Stablecoins increase the velocity of money and trade efficiency, but it’s vital to understand the difference between perceived value and actual liquidity.
This is Part 3 of a 4-part stablecoin series. If you haven’t already, check out Part 1 and Part 2 to get the full picture.
Stablecoins are often misunderstood. While they don’t directly increase remittance flows, they play an incredibly important role in enhancing money velocity and facilitating cross-border trade. But to fully appreciate their potential—and their limitations—we need to understand what they really are.
Think of stablecoins as Layer 2 payment system instruments, much like casino chips.
Inside a casino, a chip has value. Everyone within that environment—dealers, players, cashiers—recognizes and accepts it. You don’t need to carry U.S. dollars around the casino floor because the chip represents a promise. It’s backed by the casino, and there’s an underlying belief that you can redeem that chip at any time for real money.
This is exactly how stablecoins work within their ecosystem. As long as everyone you trade with—merchants, consumers, vendors—is “inside the casino”, that stablecoin functions as an IOU, a trusted medium of exchange. You can trade it, hold it, use it to settle accounts. But the actual dollars—the real money—never left the issuer’s bank account. The fiat currency remains in custody, while the IOU changes hands rapidly, creating the illusion of money in motion.
Now, let’s say you leave the casino and try to pay for groceries using that chip. The store won’t accept it. Why? Because they’re not part of the casino ecosystem. Outside of the accepted network, the chip loses its value unless it’s converted back into fiat. The same applies to stablecoins. Their value is contextual—powerful inside the system, meaningless outside without redemption.
This is the crucial point: the underlying Layer 1 currency—the real money—is held by the issuer. The stablecoin is a fast-moving, widely accepted promise, but it’s not actual liquidity in your hands. If you want to convert it to usable fiat, you have to redeem it, just like cashing in your casino chips.
Despite this, stablecoins are transformative. They enable high-frequency trade, improve transaction speed, and significantly boost the velocity of money. If deployed wisely, they can fuel economic activity and even support cross-border commerce.
But since they don’t automatically contribute to a country’s foreign exchange reserves, how do we align them with traditional financial systems?
One solution: build a conversion mechanism. Institutions using stablecoins could convert their holdings into USD at regular intervals—say every 10 days—and wire the funds back into the beneficiary country using SWIFT. This process would link the benefits of high-velocity digital IOUs with the real-world accumulation of FX reserves.
In essence, this approach becomes the glue between stablecoins and the fiat-based SWIFT ecosystem, preserving the agility of crypto while ensuring the monetary system gains from actual inflows.
So, while stablecoins may look like the money we use every day, they’re more accurately described as a highly efficient promise of money—only as good as the ecosystem and redemption process behind them.
A Slightly Deeper Way of Looking Into It:
If stablecoins are not available in a given economy, the people within that geography are effectively cut off from participating in global trade. We’re not talking about cashing out just yet—this is purely about enabling trade. When stablecoins are accessible, individuals and businesses can engage in commerce across borders. This ability to trade—even in a virtualized or indirect manner—contributes to economic activity and can, in a sense, inflate or simulate the GDP potential of that country.
Trade fosters connections, trust lines, and business relationships. It enables virtual or real import-export transactions. Over time, as this trade scales, the volume and importance of these activities become significant. At that point, the participants in that country may say: “Stablecoins are useful, but we now need actual US dollars within our banking system.”
In such cases, the stablecoins can be redeemed from the issuer, and the corresponding USD can be sent via SWIFT or other channels into the local economy—be it Nepal, Bangladesh, Pakistan, Nigeria, Tanzania, or Argentina. This, in turn, boosts the country’s foreign exchange reserves.
Without stablecoins acting as that Layer 2 virtualization layer for trade, such economic activity doesn’t happen—or happens at a much smaller scale. That’s why the presence of stablecoins is critical: they increase the velocity of money on Layer 2, and eventually allow for that liquidity to be pushed down to Layer 1 in the form of actual fiat inflows.
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This page was last updated on March 27, 2025.
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