Author: Lorenzo Valente, ARK Invest Director of Digital Asset Research
Compiled by: Chopper, Foresight News
In 2025, the supply, trading volume, and number of active users of stablecoins all reached historic highs, thanks to the enactment of the GENIUS Act, which legalized the status of stablecoins as privately issued digital currencies.
The views in this article originate from an interview on ARK Invest's Bitcoin Brainstorm podcast, featuring guests including Tether CEO Paolo Ardoino, renowned economist Dr. Arthur Laffer, and ARK Invest CEO & CIO Cathie Wood. During the interview, we explored the similarities between stablecoins and privately issued currency before 1913 (the year the U.S. government designated the Federal Reserve as the sole issuer of U.S. dollars). Arthur Laffer compared the current explosive growth of blockchain-based privately issued dollars to the monetary system before the Fed ended the era of 'free banking'.
While the underlying technological infrastructure of stablecoins is new, privately issued money is not a novel concept. In fact, private money was a crucial foundation upon which the U.S. economy was built.
Against this backdrop, this article will address three core questions: How were stablecoins born? What is the underlying technology of stablecoins? What is the future trajectory for stablecoins?
How were stablecoins born?
In 2014, Giancarlo Devasini launched USDT and the Tether platform, at a time when the digital asset industry was still in its infancy. The crypto ecosystem was then a 'wild west,' characterized by a lack of regulation, security risks, and fragile infrastructure. The global trading market was dominated by a handful of exchanges like Kraken, Bitfinex, Coinbase, Poloniex, and Bitstamp. The bankruptcy of Mt. Gox, then the world's largest Bitcoin exchange, in February 2014, further highlighted the industry's fragility.
At that time, other exchanges were located in different jurisdictions and only traded the then-mainstream token—Bitcoin. Although Bitcoin trading had gone global, arbitrageurs trying to profit from price differences between exchanges could not transfer U.S. dollars quickly and cheaply between banks, brokers, and countries to seize these opportunities. For example, when Bitcoin was quoted at $115 on Kraken and $112 on Bitfinex, an arbitrageur should have sold Bitcoin on Kraken, transferred dollars to Bitfinex, and bought back Bitcoin at $112. However, in practice, this fund transfer often took 1 to 2 days.
It was the efforts of Giancarlo and Paolo that made USDT the solution to this problem, enabling internet-speed transfers of dollar equivalents. Initially launched as 'Realcoin' in July 2014, USDT was developed on the Omni Layer protocol atop the Bitcoin network, before smart contract chains like Ethereum were born. In November 2014, the project was officially renamed Tether and launched three tokens pegged to fiat currencies: USDT (pegged to the USD), EURT (pegged to the Euro), and JPYT (pegged to the Japanese Yen).
In 2015, Bitfinex, one of the world's leading exchanges, began supporting USDT and built the first deep liquidity pool. From 2017 to 2019, Tether expanded USDT's issuance network from Omni to Ethereum, and later to chains like Tron, Solana, and Avalanche, while continuously improving transaction speed, reducing fees, and enhancing cross-chain interoperability. In 2019, USDT became the world's most traded crypto asset, with daily trading volume even surpassing Bitcoin. In late 2019, when competitors claimed their stablecoins were backed 100% by cash or cash equivalents, Tether first disclosed that its reserves included commercial paper rated A1 and A2, and announced plans to gradually shift reserves towards U.S. Treasury bills and cash.
The COVID-19 pandemic propelled USDT into a period of rapid growth. Between 2020 and March 2022, a two-year period of immense pressure on the global financial system, USDT's supply surged 25-fold from $3.3 billion to $80 billion, driven primarily by emerging markets. USDT's core use case evolved from a tool for speculation and arbitrage in crypto markets to a 'lifeline' against local currency depreciation.
From 2020 to 2023, as local currencies in emerging markets like Venezuela, Lebanon, and Argentina depreciated sharply against the dollar, people turned to USDT to preserve their assets. For many, USDT served as a savings account, payment tool, and store of value. As countries restricted offline transactions, reducing access to black-market dollars, younger generations began teaching their parents and grandparents how to use this 'digital dollar.' People could hold dollar assets from home via USDT in a faster, safer, and more scalable way, without relying on fragile banking systems and volatile local currencies.
Depreciation of some national currencies relative to the U.S. dollar. Data source: rwa.xyz, as of December 31, 2025
What is the current state of stablecoin development?
