Stablecoins and the Blockchain Question

Less than a year ago, I was genuinely optimistic about blockchain. The technology had real properties, real use cases, and I wanted to understand it properly before forming opinions. Then $40 billion evaporated in a week, and the picture changed.

The Collapse

Terra had a stablecoin called UST that was supposed to always be worth one dollar. But instead of backing each token with actual dollars in a reserve, it maintained its peg algorithmically through a companion token called LUNA. When confidence broke in May 2022, both tokens entered a death spiral. LUNA dropped from around $80 to fractions of a penny. UST went to near zero. Roughly $40 billion gone in days.

What struck me wasn't just the scale. It was how predictable the failure mode was, in hindsight. An algorithmic peg is a promise made by code, not by reserves. That's exactly the kind of counterparty risk that banking regulation exists to prevent. When the code couldn't deliver, there was nothing underneath.

Two Kinds of Stablecoins

The collapse sharpened a distinction that matters. Stablecoins are digital tokens designed to hold a fixed value, usually one dollar. But the way they hold that value is everything.

Reserve-backed stablecoins like USDC and USDT hold actual assets, including dollars, treasuries, and commercial paper, to match the tokens in circulation. Every token is theoretically redeemable for a real dollar. The quality and transparency of those reserves varies, but the basic model is familiar. It's not that different from how a money market fund works.

Algorithmic stablecoins like UST tried to maintain the peg through incentive structures and code rather than reserves. The idea was clever. The reality is that it worked until it didn't.

After Terra/Luna, I stopped taking the algorithmic approach seriously, and I doubt I was alone. The conversation worth having now is about reserve-backed stablecoins, and whether their reserves are actually what they claim to be.

The Bank Question

This is where it gets interesting, and where I have to flag the limits of what I know. I'm not a securities or crypto-regulation expert, and I won't pretend to chart where the rules are going. But the direction regulators were already pointing wasn't hard to read. If a token is supposed to function like a dollar, the natural question is whether the entity behind it should carry the same safeguards as an entity that holds actual dollars. That points toward banks, as participants rather than bystanders.

The part I can actually speak to is the business angle. Stablecoin reserves are essentially deposits. If stablecoins become a payment rail, banks either help build it or watch another piece of the payments business move somewhere else. From the payments world, that competitive dynamic is familiar. And someone has to hold those reserves and provide the trust layer underneath, which is exactly what community banks already do for deposit clients every day.

Technology vs. Speculation

When I was digging into blockchain, I was focused on the technology. Distributed ledgers, consensus mechanisms, immutability. That layer still works. The blockchain didn't fail in the Terra/Luna collapse. What failed was a financial product built on top of it.

That distinction matters. The underlying technology has properties that are genuinely useful, particularly around settlement, verification, and cross-border payments. The speculative layer built on top, the trading, the leveraged positions, the algorithmic experiments, is where the damage has been.

Bitcoin is sitting around $19,000 as I write this, down from near $69,000 last November. The market is in a painful correction. But the technology development hasn't stopped, and the regulatory conversation has only gotten more concrete.

My Take

I was right to study the technology. I'd approach it the same way today. But I underestimated how much of what was being built on top of blockchain was speculation dressed up as innovation. Terra/Luna made that obvious.

The interesting question for a community bank isn't the technology. It's the business model. If stablecoin reserves are deposits, and stablecoins become payment rails, then what's emerging is a parallel financial system. Banks should either be part of shaping it or understand exactly why they're choosing not to.