Author: Zhu Weisha

The author published an article titled “Will the Introduction of the Stablecoin Act Trigger a Financial Tsunami?”, which mainly focuses on the risks brought by stablecoins. The article “Stablecoins: The Path for the U.S. to Defend Financial Hegemony” answers questions raised by the “Tsunami” article. Subsequently, I received feedback from readers asking me to explain the reason behind the statement in the “Hegemony” article: “The genius act of the U.S. aligns with the trends of history. The result is that slower banks and other financial institutions will be the first to perish.”

Stablecoins Are Not Payment Tools but Currency

Currency has three characteristics: store of value, payment tool (medium of exchange), and unit of account (yardstick). After the emergence of stablecoins, relevant speakers in the U.S. and Hong Kong stated that stablecoins are payment tools. The reason is that the act stipulates that stablecoins cannot pay interest, artificially stripping stablecoins of their store of value, thus making them incomplete currency.

The genius act does not explicitly prohibit stablecoin lending but imposes numerous restrictions on stablecoin-related businesses, which may make it difficult for stablecoin issuers to engage in lending-related activities.

However, how can lending of stablecoins, after several transfers, be prohibited? There are many protocols in the cryptocurrency space that engage in lending, commonly including Morpho, Compound, Aave, etc. The annual interest income from borrowing stablecoins is between 3% and 8%.

In the practice of cryptocurrency, stablecoins possess the complete attributes of currency. In an anonymous world, an incomplete regulation has limited effectiveness and will not change the currency attributes of stablecoins.

By artificially creating protection for banks, legislators have good intentions, leaving time for banks to transform and develop new businesses that are compatible.

Issuers' Fiat Assets Can Earn Interest but Cannot Pay Stablecoin Redeemers

The act stipulates that issuers are allowed to collect interest income from the backing assets but are prohibited from paying interest to stablecoin redeemers. It is easy to circumvent this point; one can use the exchanged stablecoins to buy digitized U.S. Treasury bonds in the crypto market, thus also obtaining returns. This is no different from purchasing Treasury bonds with fiat currency. Moreover, the loan returns from cryptocurrencies are even higher than those from Treasury bonds.

Large holders of stablecoins must find ways to earn interest. There are many circumvention methods, and the market will determine that this regulation is impractical. Such regulations can be enumerated.

These regulations are quite absurd; the same U.S. dollar, just because of different uses, one earns interest while the other does not. It still aims to protect banks. This protection period will inevitably be broken by innovation, and some slower banks and other financial institutions will fail in competition. This is because the underlying logic of currency issuance has changed, challenging the business model of commercial banks.

Stablecoins Challenge the Business Model of Banks

1. The Profit Model of Commercial Banks Based on Interest Rate Spread is Challenged

The basic business model of commercial banks is to collect interest spreads, offering depositors lower interest rates and then lending out at higher rates. In China, the net interest margin for banks is between 1.27% and 1.87%, with large commercial banks around 1.4%. U.S. banks often operate in a mixed manner, with net interest margins higher than those in China, around 2% to 3.5%.

Banks exchange fiat currency for stablecoins for users and purchase bonds with fiat to obtain stable returns, which is an investment banking business. If a bank purchases U.S. Treasury bonds with a 4.5% return, excluding market volatility factors, the feasibility of a 4% net return is very high. If the bank offers a 2% return to stablecoin redeemers, it does not significantly impact the bank's net interest margin. It seems to be a profitable business for banks and should not be restricted.

The problem is that the basic business of commercial banks is lending, and loans to enterprises cannot be immediately spent; the funds remain in the bank, becoming idle capital that can be lent out again. The money circulation speed of commercial banks is 4 to 5 times per year. If all funds are managed, banks will lose their lending business. In other words, stablecoins will affect the money circulation rate of commercial banks, causing the multiplier V to decline. Banks that profit from a bubble lending model will see their profits decrease. Not providing interest income from bond investments to stablecoin redeemers can be seen as compensating for the profit loss of commercial banks. But what if bond interest rates decline? What if bond interest approaches zero?

2. The Fisher Equation Needs to Be Redefined

The emergence of stablecoins has changed the landscape of currency issuance. The issuance of base money M is controlled by the central bank, while stablecoins belong to the category of broad money M2. Their turnover rate has not yet reached the 4 to 5 times per year experience constant of bank funds. The difference in the circulation speeds of the two types of currency affects the expression of the Fisher equation.

