Investment Gems

I have been following Circle (CRCL) for a while now, and I have even written a report on the company (free). However, I have come to believe that the main issue is not that folks don’t believe in Circle, is that folks misunderstand stables.

The easiest way to misunderstand stablecoins is to view them only through the lens of user experience. Faster settlement, 24/7 transferability, lower cost cross border movement, programmable payments, all true, all useful, all investable at the application layer. But those benefits, while real, are not the deepest part of the thesis. The deeper part is structural.

Stablecoins may be the first scaled financial product that lets the system separate two functions that modern banking has long bundled together: money storage and credit creation.

In the traditional banking model, deposits do several jobs at once. They are the medium people and businesses use to hold cash, make payments, and maintain liquidity. But they are also the raw material banks use to fund lending. That bundling is one of the defining features of fractional reserve banking. The depositor experiences the asset as money. The bqnk experiences it as funding.

Stablecoins begin to challenge that arrangement. If they scale, they may absorb dollar balances, hold them largely in safe liquid assets, offer payment utility, and yet not recycle those balances into the broad loan creation system in the same way commercial banks do. In that sense, they start to look less like fintech wallets and more like narrow banks without a chartered lending function – and this is a critical nuance.

The common framing says stablecoins are modernizing rails. The stronger framing is that stablecoins may be deposit disintermediation machines. They do not just create a better frontend for money movement. They create an alternative home for transaction balances and short duration cash balances that historically would have sat inside the banking system, subsidizing the economics of lending.

That matters because cheap, sticky deposits are among the most valuable inputs in finance. Banks do not merely enjoy those deposits as a convenience. They build entire business models on them. Deposits fund loans, support maturity transformation, lower funding costs, and give banks a structural advantage over less privileged lenders. If even a modest share of transactional and treasury balances migrates out of banks and into stablecoin systems, the impact is not just on payments revenue. It is on the cost and composition of bank funding.

This is where the second order effects become interesting.

If stablecoins behave like narrow money, absorb balances, hold reserves, facilitate movement, but do not lend against those balances in the traditional sense, then money becomes safer and more transparent, but credit becomes more explicit. That is a profound change. In the old model, deposits and lending are fused. In the new model, the system begins to split into one layer that stores money and another that funds risk.

That split sounds abstract, but it is economically powerful. It means that part of what used to be hidden inside banks as an internal subsidy becomes visible to markets. Stablecoin reserves likely flow into T-bills, reverse repo, cash equivalents, or other very safe short-duration assets. That is good for perceived safety and often good for the U.S. Treasury funding base. But it also means those balances are no longer sitting inside banks as cheap fuel for loan books.

This is why the stablecoin story is not just bullish for crypto rails. It is also potentially bearish for the economics of deposit franchises.

The conventional bank model depends on a quiet but valuable asymmetry. Customers treat deposits as money. Banks treat them as funding. Stablecoins challenge that asymmetry by making it possible for customers to hold something moneylike that is not simultaneously financing a bank’s balance sheet in the old way. That does not destroy banks. But it can make one of their core privileges less durable.

The likely result is not that credit disappears. Credit almost never disappears. It migrates. If stablecoins siphon off some portion of lowcost deposits, than lending activity will increasingly need to be funded through more explicit channels: capital markets, securitization, private credit, warehouse lines, asset backed structures, nonbank lenders, or tokenized forms of these things over time. In other words, stablecoins may not shrink finance. They may push it toward a more visibly barbelled structure: safe money on one side, explicitly funded risk-taking on the other.

That is why this theme belongs in financial structure analysis rather than crypto tribalism.

The market still mostly discusses stablecoins as rails because rails are easy to see. What is harder to see is the balance-sheet consequence. A stablecoin is not merely a payment object. It is also a choice about where not to hold money. To the extent that a user or a treasury department chooses a stablecoin over a bank deposit for a portion of its liquid balances, that is not just a transaction-tech decision. It is a small act of bank disintermediation.

Scaled up, enough of those small acts begin to matter.

There is a paradox here that makes the theme even more interesting. Stablecoins are often framed as anti-system or anti-dollar, but the first and most plausible version of their success may actually strengthen the dollar system rather than weaken it. Dollar stablecoins extend the utility of the dollar globally. They make dollar claims easier to hold, transfer, program, and use in places where banking is weak, correspondent rails are slow, or local currency credibility is limited. At the same time, the reserves backing those stablecoins often increase demand for short dated U.S. government assets.

So stablecoins may simultaneously do two things that look contradictory but are actually complementary. They may strengthen dollar reach while weakening the exclusivity of bank deposit franchises. That is not an anti system outcome. It is a reconfiguration of which institutions sit where inside the system.

Once you see that, the strategic implications for banks become clearer. The near-term losers are probably not every bank equally. The most exposed are the institutions whose economics depend most on abundant low-cost deposits and whise customer relationships are not strong enough to prevent balance migration when better utility appears. Large moneycenter banks may retain advantages in compliance, underwriting, origination, wealth distribution, and embedded client relationships. Smaller banks and weaker deposit franchises could be more exposed. But even the strongest banks face the same long-run question: what happens if part of the payment and cash-management function is permanently detached from the lending function?

The answer is not that banks vanish. The answer is that they evolve. They may increasingly become originators, underwriters, servicers, compliance engines, balance-sheet intermediaries, and distributors of credit risk rather than sole integrated owners of the entire money credit pipeline. Some will adapt. Some will resist. The broader trend, if stablecoins scale, is that money becomes more utility-like and credit becomes more market-like.

Stablecoins do not just threaten something. They also create room for new winners. If money gets narrower and safer, somebody still has to fund the riskier side of the system. The old implicit subsidy of deposit funded lending may gradually give way to more explicit funding models. That could mean higher transparency. It could also mean higher cost of credit, more cyclicality, and more visible market discipline. The consequence is not simply a more efficient system. It may be a system that is cleaner in one dimension and harsher in another.

That may be healthy over the long run if it reduces hidden fragility and makes risk pricing more explicit. But it is not frictionless. Systems built around cheap, sticky, semi-subsidized deposits do not transform without changing the economics of housing finance, commercial lending, small-business credit, and corporate liquidity management.

The biggest mistake investors can make is to ask whether stablecoins will replace banks. That is too binary and too theatrical. The better question is whether stablecoins can take enough of the cash-management and payment layer to force banks, asset managers, and credit providers to operate with a more explicit and more contested funding base.

Stablecoins may not just modernize payments. They may unbundle money from credit.