Currently, the supply of USDT issued by Tether has reached $187 billion, capturing a 60% market share, making it the largest stablecoin in the digital asset industry. Its only significant competitor is USDC, issued by Circle, with a supply of $75 billion. USDT has over 450 million global users, adding approximately 30 million new users per quarter; Tether is headquartered in El Salvador and regulated there, with reserve assets custodied by Cantor Fitzgerald.
The U.S. government has taken strategic notice of Tether. The vast majority of Tether's balance sheet consists of U.S. Treasury bills, a holding size comparable to some developed nations, making it one of the largest and fastest-growing demand sources for U.S. Treasury debt.
Tether's reserve assets. Data source: Tether, as of December 31, 2025
As of January 2026, Tether's reserve assets, excluding corporate bonds, gold, Bitcoin, and secured loans, include over $5 billion in excess collateral, far exceeding the total liabilities of USDT in circulation. With stablecoin supply continuing to grow, Tether's dominant position in emerging markets solidifying, and the enactment of the GENIUS Act, some observers note strong parallels between the current banking landscape and the Free Banking Era of the late 19th century; critics also cite this period when discussing the dangers of privately issued money.
In the interview, Dr. Arthur Laffer argued that stablecoins would introduce a new, more efficient form of free banking to the United States, and that the negative perception is unfounded. Critics claim that private entities like Tether and Circle issuing stablecoins could recreate the 'wildcat banking' chaos of the 19th century. Dr. Laffer explained that 19th-century private banknotes often traded at a discount because users had to assess the creditworthiness of the issuing institution themselves, and the U.S. government did not guarantee these notes. They were essentially liabilities of the individual banks, redeemable for hard currency like gold or silver only if the issuing bank was solvent. Both Laffer and Brian Domitrovic, a historian at the Laffer Center, pointed out that before the U.S. federal government established the Fed in 1913, various forms of money competed domestically.
Dr. Laffer further elaborated that in 1834, the U.S. government set the price of gold at $20.67 per ounce, establishing a gold standard, but did not guarantee redemption for every banknote in circulation. The redeemability of a banknote depended entirely on the issuing bank's balance sheet and market credibility. This mechanism violated the principle of 'unconditional payment.' Despite this, prices remained remarkably stable over the long term: from 1776 to the establishment of the Fed in 1913—a span of 137 years—cumulative inflation in the U.S. was 0%, with prices fluctuating slightly around a fixed par value without a long-term trend.
Some free banking systems outside the U.S. performed even better, notably Scotland (1716-1845) and Canada (1817-1914). These systems achieved low inflation and extremely low bank failure rates, with their banknotes circulating largely at par. Part of this success was due to competitive redemption mechanisms and note exchange systems, both of which imposed market constraints on banks. In contrast, restrictive state regulations in the U.S. (1837-1861) hindered development, such as laws prohibiting branch banking and requiring banks to hold risky state government bonds as collateral. After a period of turbulence in the early 1840s, the average discount on 'broken bank' notes (currency from failed banks) in the U.S. fell below 2%. Interestingly, this figure is precisely the Fed's current inflation target. During this period, the U.S. economy experienced strong growth, laying the financial foundation for the full爆发 (burst/outbreak) of the Industrial Revolution after the Civil War ended in 1865.
Stablecoins share many similarities with the currency of that era. Both are privately issued liabilities backed by reserve assets. However, modern technology and regulatory oversight have addressed many of the drawbacks of the 'wildcat banking' era. Stablecoins are not constrained by branch banking rules because they are inherently global and digital. Today, functions similar to clearing houses exist in the form of highly liquid secondary markets, exchanges, and arbitrage mechanisms that ensure stablecoins maintain a stable link to their peg. Compared to the illiquid state bonds held by U.S. free banks in the late 19th century, the collateral quality for regulated issuers (like cash and short-term Treasuries under the GENIUS framework) and some unregulated issuers (like Tether) is much higher. Fraud risk at large issuers is also significantly reduced due to regular audits, on-chain transparency, and federal regulation.
Just as free banking systems arose when central banking was weak or non-existent, stablecoins emerged to fill the void left by inefficient, heavily regulated, and costly banking and payment systems. In the 18th and 19th centuries, railroads, telegraphs, and advanced printing technology propelled free banking; today, blockchain and global internet infrastructure are the core drivers of stablecoin development.
The U.S. Free Banking Era ended with the Civil War and the National Banking Acts, which brought currency issuance under federal control. The U.S. suspended the gold standard early in the Civil War. From 1861-1865, states required banks to hold state bonds as reserve assets, creating demand for state debt; simultaneously, the U.S. government taxed all banknote issuance not backed by high-quality federal bonds, eventually forcing free bank notes out of the market. The U.S. returned to the gold standard in 1879, and the 1870s and 1880s became one of the fastest-growing periods in U.S. history.