The Fisher equation is a famous formula that describes whether currency issuance is reasonable:

MV = PT………………(1)

Where:

M = Base money

V = Money circulation speed (multiplier)

P = Price level

T = Total transaction volume

This formula describes the relationship between money and total value (the value of broad commodity transactions). The left side of formula (1) represents finance, while the right side represents total value. This equation indicates the correspondence between currency issuance and currency application. The multipliers of the stablecoin market and the fiat currency market V are different; we define the multiplier of the stablecoin market as V1. Stablecoins should be on the currency side, i.e., the left side of the formula. The money supply is divided into two parts: the fiat currency market and the stablecoin market, represented by S for stablecoins, with M and V having the same meanings as in formula (1). Assuming PT remains unchanged, the Fisher equation can be written as:

MV + SV1 = PT………………(2)

This formula encompasses the correspondence that should exist between the money supply and total value after the introduction of the genius act. Here, the quantity of stablecoins in cryptocurrency is transparent and easier to quantify than the money creation by banks. V1 can be statistically derived from the cryptocurrency PT/S.

If banks simultaneously engage in both fiat and stablecoin businesses, the impact on commercial banks is not significant. However, the stablecoin market is currently not a stronghold for banks. Banks must innovate to excel in this business.

3. Individual "Banks" Participate in Competition

The practice of cryptocurrency tells us that lending occurs privately through smart contracts. You can collateralize stablecoins like USDT and USDC or trusted assets like Bitcoin and Ethereum for lending, with user income being the loan interest, which is significantly higher than bank deposit rates. Protocols like Morpho, Compound, and Aave have matured; they are decentralized automatic lending intermediaries. Compared to the interest spread of banks, these protocols only charge fees. For example, in Aave:

Fees vary by business type, as follows:

• Deposit and withdrawal fees: Deposits usually have no fees. Withdrawal fees are generally 0.25%.
• Borrowing fees: A fee of 0.01% is charged when borrowing.
• Loan issuance fee: 0.00001%.
• Transaction fees: When exchanging tokens on Aave's decentralized exchange (DEX), a transaction fee of 0.3% is charged for each trade.
• Wallet transfer fees: When transferring tokens between wallets, a transaction fee of 0.001 ETH is charged. This is a high fee and an area where cryptocurrency needs improvement; if not using the Ethereum network, this fee would be much lower, as it is a thousandth of a fee charged by the Ethereum network. This fee will vary with network congestion.

The total of these fees, when converted to fiat, does not exceed 1%.

With the elimination of bank exploitation, retail investors can earn interest rates almost equal to loan interest rates. This means that retail lending may be taking business away from banks. If banks engage in the stablecoin portion of formula (2) and transform into lending protocols, they have the advantage of existing customers and credit, but the fees will be less than the interest spread profits. A decline in main business profits is inevitable.

In Aave, there is no need for scrutiny, and the identity of the borrower does not even need to be known. Considering that after the introduction of the genius act, anonymity will become difficult. This is the institutional dilemma faced by such protocols. The idea is correct, and solutions will surely emerge.

Private lending does not require a license. The subjects of cryptocurrency lending are not banks but individual entities. Individual funds do not need to be lent out through banks as intermediaries, effectively removing the bank intermediary. The basic principle of cryptocurrency is smart contract collateralized lending, which does not involve bubbles; banks engage in bubble lending, colloquially known as “10 toilets and a few lids.” Without bubble lending, economic bubbles are reduced, and the harm of economic crises will be significantly diminished.

As banks are weakened, who will become strong? The concept of cryptocurrency: control your own money. Clearly, cryptocurrency wallets will rise to become the new “personal banks.”

Cryptocurrency Wallets Put Pressure on Banks

1. The Functionality of Cryptocurrency Wallets Exceeds That of Banks

Currently, cryptocurrency wallets generally come with currency exchange and wealth management functions and can also connect to exchanges. The overall functionality far exceeds that of banks, so it is not an exaggeration to call them personal banks. The reason cryptocurrency has not yet become widespread, aside from legal issues, is due to three key problems.

