Author: neira, Tokenized Financial Product Architect at Tempo
Compilation: Jiahuan, ChainCatcher
Most people believe that stablecoins are replicating the function of Eurodollars and driving the further expansion of the offshore dollar system.
But that is not the case. Stablecoins primarily substitute only part of the functionality within the existing system, especially the dollar balances needed for daily operations and settlement; in some areas that the Fed pays the most attention to, they might even suppress the multiplier effect of credit expansion.
The truly worthwhile question is: What happens when financial intermediaries use stablecoins as a base to create a new layer of dollar claims on top of them?
This article will explain how this new collateralized financing channel operates, the conditions it needs to meet to achieve scale, and why its performance under stress has a fundamentally different structure from the traditional Eurodollar system.
Abstract
Stablecoins introduce a tokenized private dollar claim. Even if the issuer, the reserve assets, and the primary settlement bank are all within the legal boundaries of the United States, or rely on banking and securities settlement infrastructure connected to the US, such claims may still become economically "offshore" in their circulation and collateral use.
Enforceable control rights over collateral open a secured credit channel but do not thereby create a monetary claim. A true monetary event only occurs when another balance sheet funds, rolls over, or accepts the liability issued against the controlled token at a price close to par.
The haircut prices the distance between "effective control over the token" and "reliable conversion into bank dollars." The source of elasticity is different: it comes from the balance sheet that issues the liability against the token, and from third-party balance sheets' willingness to treat that liability as an asset near par even under stress.
The decisive variables include: who has effective control over the token, through what legal and operational paths it converts into bank dollars, what the actual costs are, how long the terms are, and whether the resulting claims can still obtain financing close to par when these paths are obstructed.
Collateral dollars are not the stablecoin itself. They are the second-layer liability that another balance sheet is willing to issue, fund, and maintain near par against a controlled token balance.
1. The Eurodollar System is a Hierarchy of Claims
Strictly speaking, a Eurodollar is a dollar-denominated bank liability recorded outside the Fed's direct jurisdiction: it is a private promise to deliver dollars, issued by a banking institution whose legal domicile, regulatory treatment, and access to liquidity differ from those of US domestic banks.
The broader offshore dollar system also includes dollar claims issued by dealers and market intermediaries, based on collateral and derivatives. The unit of account is always the dollar, but the balance sheet issuing the claim lies outside the central bank's direct jurisdiction.
This market constitutes a system of private dollar balance sheets. An offshore institution can create a dollar claim simply by simultaneously recording a matched liability and asset. Final settlement may still pass through the US payment system, but "creation" and "settlement" are separated in institutional space.
This separation allows non-US institutions to finance positions, hedge exposures, and settle in dollars without constantly relying on domestic central bank money. But it also creates dependencies: on rollover ability, interbank credit, dealer intermediation, and conversion into higher-grade claims when settlement pressures intensify.
Claims are ranked by: the strength of the par promise, the quality of the backing assets, tenor, market liquidity, and the directness of access to higher-grade money. Normally, market-making and rollover compress this hierarchy. Under stress, this compression reverses: counterparty lines tighten, tenors shorten, haircuts widen, and the hierarchy re-emerges through various operational constraints.
Elasticity comes from balance sheets willing to expand dollar liabilities before final settlement imposes hard constraints.
In the unsecured channel, offshore banks issue deposits, CDs, or interbank liabilities and invest the proceeds in dollar assets. In the secured channel, dealers issue a dollar claim against collateral, with the haircut determining how much financing the collateral can support.
In the derivatives channel, FX swaps and forward contracts create dollar funding not through an immediately visible deposit, but through commitments across time. The forward leg allows banks and non-banks to convert balance sheet capacity at the monetary level into dollar funding capacity. A transferable stablecoin balance is merely a spot claim with no forward funding market behind it, thus entirely incapable of replicating the above functions.
In the Eurodollar context, "offshore" primarily refers to the legal and balance sheet location where the liability is issued. Stablecoins acquire their "offshore" attribute differently—through economic usage: even if the issuer and its reserves remain within US borders or rely on US-connected banking and securities settlement infrastructure, their circulation, custody, staking, and leverage chains may still operate outside US legal boundaries.
Therefore, what is truly worth comparing is the contrast between two chains: the stablecoin collateral chain versus the offshore dollar funding chain. Directly opposing "token" and "Eurodollar deposit" is a mismatched comparison.
