The Battle for the Right to Print Money: The Trillion-Dollar Game Between Banking Giants and Encryption Newcomers

Original author: Yuliya

Reprinted: Daisy, Mars Finance

In an era of rapid development in cryptocurrency and blockchain technology, Frax Finance founder Sam Kazemian and Aave founder Stani Kulechov are undoubtedly two leading figures in the stablecoin space. In a recent special conversation with The Rollup, they shared insights on the explosive growth of the stablecoin industry, the innovative journey of their own projects, and their views on the upcoming regulatory changes, especially how stablecoins have become a focal point in the industry following the volatility in the crypto market in 2022.

Today, their attention is focused on the GENIUS Act, a landmark piece of legislation that could elevate stablecoins to the status of legal tender, fundamentally altering the global landscape of the dollar. This article will delve into Sam and Stani’s insights on the stablecoin market, their expectations for the bill, and the prospects of how stablecoins will shape the future financial ecosystem. PANews has transcribed this dialogue.

The Boom of Stablecoins and the Legislative Windfall

Host: The stablecoin industry is currently making rapid progress, with multiple versions of legislation being promoted in both the House of Representatives and the Senate. Although its market share is only 1.1% of the USD M1 money supply, it seems that the entire industry believes “this is just the beginning.” As core players in the industry, what is your perspective on this timing?

Sam Kazemian:

To be frank, I find it hard to contain my excitement. Every day, I read investment reports and ETF briefs, and without exception, they all list “AI” and “stablecoins” as the two hottest fields in today’s world, with no other industry able to compete. As the founder of a stablecoin protocol, seeing this industry finally understood and accepted by the whole world feels amazing.

We spent many years researching and building Frax, which started as an experimental “hybrid model” and has now transformed into a “legal digital dollar” path that policymakers are willing to support through legislation. This transition is significant.

Stani Kulechov:

I completely understand Sam’s feelings. Stablecoins are very intuitive and easy-to-understand tools, especially in regions experiencing financial turmoil and fiat currency devaluation—such as Argentina, some African countries, and certain areas in the Middle East—where the financial stability offered by stablecoins is much more attractive than their local currencies.

However, even in Western countries, the value of stablecoins lies not only in their “stability” itself but in how they transform the profitability (yield) of DeFi into something that mainstream users can understand and use. This represents the natural evolution of financial technology from “paper money → digital currency → on-chain assets.” It truly opens up a new paradigm for cross-border value transfer.

Do stablecoins threaten the US dollar?

Host: You mentioned the value of stablecoins expanding into markets where good currencies are hard to obtain, such as Argentina, African countries, and some areas in the Middle East and Asia. Regarding how stablecoins affect the position of the dollar in the global monetary system, some believe that stablecoins threaten the dollar’s dominance, while another perspective suggests that stablecoins actually expand the global influence of the dollar. What are your thoughts on this issue?

Sam Kazemian:

I think this completely misunderstands the role of stablecoins. The reality is quite the opposite: stablecoins are an “extension” of the US dollar, a global extension of the dollar’s influence.

We can look at stablecoins from two historical stages:

The first stage is the ideal of “decentralized algorithmic stablecoins”—maintaining stability purely through market mechanisms like Terra, which ultimately ended in a collapse;

The second stage is the realism phase we are now entering: if you are pegging to USD, then the “perfect” stablecoin design is actually to gain the recognition of the US government—getting it to directly acknowledge that your token is “dollars.”

This is the revolutionary aspect of the GENIUS Act. It allows stablecoins to have “dollar equivalence” for the first time, meaning that when the U.S. Treasury says “this compliant token is equivalent to the dollar,” it can truly be accepted by all banks worldwide that receive dollars—it is no longer just a “digital asset” on the blockchain, but legally a “dollar.”

Stani Kulechov:

The US dollar is a simple and effective tool for trade settlement, and the proliferation of the internet has actually expanded global dollar trade. It is expected that a similar situation will occur with stablecoins in the future, as the reach of the internet will be even wider. Achieving a more decentralized system requires time and widespread adoption; this is a long-term process. Currently, the scale of technology is reflected in expanding existing value.

