Original article: The Rollup

Compiled by: Yuliya, PANews

In an era of rapid development of cryptocurrency and blockchain technology, Frax Finance founder Sam Kazemian and Aave founder Stani Kulechov are undoubtedly two leading figures in the field of stablecoins. In the latest special conversation with The Rollup, they shared the rapid growth of the stablecoin industry, the innovation process of their own projects, and their views on the upcoming regulatory changes, especially how stablecoins have become the focus of the industry after the volatility of the crypto market in 2022.

Today, their eyes are on the GENIUS Act, a landmark legislation that could elevate stablecoins to legal tender and completely change the global landscape of the U.S. dollar. This article will delve into Sam and Stani’s insights into the stablecoin market, their expectations for the bill, and how stablecoins will shape the future financial ecosystem. PANews has compiled this conversation in text.

Stablecoin craze and legislative trend

Moderator: The stablecoin industry is now unstoppable, with multiple versions of legislation being advanced in the House of Representatives and the Senate. Although the market share is currently only 1.1% of the USD M1 supply, it seems that the entire industry believes that "this is just the beginning." As a core player in the industry, what do you think of this timing?

Sam Kazemian:

Frankly speaking, it’s hard to contain my excitement. Every day I read investment reports and ETF briefings, and without exception, they list “AI” and “stablecoins” as the two hottest fields in the world today. No other industry can match them. As the founder of a stablecoin protocol, it feels great to see that this industry is finally understood and accepted by the world.

We have spent years researching and building Frax. What started out as an experimental “hybrid model” has now become a “legal digital dollar” route that policymakers are willing to legislate to support. This leap is huge.

Stani Kulechov:

I completely understand how Sam feels. Stablecoins are very intuitive tools, especially in areas of the world where there is financial turmoil and fiat currencies are depreciating - such as Argentina, African countries, and some parts of the Middle East - the financial stability provided by stablecoins is far more attractive than their local currencies.

But even in Western countries, the value of stablecoins lies not only in "stability" itself, but in the fact that it turns the profitability of DeFi into something that mainstream users can understand and use. This is 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?

Moderator: You mentioned the value of stablecoins expanding to markets that have difficulty accessing good currencies, such as Argentina, African countries, and some parts of the Middle East and Asia. Regarding how stablecoins affect the position of the US dollar in the global monetary system, some people believe that stablecoins will threaten the dominance of the US dollar, while another view is that stablecoins actually expand the global influence of the US dollar. What do you think about this issue?

Sam Kazemian:

I think this completely misunderstands the role of stablecoins. The opposite is true: stablecoins are an “extension” of the 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 stablecoin" - relying purely on market mechanisms to maintain stability like Terra, which eventually ended in a collapse;

• The second stage is the realism stage we are entering now: if you are anchored to USD, then the "most perfect" stablecoin design is actually to obtain the approval of the US government - let it directly recognize that your token is a "US dollar."

This is the revolutionary nature of the GENIUS Act. For the first time, it allows stablecoins to have "US dollar legal status", that is, when the US Treasury Department says "this compliant token is equal to US dollars", it can really be accepted by all banks in the world that accept US dollars - it is no longer just a "digital asset" on the chain, but a "US dollar" in the legal sense.

Stani Kulechov:

The dollar is a simple and effective tool for transaction settlement, and the popularity of the Internet has expanded global dollar trade. It is expected that a similar situation will happen with stablecoins in the future because the coverage of the Internet will be wider. It will take time and widespread adoption to achieve a more decentralized system, which is a long-term process. At present, 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 the sum of stablecoins and crypto-native assets. Traditional assets on the chain bring benefits to RWA (real world assets), mostly denominated in US dollars, which strengthens the concept of US dollar settlement transactions, but is not necessarily the final form of the future financial system. The next 10-15 years will witness the transformation of transaction media to new media with unique security and interoperability, which will enhance liquidity and create more ecosystem interest, establish future stablecoins and new ways of trading value.

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

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

Stani Kulechov:

This is a broad concept. The RWA (Real World Assets) we often talk about actually also covers security tokens. The range can range from listed company stocks, private equity, debt instruments (such as government bonds, corporate bonds), to possible structured financial products in the future.

Currently, many stablecoin reserves are supported by short-term U.S. Treasury bonds, and this asset has already played a role on the chain. But as the on-chain interest rate tools mature, we will see traditional assets with higher returns and more complex risk levels also brought on-chain - 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 because of high barriers to entry and limited distribution channels. DeFi provides a globally accessible liquidity network that can free these assets from the "closed" financial structure and allow them to be priced and traded directly on the chain. This will reshape the entire capital market structure.

The core impact of the GENIUS Act: Who can "print dollars"?

Moderator: Sam, you talked about conversations with Senator Hagerty and other legislators. Can you talk about what new opportunities the GENIUS Act will open up once it becomes law?