A Eurodollar deposit, from its inception, lands on a bank balance sheet capable of expanding credit: it carries elasticity from its very first entry. A stablecoin, born on the balance sheet of an issuer promising reserve backing, thus brings only "substitution" at the moment of birth; elasticity appears later, elsewhere.
Only when another intermediary issues a fundable liability against it, and more balance sheets accept that liability at a price close to par, does the stablecoin become related to elasticity.
2. Stablecoins Disrupt Specific Tiers Within the Offshore Dollar System
Stablecoins change the composition of claims within certain specific tiers of the offshore dollar system. The system itself remains in place.
The most obvious substitution occurs in this scenario: the holder wants a transferable dollar balance, not access to a full dollar balance sheet. Exchanges, brokers, payment companies, and some corporate treasury departments can hold stablecoins as settlement inventory. In this use, tokens take on part of the function previously performed by offshore operating deposits.
The balance sheet change here is direct. The user replaces a claim on an offshore bank with a claim on the stablecoin issuer. The bank loses that liability; the issuer gains a token liability matched by its reserve portfolio.
The composition of these reserves determines where the displaced funding demand ultimately reappears. If reserves remain in the form of bank deposits, the banking system recaptures part of the funds. If reserves shift to Treasury bills or repos, the pressure moves to the sovereign collateral market and dealer intermediation. This substitution merely redirects "dependence on banks," not eliminating it.
This substitution is strongest at the operating balance layer: exchange inventory, broker settlement balances, payment floats, and corporate working capital. It weakens at the wholesale bank funding layer, because this layer involves term deposits, CDs, and interbank placements that create term structure.
In FX swaps, it is almost non-existent: forward commitments and cross-currency balance sheet capacity jointly create dollar funding, with spot tokens playing no role. At the dealer layer, stablecoins can be a qualifying asset, but they remain subject to the constraints that truly matter: capital, settlement capacity, counterparty lines, collateral inventory. It replaces none of these constraints.
A stablecoin accepted as collateral can support a further dollar claim. But until another balance sheet is willing to fund, roll over, or hold that claim at a price close to par, it remains merely secured credit.
3. A Dollar Balance Does Not Create Dollar Balance Sheet Capacity
The offshore dollar system serves two distinct needs.
One is the need for "dollar balances": a claim that can be stored and transferred for payment. Stablecoins fit this need well in scenarios where transfer friction is the primary constraint.
The other is the need for "dollar balance sheet capacity": the ability to obtain funding, margin, hedging, or maturity transformation. This capacity resides in banks, dealers, and funds. It consumes capital, liquidity, and counterparty lines, and is withdrawn when conditions tighten.
There is a third need, overarching the first two: the need for a type of claim that other balance sheets are willing to treat as an asset near par without having to re-examine the underlying collateral each time. Users need a dollar balance. Leveraged funds need funding capacity. And cash pools or second-layer funders need a claim that can be held near par. The collateral channel only becomes truly important when it touches this third need.
Three tests distinguish these layers.
Transferability. The holder can transfer the dollar claim. Stablecoins easily pass this test.
Funding Capacity. Intermediaries are willing to lend, provide margin, or extend credit against this claim. Stablecoins only pass this test under eligibility, control, and haircut constraints.
Monetary Acceptability. Whether the claim created by that intermediary can itself obtain funding or be held near par. Stablecoins only attain systemic significance at this step.
Firm-level substitution follows the same gradient: strongest for settlement inventory, weakest for relationship banking. A token balance can substitute for the portion of operating deposits used to transfer value. But it replaces none of what stands behind most corporate cash positions: overdraft facilities, FX credit lines, correspondent banks, intraday liquidity providers, sanctions compliance interfaces, credit relationships.
Tokens transfer claims. Balance sheets provide elasticity.
4. From Deposit Elasticity to Haircut Elasticity
In the traditional offshore channel, elasticity originates in a bank liability.
(Offshore Bank)
The depositor holds a money-like claim, and the bank obtains usable funds. Elasticity is born on the liability side of an expansible balance sheet.
Stablecoin issuance produces a narrower structure.
(Stablecoin Issuer)
The holder gets a transferable claim, and the issuer holds reserves. As long as the issuer remains "narrow," no second private dollar claim is created: only the form and location of the first claim change.