In the next 2-3 years, stablecoins will become the largest asset class on the chain, and in 5-7 years, security tokens will surpass stablecoins and crypto-native assets combined. The benefits of RWA (real world assets) brought by traditional assets on-chain, mostly denominated in US dollars, reinforces the concept of dollar-settled transactions, but not necessarily the final shape of the financial system of the future. The next 10-15 years will see a shift in the medium of exchange to a new medium with unique security and interoperability, which will enhance liquidity and create more ecosystem interest, building new ways of future stablecoins and trading value.

Are security tokens the ultimate form of on-chain assets?

Host: Stani, you just mentioned that in the long run, stablecoins are merely a transition, and security tokens will become the largest asset class on-chain, even surpassing stablecoins and native crypto assets. Which specific assets are you referring to? What is the logic behind this judgment?

Stani Kulechov:

This is a broad concept. What we commonly refer to as RWA (Real World Assets) actually also includes security tokens. The scope can range from publicly traded company stocks, private equity, debt instruments (such as government bonds and corporate bonds), to potentially structured financial products in the future.

Currently, many stablecoin reserves are supported by short-term U.S. Treasury bonds, and these assets have already been functioning on-chain. However, as on-chain interest rate tools mature, we will see traditional assets with higher yields and more complex risk layers being brought on-chain as well — and this is the backbone of the financial system.

In the past, many high-quality assets had poor liquidity, not because they were unattractive, but due to high entry barriers and limited distribution channels. DeFi provides a globally accessible liquidity network that can liberate these assets from the “closed” financial structures, allowing for direct pricing and trading on-chain. This will reshape the entire capital market structure.

Core impact of the GENIUS Act: Who can “print dollars”?

Host: Sam, you mentioned the conversations with Senator Hagerty and other lawmakers. Can you talk about what new opportunities the GENIUS Act will open up once it goes into effect?

Sam Kazemian:

There are various definitions of the U.S. dollar in the financial system, and the Federal Reserve distinguishes different types of U.S. dollar assets through classifications such as M1, M2, M3, etc. Among them, M1 money refers to the currencies that can be used immediately in the economy, including bank deposits, on-demand deposits, and money market funds that can be quickly converted into cash. M2 money, on the other hand, is riskier, such as U.S. dollar-denominated but not FDIC-insured bank debt, which is more like a U.S. dollar-denominated investment than a currency in the traditional sense.

Since the 19th century, the issuance rights of M1 money have been the exclusive privilege of federally chartered banks in the United States. They can create “immediately available” money, such as demand deposits and money market funds. Now, the GENIUS Act has granted this ability to stablecoin issuers, allowing some entities that are not chartered banks to flexibly and innovatively issue M1 money. This is why some banks now seem poised to support a bill they previously opposed, as they prefer to maintain a monopoly on the issuance of M1 money.

The GENIUS Act and payment stablecoins are historically significant because they allow non-chartered banks to issue M1 currency under strict regulations for the first time. These regulations require that stablecoins be backed by highly secure assets, such as money market fund securities, Treasury bills, Federal Reserve reverse repos, and FDIC-insured certificates of deposit. Currently, FRXUSD is working to become the first payment stablecoin chartered entity. This development has not yet been fully priced by the market, and it may gradually gain recognition in the coming months as more news about banks issuing legitimate stablecoins emerges.

Stani Kulechov:

Although regulatory approval for stablecoins and other areas may seem reasonable intuitively, the key lies in the limitations these regulations may impose, especially regarding innovation. Before entering DeFi, I also worked in fintech, where P2P lending and crowdfunding platforms were initially very active, but the later regulatory framework forced many small startup teams to withdraw because they could not bear the high compliance costs.

So, the key is that the GENIUS Act needs to establish clear and inclusive rules. We cannot let excessive caution drive innovators away. Fortunately, there is now a group of very professional legislative representatives in the crypto industry who are working hard to advance this process.

