Source: WeChat Official Account Jiu Jiu Ri
At the beginning of this article, let’s state the conclusion: The "Genius Act" appears to regulate cryptocurrency, but in essence, it is a quiet reconstruction of the core national power of the United States government, the "coinage power," utilizing new technology. It aims to address the inherent flaws of the traditional credit currency system and to re-concentrate monetary sovereignty from banks and platforms back into the hands of the government, which represents the public interest. This article will discuss this through three chapters: "The Evolution of Currency," "The Flaws of the Modern Monetary System," and "The Monetary System Revolution Triggered by the Stablecoin Act."
The Evolution of Currency
To begin with the conclusion: The value of currency depends on credit. Currency is a process that evolves with the development of social production and capitalism, from ancient currency as a general equivalent, to modern currency before the collapse of the Bretton Woods system as a dual structure of general equivalent and credit derivation, to modern currency as an imagined entity created through accounting.
Marx wrote a passage in Capital when examining currency through the study of commodities: "It is a very strange thing, full of metaphysical subtleties and theological absurdities."
When we hold the paper money in our hands, look at the WeChat balance on our phones, and receive a text message notifying us that the bank has just approved our loan, we might wonder, "Why do people consider this piece of paper, this string of numbers, to be valuable?" A phrase from a political textbook might pop into our heads: "Currency is a commodity that serves as a general equivalent."
"A commodity that serves as a general equivalent?" You glance at your loan amount and recall a line you learned while studying for the postgraduate entrance exam: "The value of a commodity is determined by the socially necessary labor time required to produce it." But isn't that string of numbers just something the bank staff typed out? Does the labor of the bank staff typing on a keyboard really equate to 1 million RMB? The implicit meaning of a general equivalent is that currency is a commodity that exists beforehand and is used for exchange. If currency is an equivalent: then there should be 1 million "goods" in society to conduct a transaction of 1 million RMB. The reality is that when the bank approves your 1 million loan, it is not taking 1 million ready-made "equivalents" from the vault to give you. It is merely typing numbers into your account, creating 1 million deposits out of thin air. This money did not exist before the loan was granted.
This raises a puzzling question: since modern currency is not a general equivalent, if I go to the Agricultural Bank of China and ask to exchange it for gold and silver, I would likely just be chased out by the security guard. So why do I consider this string of numbers to be valuable?
Exchange for gold and silver? At this moment, you suddenly remember that for a time in the past, we referred to the US dollar as "greenback." Now, let’s turn our attention to the banks before the collapse of the Bretton Woods system. We can imagine the previous US dollar; the dollar itself is paper, but at that time, you could take the dollar to the bank and exchange it for real gold. Here, "gold" is the "general equivalent," the foundation of value. At that time, the value of the dollar depended on the gold it could be exchanged for. However, as a banker, I suddenly realize that not everyone is simultaneously coming to my bank to exchange dollars for gold. I can issue more dollars as loans than the gold in my vault. For example, if my vault has 100 gold, I can loan out 150 dollars. What is the extra 50 dollars? It is a product derived from credit. Thus, we can conclude: Pre-modern currency is a dual structure of general equivalent + credit derivation. Simply put, part of the currency is backed by real gold and silver, while another part is "created" by banks through credit.
But looking at your WeChat balance, as mentioned at the beginning of this section, it cannot be converted into gold at the bank and is not anchored to any precious metal. It is clear that modern currency has detached from the dual structure. So why did this change occur? We need to return to the pre-modern currency era to explore.
First, gold is scarce and unevenly distributed. Those who have gold possess the "privilege license" to open banks and issue currency. Ordinary laborers create abundant goods, but because they lack gold, they are deprived of currency for exchange. The coinage power has shifted to a few bankers.
Second, gold production grows very slowly, but after the Industrial Revolution, social wealth grows rapidly. However, if there is not enough currency, it will suppress trade and productivity development, leading to deflation and economic recession. To solve the problem of "not enough money," banks have to derive a large amount of "credit" based on a small amount of gold, issuing paper currency far exceeding their gold reserves. This is like building a taller and taller building on a very small foundation. If there is a slight disturbance, everyone will panic and want to exchange their paper currency for gold, and the entire monetary edifice will collapse instantly. Therefore, the more the economy develops, the more fragile the modern currency system becomes. Thus, in 1971, the Bretton Woods system collapsed, and modern currency officially took center stage.
Since there is no gold, how is money printed? Where does the value of modern currency come from?
The conclusion is: The creation of modern currency is a magic trick that follows rules, creating currency out of thin air through collateral assets + accounting. This magic trick has three essential elements.