The secured channel begins when the token is used for financing. The haircut determines how much financing the controlled token can support:
X = V_token × (1 − h)
Where X is the second-layer funding capacity, V_token is the market value of the controlled token, and h is the haircut rate. Here, the accounting must distinguish four balance sheets.
The situation of the collateral intermediary depends on the legal form of control. Pledge and title transfer are not the same balance sheet.
(Collateral Intermediary: Pledge Structure)
Under a pledge structure, the borrower remains the owner of the token. The intermediary does not own the entire token balance; it holds a secured claim for amount X and has control or enforcement rights over collateral worth V. Its balance sheet exposure is X, and legal protection covers V. The excess collateral V − X remains economically owned by the borrower unless default and close-out mechanisms allocate it otherwise.
(Collateral Intermediary: Title Transfer Structure)
Under a title transfer structure, the intermediary holds the token itself. Assuming the token is worth 100 and the loan is 90, the intermediary controls the entire 100 token balance, while the borrower retains the economic surplus through the right to "receive equivalent collateral or residual value upon repayment."
The intermediary's total legal control is V; its net economic exposure is X. The difference V − X is not freely usable equity. It is the borrower's residual protection, embedded in the obligation to "return equivalent collateral or settle the surplus upon close-out."
If the loan is funded using existing cash, the intermediary may not have expanded its liabilities; it merely exchanged cash for a secured exposure or a title transfer exposure. If the loan is funded by issuing platform balances, notes, repo-like claims, or other short-term liabilities, then the intermediary has expanded its balance sheet.
Therefore, the monetary issue does not end with whether title is transferred. It depends on how the loan itself is funded and whether the resulting liability is accepted near par.
This distinction matters because their stress mechanisms differ. In a pledge, the lender's enforcement relies on perfected rights, priority, and realization rights over collateral still associated with the borrower. In title transfer, the intermediary may have stronger control, rehypothecation ability, or realization rights, but also bears a clearer obligation to return equivalent collateral or value once the secured exposure is settled.
(Second-Layer Funder)
Monetary elasticity is strongest in the second scenario: the funder finances the claim by issuing its own near-par liabilities. In the first scenario, the system merely reallocates existing cash to a token-backed claim; the stock of private dollar liabilities may not expand.
Issuance itself creates nothing but the token. Secured credit advances value against the token. Only when the lender's claim becomes an asset that another balance sheet funds at near par does the monetary line get crossed. The step from secured lending to monetary creation happens here, never earlier.
The haircut prices the distance between "effective control over the token" and "reliable conversion into bank dollars," transforming collateral value into funding capacity. And the elasticity itself comes from the liability issued against the token and another balance sheet's willingness to fund that liability at near par.
5. Institutional Conditions for the Collateral Channel
Four conditions determine whether a second-layer claim can obtain funding near par.
Legal Control. Possession of an enforceable, prioritized position against the borrower, the borrower's creditors, custodians, platforms, and any intervening bankruptcy estates. Facing the issuer, the questions are different: redemption eligibility, transferability, freeze rights, account status, blacklist risk, and the legal status of the token holder's claim. The lender must be clear whether the arrangement is a pledge, title transfer, custodial control, smart contract lockup, or a hybrid platform claim. Each form yields different rights upon default.
Operational Control. The realization path and the redemption path must be distinguished. Realization depends on secondary market depth, market-maker balance sheets, and access to trading venues. Redemption depends on issuer rules, whitelists, settlement banks, banking hours, and redemption timing. A haircut treating these two exit paths as equivalent is not rigorous.
Rigor of Haircuts. The haircut must cover: issuer risk, reserve composition, settlement bank access, redemption eligibility, custody structure, legal enforceability, venue depth, on-chain finality, operational suspension rights, wrong-way risk with the borrower, market-maker concentration, and the time required to convert the token into bank dollars.
Persistence of Funding. Third parties are willing to fund the lender's claim without having to re-examine the token, borrower, and full realization path from scratch each time. The original lender's comfort with the collateral is never the benchmark. As long as every funder must individually analyze this collateral loan on a case-by-case basis, the result is bilateral secured credit, not a near-par claim.
Near-par funding is tied to tenor. A claim that can be borrowed overnight is not the same as one that can withstand multi-day redemption delays, periodic funding withdrawals, or investor runs. Monetaryity is not just a price issue, but also a timing issue.