2. Wallets Are Personal Banks, Not Platforms

Wallets are personal; they can connect to various platforms in cryptocurrency and serve as entry points for these platforms, but they themselves are not platforms. Currently, blockchain platforms are mostly B2B, and their connection with wallet holders is not close. The business model of personal banks is correct; establishing a good entry point is also a huge business. The genius act has already reflected the government's protection of banks, which is unreasonable. Therefore, a correct business model does not necessarily guarantee success.

The clarity of the act is still under debate, and they wield a big stick: “Equal business, equal regulation.” Is this not correct? Just strengthening real-name registration alone will eliminate the purely anonymous ecosystem, and significant turbulence in cryptocurrency is inevitable.

This is a path filled with risks, opportunities, and a huge game of interests. The entry of regular forces has increased the difficulty of success for cryptocurrency startups.

3. Security and Usability Issues

Cryptocurrency wallets are divided into centralized and decentralized wallets. Centralized wallets carry the risk of misappropriating user assets, and such incidents occur frequently.

Decentralized wallets are divided into cold wallets and hot wallets. Hot wallets are online wallets that appear secure but theoretically do not have the robust security measures of major exchanges like Binance or Coinbase. However, the funds in exchange wallets do not align with the principle of personal control over one’s money; experienced large clients will store their crypto assets in non-connected “cold wallets.” The issue with cold wallets is their complex operation.

4. Inheritance Issues

The money in a cryptocurrency wallet is controlled through private keys. Whoever holds the private key controls the money. Therefore, private keys must not be leaked. Due to the inconvenience of private key storage, loss is a common issue. If the private key is lost, the money in the wallet cannot be retrieved. If a user informs someone else of the private key during their lifetime, there is no guarantee that the money will be safe.

We need the security and usability of banks; even in the event of an accident, we should be able to retrieve our money.

If cryptocurrency wallets cannot achieve the security and usability levels of banks, claiming to surpass banks is mere nonsense.

Technical issues can all be resolved. We have designed a No-Chain Multi-Signature Wallet System to address the aforementioned problems.

Next-Generation No-Chain Cryptocurrency Financial Operating System and Platform

The blockchain-based No-Chain system serves as the underlying foundation of digital civilization, much like the internet's HTTP or TCP/IP. "No-Chain" does not mean the absence of a chain; rather, it signifies that the chain no longer exists as an overt barrier to user experience. Just as we do not concern ourselves with the underlying technology when depositing money in a bank, the technology that should have been in place 15 years ago has now arrived, and the essence of No-Chain is to downplay the chain and focus on applications.

No-Chain is a unified platform for both To C and To B, similar to WeChat's mini-program platform, but No-Chain focuses on finance, serving as a financial mini-program platform. In the coming months, mini-program interfaces will gradually be opened, providing opportunities for the aforementioned lending and wealth management projects to connect. Swift is a financial transmission protocol, Aave is a cryptocurrency lending protocol, and the connections between traditional banks are protocol-based rather than financial platforms. The young Vitalik created a smart contract financial platform, becoming a common ledger that communicates various financial applications. This is a great creation that has pioneered a new future for finance. Stablecoins are a beautiful flower blossoming on Ethereum, which has then been promoted to other public chains. Ethereum serves as a To B financial platform, unable to connect C-end users with Ethereum. No-Chain, in addition to being a To B platform, is also a To C platform, providing traditional banks the opportunity to become nodes and mini-programs within the No-Chain financial platform, enjoying a shared ledger that, like Ethereum, is public.

In addition to platform issues, security, usability, and inheritance problems must also be addressed.

The No-Chain wallet is multi-signature, allowing for up to 12 signatures. It sets multi-signatures based on the amount you need to transfer. The platform does not touch user assets. The entire security design follows the principle of multi-verification. Bitcoin requires six block confirmations, while Binance uses SMS verification + email verification + Google verification, which is well executed. Its drawback is that regardless of the amount transferred, three-step verification is required, which is inconvenient for small amounts. Banks use SMS verification, but for large transfers, customer service will confirm with the user, and layered management of fund amounts is the correct decision. Referring to Binance, using three signatures is safe. When Binance designed the three-step verification, it did not expose any security issues for users.

The No-Chain multi-signature verification is completed via mobile phones, and its multi-signature differs from the equal multi-signature in cryptocurrencies. It involves a master control mobile phone, a personal master mobile phone, and a verification mobile phone bound for multi-signature. Inheritance can also be automatically completed.

Only by exceeding the security and usability levels of banks can financial reform reach a new stage.

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