integrated into the local economy, they typically only serve as a temporary settlement layer and will eventually be exchanged for the local currency. In emerging markets where the local currency is unstable, USDT is not only a payment tool but also serves as a savings and store of value, thus enabling it to circulate continuously and be widely used locally.
Tether understands that the US, Latin America, and Africa are vastly different markets. In developed countries, people can use e-dollars through platforms like Venmo, Cash App, and Zelle. In the coming months, Tether will launch its new stablecoin, USAT, specifically designed for developed markets in the US. This move by the world's largest stablecoin issuer into the world's largest financial market is worth close attention.