First, everyone knows that money cannot be printed out of thin air; it requires a basis or collateral, which serves as the anchor for currency. So what does modern currency collateralize? Abstractly, it collateralizes the future, such as government bonds (the government uses future tax revenues as guarantees for IOUs), corporate bonds (companies use their future profitability as guarantees for IOUs), and mortgage loans (ordinary people use their most valuable assets as collateral). Therefore, the value of currency is indirectly anchored to the ability and credit represented by these collateralized future wealth.
With an anchor in place, the next step is to "print money." Many people understand printing money as turning on the printing press, but the operation of modern currency is not like that; it mainly involves typing on a computer keyboard to create money.
Returning to the notification of the bank loan approved on your phone, generally, we first go to the bank to apply for a mortgage to buy a house. After the bank approves it, it does not directly hand me a box containing 1 million; instead, it simply adds 1,000,000 to my account. At the same time, on the bank's ledger, the asset side increases by 1 million in receivables, and the liability side increases by my 1 million in deposits. Thus, a new currency is created out of thin air, and the core of the entire process is accounting.
This magic trick is not something just anyone can perform; it requires credit as permission. Banks cannot arbitrarily accept any collateral for loans. Collateral (such as government bonds, real estate) must undergo risk control, credit rating, and comply with central bank regulations. Most importantly, we all believe that this piece of paper or this number can be used to buy things, pay rent, and pay salaries. This trust is backed by national laws, national strength, and economic stability.
The essence of modern currency is a recording tool. It exists because we all collectively believe in and adhere to a set of rules that allow financial institutions to use trusted assets as anchors and create currency through simple accounting actions.
The Flaws of the Modern Monetary System
At the beginning of the book "The Deficit Myth," the author quotes a saying from Mark Twain: "What gets us into trouble is not ignorance, but the illusion of knowledge."
To conclude: The modern monetary system is a sophisticated machine that creates currency through accounting, but this machine has a fatal flaw: the compound growth of interest. This flaw forces the economy to grow at high speed forever; once growth slows down, the entire system will fall into a snowball debt dilemma, ultimately ending only through financial crises or the game of borrowing new to pay old debts.
Let’s return to the end of the previous section and review the creation of modern currency.
Modern currency is not printed; it is "recorded" into existence. It is like God saying, "Let there be light," and then there was light; the central bank and banks say there should be money, and thus money is written in the ledger. Specifically, the central bank creates base money M0 out of thin air by purchasing government bonds in the secondary market, directly increasing the reserve balance in the bank account that sold the bonds. This means that on the asset side, government bonds increase, and on the liability side, reserves increase. The result is that base money M0 is created out of thin air. Commercial banks, as mentioned in the previous section, can issue loans after receiving reserves. When the bank approves your 1 million mortgage, it does not hand you cash from the vault; instead, it directly adds 1 million in deposits to your account, resulting in the creation of a broad money supply M2. The currency creation system described above is a dynamic system; when commercial banks or the central bank issue loans or purchase assets, the balance sheet expands, currency is created, and market liquidity increases. When commercial banks or the central bank recover loans or sell assets, the balance sheet contracts, and market liquidity decreases.
Then money is created and needs to flow in the market. However, in a competitive market economy, the strong get stronger, and currency naturally concentrates in the hands of the successful, while it depletes in the hands of the weak. This leads to most participants losing purchasing power, and the entire economic cycle faces stagnation. Therefore, financial intermediaries like banks and stock markets act as the heart, collecting the currency that has settled in the hands of the strong and injecting it into the weak links of the economy through loans or investments, forcing currency to continue circulating. This currency circulation process is fraught with risks (information asymmetry, maturity mismatch, credit risk). Financial intermediaries bear these risks and charge interest and fees for it. Thus, risk and return are not simply exploitation but are the necessary system costs to maintain system operation. Without this cost, no one would be willing to bear the risk, and the currency circulation would come to a halt.
Hidden within the above discussion is a significant risk flaw in the modern monetary system: the snowball effect of interest.
For example, if a bank issues a 100 yuan loan to a company, agreeing to repay 110 yuan (100 yuan principal + 10 yuan interest) a year later. However, due to various reasons, the total amount of currency circulating in the market after a year is only 100 yuan, meaning the 10 yuan interest has not been created. The company then faces the dilemma of how to repay this 10 yuan interest. The solution is for the bank to lend a new loan to a second person. This way, there is extra currency in the market, allowing the first person to earn money to repay the interest. This creates an expansionary spiral, where debt grows like a snowball, increasing exponentially. The currency in the market can only grow by the bank continuously issuing more new loans. The consequence of this flaw is that the entire economic system is like riding a bicycle; it must pedal faster and faster, meaning the economy must continue to grow. Once the speed slows down, a debt crisis will occur. This is because real-world productivity growth is volatile and limited, while the growth of debt interest is ruthless and exponential.