Sam Kazemian:

There are many definitions of the US dollar in the financial system. The Federal Reserve distinguishes different types of US dollar assets through classifications such as M1, M2, and M3. Among them, M1 currency refers to the currency 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 currency forms are more risky, such as bank debt denominated in US dollars but not insured by the FDIC (Federal Deposit Insurance Corporation). These assets are more like investments denominated in US dollars rather than currencies in the traditional sense.

Since the 19th century, the right to issue M1-type currencies has been the exclusive privilege of federally chartered banks in the United States. They can create "immediately available" currencies such as demand deposits, money market funds, etc. Now, the GENIUS Act gives this ability to stablecoin issuers, and some entities that are not chartered banks can issue M1 currencies flexibly and innovatively. This is why some banks were very opposed to this bill until it seemed to be passed now, because they prefer to maintain their monopoly on issuing M1 currencies.

The GENIUS Act and payment stablecoins are historic because it allows non-chartered banks to issue M1 money for the first time through strict regulations. These regulations require that stablecoins must be backed by high-security assets such as money market fund securities, Treasury bills, Federal Reserve reverse repo, 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 in by the market, and it may gradually be recognized in the coming months as more news about banks issuing legal stablecoins comes out.

Stani Kulechov:

Although regulatory approval for areas such as stablecoins seems to make sense intuitively, the key lies in the restrictions that these regulations may bring, especially in terms of innovation. I also worked in fintech before entering DeFi. At that time, P2P lending and crowdfunding platforms were initially very active, but the subsequent regulatory framework forced many small entrepreneurial teams to withdraw because they could not afford the high compliance costs.

So, the key is that the GENIUS Act must set clear but inclusive rules. It cannot let innovators withdraw due to excessive caution. Fortunately, there are now a group of very professional legislative representatives in the crypto industry who are working hard to promote this process.

If multiple entities can issue US dollars, will they compete with each other?

Moderator: JP Morgan, Citigroup and other traditional banks are planning to issue their own stablecoins. Will there be competition between stablecoins or even the problem of "dollar inflation" in the future?

Stani Kulechov:

In fact, we do not think this is "competition". In our view, stablecoins are more like "payment channels" or "tracks" - each user chooses the most appropriate track according to the scenario, such as USDC, GHO, frxUSD, etc. In the Aave ecosystem, many users hold stablecoins for more than 6 months, which shows that they are not only a medium of circulation, but also a long-term means of storing value.

In Aave V4, we also designed "GSM" (GHO Stability Module: an important functional module designed to ensure that Aave's native stablecoin GHO maintains 1:1 convertibility with other assets.) to accept these stablecoins as underlying collateral, such as USDC and USDT. In the future, Frax can also be included through the governance process to enhance the flexibility and risk resistance of the entire protocol.

Sam Kazemian:

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

frxUSD was launched only three months ago and is currently applying for Aave ecosystem integration. I believe that more and more compliant stablecoins will join DeFi in the future, making the entire digital dollar system more diverse and robust. Frax's goal is to become the "basic digital dollar" in this system.

The new digital dollar landscape: Frax and Aave

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

Sam Kazemian:

Absolutely correct. Our overall architecture has transformed from an “algorithmic stablecoin protocol” to a “digital dollar issuance + settlement network”. The original Frax Share (FXS) was renamed Frax and became a 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 tried to build a global universal digital currency in the early days, but failed due to political resistance. Now, with the timing ripe and policy support, we have chosen to "issue US dollars in compliance" as our goal, and realize the issuance of stablecoins, cross-chain settlement and value transfer on Fraxtal, a high-performance EVM chain.

Moderator: Stani, Aave did not choose to launch L1 or L2, but built V4's "unified liquidity architecture". Why did you choose this path?

Stani Kulechov:

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

In this way, the user experience is simpler, the capital utilization efficiency is higher, and the systemic risk is effectively isolated. We have also introduced a "risk premium mechanism" whereby high-risk collateral will pay higher interest rates, thereby optimizing the overall borrowing cost structure.

Frax and Aave collaborate to create a vision: Let "digital dollars" directly participate in DeFi earnings

Sam Kazemian:

Then I will "publicly propose" once. We plan to launch the FraxNet Rewards Program in the Frax Fintech App, and users holding frxUSD can obtain risk-free returns at the level of US Treasury bonds in a non-custodial wallet.

But I want to go a step further - let frxUSD holders deposit their assets directly into Aave and earn returns through the real lending market. This will make the combination of "digital dollar + on-chain income" a reality and make Aave the first DeFi income platform to connect to legal dollars.

Stani Kulechov:

This is a great idea and demonstrates the modularity and composability of Aave V4. We look forward to Frax's assets joining the governance proposal process and are willing to provide relevant support to make this "on-chain dollar income" a reality.