The true test is: after the borrower, issuer, custodian, trading venue, and settlement bank each become independent risk sources, does the liability issued against the token remain a near-par asset. Whether the token can be pledged is the easiest part.
6. Stress Transmission in the Collateral Channel
Stress in the offshore dollar system manifests as movement up the hierarchy. Weaker counterparties lose funding. Repo lenders widen haircuts. Dealers begin rationing balance sheet capacity. Claims previously treated as near-cash now require explicit liquidity support.
In a collateral channel built on stablecoins, the upper-layer claim fails first. The underlying token is the issuer's promise to "redeem for bank dollars." The second-layer claim is the intermediary's promise to "provide near-par liquidity backed by that token." The former can still be solvent, while the latter has already lost its money-like status.
Normally, tokens trade at par, haircuts are low, intermediaries grant credit as usual, and second-layer claims are treated as cash-like. No one simultaneously tests the full realization path and redemption path. The vulnerability lies in the layer above the issuer.
The first break is often an adjustment to collateral terms, well before any run on the token occurs. A lender raises the haircut, and the borrower receives a margin call. A borrower unable to provide cash or additional collateral forces the intermediary to realize, redeem, or internally fund the position. The second-layer claim immediately becomes extremely balance-sheet intensive.
The arithmetic here is merciless. A token balance financed at a 2% haircut can support 98 of credit:
100 × (1 − 0.02) = 98
At a 15% haircut and a secondary market price of 99 cents, the loanable value drops to 84.15:
99 × (1 − 0.15) = 84.15
The missing 13.85 must come from somewhere:
98 − 84.15 = 13.85
Either a margin call, a forced sale, an internal funding draw, or a broken second-layer claim.
This static formula measures the first loss of funding capacity. The real stress mechanism is dynamic. V_token and h are not independent variables. A higher haircut lowers the loanable value and triggers margin calls that may force token sales. Forced selling depresses the token's secondary market price. Lower prices, in turn, "justify" further increases in haircuts, creating new funding gaps.
X_t = V_t (1 − h_t)
For small changes:
ΔA ≈ (1 − h_t) ΔV − V_t Δh
Under stress, these two move in the same direction. Δh rises because lenders demand more protection; ΔV falls because the margin call process itself creates selling pressure. Thus, the haircut is not just a measure of risk; it can become a transmission mechanism for risk.
The realization path transforms a funding problem into a market depth problem. The redemption path transforms it into a banking channel problem. Internal funding leaves it as an intermediary capital problem, which is precisely where it becomes expensive. Transferring the claim to another funder only works if the claim still trades near par.
The exit of a dealer or platform withdraws an institution that had previously been "warehousing" the time gap between realization and redemption, transforming collateral into near-par funding. This is different from declining liquidity. Once this warehousing stops, the hierarchy immediately re-emerges.
Unlike the mature offshore dollar system, the stablecoin collateral chain has no established "dealer of last resort" mechanism or central bank swap line architecture for liabilities issued against tokens. The underlying token may have reserves. But the second-layer claim has only its own funding market.
Reserve quality supports the solvency of the underlying claim, but it guarantees nothing about "par liquidity" once the redemption channel, settlement bank, or secondary market depth fails. The issuer having sufficient reserves and the credit system built upon it collapsing can perfectly coexist.
7. Conclusion
The Eurodollar analogy holds only to a certain extent. A stablecoin is a tokenized private dollar claim. Even if the issuer and reserves remain within US legal borders or rely on US-connected banking and securities settlement infrastructure, its usage may still become economically offshore.
Reserve quality supports the solvency of the underlying claim. The leverage, margin, platform credit, and secured liabilities built upon it answer to another set of tests.
Collateral eligibility does not yet amount to monetary acceptability: a loan backed by a token remains just a loan until the lender's claim becomes a near-par asset in the eyes of others.
The deposit channel of the Eurodollar system begins with a bank liability and expands through deposit creation, interbank funding, and forward dollar markets. The collateral channel of stablecoins begins with a controlled tokenized asset and expands only when an intermediary issues a liability against that token and another balance sheet treats that liability as near-money.
The issuer governs the underlying promise, the collateral intermediary makes the second promise, and the funder decides whether this second promise possesses money-like attributes. The haircut prices the distance between "token control" and "bank dollar conversion." And under stress, it is precisely this distance that widens first.
Collateral dollars truly exist only when the claim built on stablecoins survives the leap from "token liquidity" to "bank dollar liquidity."
