Stablecoins: What They Are and How They Work

What It Covers

Stablecoins are blockchain-based digital tokens pegged one-to-one to the US dollar, backed by treasury notes and cash reserves, designed to solve international transfer costs, inflation in developing nations, and inefficiencies in the current global banking system.

Key Questions Answered

• •Reserve mechanics & profit model: Stablecoin issuers hold 100% reserves in treasury notes and cash, earning 4–5% interest on billions in holdings without paying holders any interest. An issuer with $100B in reserves generates roughly $4B annually in gross interest income before expenses.
• •International transfer costs: Sending $500 from the US to the Philippines currently costs $15–$40 in fees, a 2–4% exchange rate markup, and takes 1–5 business days through correspondent banks. Stablecoin transfers process near-instantly at near-zero cost, bypassing this entire intermediary chain.
• •Dollar access in high-inflation economies: Citizens in Argentina, Turkey, and Venezuela have seen local currencies lose 50–90% of their value recently. Stablecoins let anyone with a smartphone hold US dollars without a bank account, removing government risk of forced currency conversion.
• •Treasury demand implications: Stablecoin issuers must hold dollar-denominated assets, making them large buyers of US Treasury bills. Analysts project stablecoin growth could generate $500B to $1T in new Treasury bill demand by 2028, directly supporting US government deficit financing.