Against the backdrop of an economy growing much faster than the government, the requirement for issuers to hold significant federal bonds as reserves made little sense. As the supply of federal bonds couldn't meet reserve requirements, banks were forced to frequently contract their note issuance, leading to deflation and bank panics; ultimately, the U.S. Congress passed the Federal Reserve Act in 1913, nationalizing the reserve system and creating the Federal Reserve.
Before 1913, during bank panics, private clearinghouse systems and interbank temporary certificate agreements could supply significant liquidity, but federal regulation tying currency issuance to federal bond reserves limited the money supply. After the Fed's establishment in 1913, the U.S. experienced persistent inflation: the Consumer Price Index soared over 30 times. This stands in stark contrast to the century before the Fed's creation, where the gold standard, bimetallism, and competitive currency issuance coexisted, and the cumulative inflation rate remained 0% even as the Industrial Revolution fully unfolded.
What is the future direction for stablecoins?
Stablecoin issuers like Tether and Circle cannot actively issue or redeem tokens to maintain the peg. Only whitelisted institutions that meet Anti-Money Laundering (AML) and Know Your Customer (KYC) requirements can issue new USDT by depositing cash, or redeem tokens and return them to Tether. The peg is maintained by the market through arbitrage mechanisms, while Tether and Circle promise that every USDT and USDC in circulation can be redeemed for $1.
Dr. Laffer believes this model holds significant value in emerging markets and high-inflation economies, but to achieve widespread adoption in developed countries, a more advanced stablecoin model is needed: one that maintains its peg to the dollar but also appreciates with inflation, thus preserving purchasing power for goods and services.
Based on the recently enacted GENIUS Act, Tether co-founder Paolo Ardoino believes any stablecoin that distributes yield directly to users should be classified as a security and regulated by the U.S. Securities and Exchange Commission (SEC). Currently, interest-bearing 'tokenized money market funds' are only available to accredited investors. Dr. Laffer, however, suggests that future stablecoins might be pegged to a basket of goods and services indices and backed by reserves of long-term assets like Bitcoin and gold.
Indeed, Tether has already launched a gold-backed stablecoin, Alloy by Tether (AUSDT), and a tokenized gold product, XAUT. As Ardoino stated, this structure allows users to trade using these value-stable instruments while maintaining long exposure to Bitcoin and gold; as the collateral assets appreciate, users' borrowing capacity increases.
Notably, this model is not new in crypto. One of the earliest and most resilient experiments in decentralized finance (DeFi)—the Sky protocol (formerly MakerDao)—pioneered the crypto-collateralized stablecoin. Sky acts as a decentralized bank, issuing the dollar stablecoin USDS. Users can deposit assets like Ethereum into smart contracts to borrow USDS. To ensure solvency, all loans are over-collateralized, and automatic liquidation is triggered if the collateral value falls below a safe threshold. Currently, USDS is introducing a diversified collateral asset portfolio to minimize risk while maximizing efficiency and yield.
Composition of collateral backing USDS
To further stabilize the peg, Sky introduced the Peg Stability Module (PSM), which allows direct conversion between USDC and USDS. Arbitrageurs can use this module to keep the price of USDS near $1, while also providing liquidity and redeemability for the stablecoin, compensating for the price volatility of crypto collateral. Beyond trading, Sky also offers a savings mechanism through the interest-bearing token sUSDS, whose yield comes from interest paid by borrowers, tokenized money market funds, U.S. Treasury bills, and DeFi investment returns. In other words, USDS serves as both a medium of exchange and a global savings tool.
Following the GENIUS Act, many observers are watching how Tether will enter the U.S. market. In Ardoino's view, one of the fastest-growing use cases for stablecoins is the settlement of commodity trades. More and more commodity traders are realizing that stablecoins are the most efficient settlement instrument. In 2025, Tether began providing settlement services for oil trades, driving a significant surge in global commodity market demand for USDT.
Ardoino noted that if stablecoins are not integrated into the local economy, they often serve only as a temporary settlement layer, eventually being converted back to local currency; whereas in emerging markets with unstable local currencies, USDT functions not only as a payment tool but also as savings and a store of value, leading to its continuous circulation and widespread use.
Tether is well aware that the U.S., Latin America, and Africa are distinct markets. In developed countries, people can use electronic dollars through platforms like Venmo, Cash App, and Zelle. In the coming months, Tether will launch a new stablecoin, USAT, specifically designed for developed markets, in the United States. The entry of the world's largest stablecoin issuer into the world's largest financial market is a process worth watching closely.