Will multiple entities issuing US dollars compete with each other?

Host: Traditional banks like JP Morgan and Citibank plan to issue their own stablecoins. Will there be competition among stablecoins in the future, and even issues related to “dollar inflation”?

Stani Kulechov:

In fact, we do not see this as “competition.” From our perspective, stablecoins are more like “payment channels” or “tracks”—each user chooses the most suitable track based on the scenario, such as USDC, GHO, frxUSD, etc. In the Aave ecosystem, many users hold stablecoins for more than 6 months, which indicates that they are not just a medium of circulation, but also a means of long-term value storage.

In Aave V4, we have also designed the “GSM” (GHO Stability Module: an important functional module aimed at ensuring that Aave’s native stablecoin GHO maintains a 1:1 convertibility with other assets.) to accept these stablecoins as underlying collateral, such as USDC and USDT, which are already integrated. In the future, Frax may also be included through the governance process, enhancing the overall flexibility and risk resistance of the protocol.

Sam Kazemian:

I completely agree. The digital dollar is a positive-sum game. The global M1 market size is $20 trillion, while the total market capitalization of on-chain stablecoins currently accounts for only 1%. This means the penetration rate of the entire industry is still very low.

frxUSD has only been launched for three months, and it is currently applying for integration into the Aave ecosystem. I believe that in the future, more and more compliant stablecoins will join DeFi, making the entire digital dollar system more diverse and robust. Frax’s goal is to become the “base digital dollar” in this system.

The New Landscape of Digital Dollar: Frax and Aave

Host: Sam, you recently moved Frax from L2 to L1 and even restructured the original governance token FXS. Is this an early layout for “stablecoin compliance”?

Sam Kazemian:

Absolutely correct. Our overall architecture has transformed from the “algorithmic stablecoin protocol” to the “digital dollar issuance + settlement network.” The original Frax Share (FXS) has been renamed to Frax, becoming the gas and governance token; while frxUSD is a brand new, legally compliant payment stablecoin.

We would like to call it “the correct version of the Libra blueprint.” Libra initially attempted to build a global universal digital currency but failed due to political resistance. Now, with the timing being ripe and policy support, we choose to aim for “compliant issuance of the dollar,” implementing the issuance of stablecoins, cross-chain settlement, and value transfer on the high-performance EVM chain of Fraxtal.

Host: Stani, Aave chose not to launch on L1 or L2, but to build the V4 “Unified Liquidity Architecture”. Why did you choose this path?

Stani Kulechov:

Although V4 has not yet been launched, the relevant proposal was approved last year, and development is nearing completion. We believe that the variety of on-chain assets will become extremely diverse in the future, and the risk curve will also be extended. Therefore, V4 introduces the design of “Liquidity Hubs + Spokes.” Different asset classes (such as RWA, high-risk DeFi assets, etc.) can be allocated to different “branch markets,” but liquidity is still centrally managed through the “hub.”

In this way, the user experience becomes simpler, the efficiency of capital utilization is higher, and system risks are effectively isolated. We also introduced a “risk premium mechanism” where high-risk collateral will pay higher interest rates, thereby optimizing the overall borrowing cost structure.

Frax and Aave Collaboration Concept: Allowing “Digital Dollar” to Directly Participate in DeFi Yields

Sam Kazemian:

Then I will “publicly propose” it once. We plan to launch the FraxNet reward program in the Frax fintech app, where users holding frxUSD can earn risk-free returns at U.S. Treasury levels in a non-custodial wallet.

But I want to go further - allowing frxUSD holders to directly deposit assets into Aave to generate returns through the real lending market. This would turn the combination of “digital dollars + on-chain yields” into reality, making Aave the first DeFi yield platform to interface with legitimate dollars.

Stani Kulechov:

This idea is fantastic and showcases the modularity and composability of Aave V4. We look forward to the inclusion of Frax’s assets in the governance proposal process and are willing to provide relevant support to make this “on-chain dollar yield” a reality.