As debt interest overwhelms economic growth, we ultimately face two outcomes: a hard landing or a soft landing.
A hard landing is akin to the 2008 financial crisis, where the debt bubble bursts, companies go bankrupt in large numbers, bad debts soar, and market confidence collapses. Afterward, a painful deleveraging process ensues, and debts are forcibly liquidated. This is the violent clearing of market rules.
A soft landing is what China and the United States are currently doing, such as the continuous quantitative easing (QE) in the United States, where the Federal Reserve directly prints money to purchase government bonds, monetizing the debt. The risk is ultimately underwritten by the national credit of the United States.
This is the result of the flaws in the current monetary system; we rely on credit expansion for prosperity, but the inherent driving force of credit expansion—interest—forces us to remain perpetually prosperous. This has become an unsolvable paradox. Many of today’s economic phenomena, such as high global debt, housing price bubbles, and unconventional policies by central banks, can be traced back to this structural flaw.
The Monetary System Revolution Triggered by the Stablecoin Act
The U.S. government is troubled by the structural flaws brought about by the modern monetary system, and as a result, it looks back and discovers a disruptive new financial monster—blockchain finance.
Blockchain-based on-chain finance represents a more radical and fundamental challenge than centralized technology platforms. It attempts to replace national sovereignty and institutional trust with code sovereignty and algorithmic trust, aiming to build a global, decentralized financial operating system parallel to the traditional system.
The core of the traditional system is the central bank and commercial banks. We trust that the central bank will not issue currency recklessly and that banks will honor deposits. This system is built on trust in centralized institutions. The cornerstone of on-chain finance is decentralization. It does not rely on any centralized institution but instead relies on cryptography and consensus mechanisms to establish trust. The snowball effect of interest in the traditional system and the high costs of financial intermediaries are precisely the pain points that on-chain finance seeks to address. Through algorithms and peer-to-peer networks, it aims to provide more efficient, transparent, and inclusive financial services, directly targeting the inefficiencies and fairness issues of traditional finance.
As discussed in the previous section, the modern monetary system relies on the accounting authority of central banks (the Federal Reserve) and commercial banks to expand and contract their balance sheets. In contrast, blockchain is a globally shared, immutable, and transparent public ledger. The accounting authority is distributed to network participants through consensus mechanisms (such as proof of work and proof of stake).
In response to the flaws of the modern monetary system and the impact of on-chain finance, the U.S. government ingeniously introduced the Genius Act. This act is not merely a simple patch to the modern monetary system but rather utilizes new technologies like stablecoins and blockchain to reconstruct a new system, thereby addressing both traditional flaws and emerging challenges simultaneously.
The core flaw of the modern monetary system is that commercial banks create most of the currency (M2) through credit, but their snowball interest mechanism requires infinite economic growth; otherwise, it triggers a debt crisis. At the same time, the central bank's control over the total money supply is indirect and inefficient. The strategy of the Genius Act is to systematically undermine the core position of commercial banks in currency creation.
The old path involves the Federal Reserve providing base money, which commercial banks then "derive" into M2 through lending. The new path involves the Treasury issuing government bonds, which then generate stablecoins as reserve assets, directly injecting them into the economy. This new path completely bypasses the credit derivation process of commercial banks. Commercial banks are downgraded from currency creators to custodians and payment service providers.
Since the creation of the new currency is based on the Treasury's issuance of government bonds rather than individual bank loans, it cuts off the chain that allows the private sector to demand unlimited currency growth through the snowball effect of interest. The state can design currency injections that do not require principal and interest repayment or closed-loop loans, fundamentally avoiding the infinite accumulation of debt.
In facing the challenge of on-chain finance to national monetary sovereignty through code sovereignty, the strategy of the Genius Act is not to prohibit but to incorporate.
The act stipulates that stablecoins must be pegged 1:1 to cash, government bonds, and other national assets. This means that any on-chain financial application that wishes to use stablecoins as a stable measure of value must base its value on national credit. This directly negates the ambition of on-chain finance to create an independent monetary system, such as algorithmic stablecoins.
The act requires that on-chain clearing networks must be compliant, auditable, and subject to intervention. This is equivalent to granting the state ultimate jurisdiction in the decentralized blockchain world, allowing the decentralized challenge to be subject to national regulation.
Through these two steps, the U.S. government has completed a systematic reconstruction of the monetary system, with power ultimately shifting from commercial banks to the Treasury Department. The Treasury becomes the starting point and main actor in currency creation through the issuance of government bonds. Power is partially transferred from the Federal Reserve to the Treasury, which gains direct tools for injecting currency into the real economy, significantly enhancing its fiscal policy capabilities and even acquiring central bank-like functions. On-chain finance is reduced to a tool, its technology used to enhance the efficiency of the new system, but its disruptive sovereignty is stripped away.
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