Stablecoins share many similarities with privately issued banknotes, which became widespread in the 18th and 19th centuries. Banks issued their own notes with varying degrees of reliability and regulation. These notes made transactions easier—they were easier to carry, count, and exchange, eliminating the need to weigh or assess the purity of gold. To increase trust in this new form of money, banknotes were backed by reserves and a promise to exchange for a real-world asset, most commonly precious metals. The number of transacting wallets and liquidity improved substantially. Most banknotes were only accepted locally, in the proximity of the issuing bank. For long-distance transactions, they were redeemed for precious metals or cleared between banks. In exchange for these benefits, users accepted the trade-off of single bank default risk and value fluctuations based on the perceived solvency of the issuing bank.

Significant economic growth and financial innovation followed. The expanding economy required a more flexible money supply. Banks observed that not all depositors would demand redemption at the same time and realized they could profit from lending out a portion of their reserves. Fractional reserve banking emerged, where the banknotes in circulation exceeded the reserves held at the bank. Poor management, risky lending practices, fraud, and economic downturns led to bank runs, bankruptcies, crises, and depositor losses. These failures prompted an increase in regulation and oversight of currency issuance. Along with the establishment and expansion of central bank mandates, these regulations created a more centralized system with improved banking practices, stricter rules, greater stability, and public trust in the monetary system.

Our current monetary system operates with a dual currency model. Commercial banks issue commercial bank money, essentially a liability (IOU) of a single, specific bank, which is comprehensively regulated and supervised. Commercial banks operate on a fractional reserve model, meaning they only hold a fraction of deposits as reserves in central bank money and lend out the rest. Central bank money is a liability of the central bank and considered risk-free. Liabilities between banks are settled electronically in central bank money (via RTGS systems like FedWire or Target2). The public only has access to commercial bank money for electronic transactions, and the use of cash (physical central bank money) for transactions is declining. Within a single currency, all commercial bank money is fungible. Banks compete on services, not the quality of money they provide.

With the rise of computers and networks, money transactions were recorded electronically and conducted without the presence of cash. Liquidity, access, and product innovation reached new heights. Solutions were country specific, and cross border transactions remained difficult both economically and technically. Correspondent banking's need to keep idle funds at partner banks and infrastructure complexity forces banks to limit partnerships. As a result Banks are getting out of correspondent relationships (25% decline over the last decade) which means longer payment chains and slower and more expensive payments. Convenient solutions that abstract these complexities (like global credit card networks) are expensive to businesses who pay the fees. And most improvements have focused on the front-end with slow innovation in payment processing infrastructure. 

Fragmentation of financial systems adds friction to trade and slows economic growth. The Economist estimates the macroeconomic impact of fragmented payment systems to the global economy by 2030 at a staggering loss of $2.8 trillion (-2.6% of global GDP) which corresponds to over 130 million jobs (-4.3%). 

Fragmentation and complexity also hurt financial institutions. Annual maintenance costs for outdated payment systems were $37 billion in 2022 and are projected to grow to $57 billion in 2028 (IDC financial insights). Additionally, inefficiency, security risks, and very high cost of compliance compound in direct loss of revenue due the inability to offer real-time payments (75% of banks struggle to implement any new payment services in dated systems, 47% of new accounts are at fintechs and neobanks). 

High payment fees hinder businesses' international growth, impact profitability, and valuation. Companies processing a large volume of payments are strongly motivated to reduce their payment processing fees. Let’s use Walmart as a hypothetical example - reducing their ~$10 billion annual payment processing fees (assuming a 1.5% average fee on $700B revenue) to $2 billion could boost EPS and stock price by over 40%.

Experimentation in the Web3 space has led to the development of promising technologies like distributed ledgers (DLT). These technologies provide a new way to transact for financial systems by offering a global, always-on infrastructure with advantages such as: multi-currency/multi-asset support, atomic settlement, and programmability. A paradigm shift in finance from siloed databases and complex messaging to transparent, immutable shared ledgers has begun. These modern networks simplify interactions and workflows, eliminate the need for independent, expensive and slow reconciliation processes, and remove technical complexity that hinders speed and innovation.

Stablecoins, operating on decentralized ledgers, enable near-instant, low-cost global transactions, unrestricted by traditional banking limitations (hours, geography). This freedom and efficiency have fueled their explosive growth. High interest rates also made them very profitable. Profit, growth, and increasing confidence in the underlying technology are attracting investment from Venture Capital and Payments Processing Businesses. Stripe acquired Bridge and offers online merchants the ability to accept stablecoin payments. Visa also offers partner payouts and settlement using stablecoins. Retailers (e.g., Whole Foods) are accepting and even incentivizing payments with stablecoins to cut down on transaction fees and receive payments instantly (Atlanta FED article). Consumers can get access to stablecoins in seconds (Coinbase's integration of ApplePay).

Stablecoins face a number of challenges.

• Regulation: Unlike traditional money, stablecoins lack comprehensive regulation and oversight. Regulatory efforts are accelerating in the US, and the EU applies e-money rules to e-money tokens via MICAR. Depositor protection does not apply to stablecoins. 
• Compliance: Ensuring compliance with anti-money laundering and sanctions laws is challenging when anonymous accounts transact on public blockchains (63% of $51.3B illicit transactions on public blockchains were in Stablecoins in 2024).
• Fragmentation: The multitude of stablecoins operating across different blockchains necessitates complex bridges and conversions. This fragmentation leads to a reliance on automated bots for arbitrage and liquidity management, and these account for almost 85% of the transaction volumes ($5 trillion in organic volume vs $30 trillion in total transactions). 
• Infrastructure Scalability: To achieve widespread use, the underlying technology must handle massive transaction volumes. In 2024 there were about 6B stablecoin transactions, ACH transactions are roughly one order of magnitude higher, and card transactions two orders of magnitude higher.) 
• Economics / Capital Efficiency: Currently, banks expand the money supply by lending multiples of their reserves, fueling economic growth. Widespread use of Stablecoins would divert reserves away from banks significantly reducing banks’ ability to lend with direct impact on profitability. 

The immediate challenges for Stablecoins–trustworthiness of issuers, ambiguity in regulation, compliance/fraud, and fragmentation–are similar to early day privately issued banknotes.

Mass adoption of fully reserved stablecoins disrupts the current economic system beyond just banking and finance. Commercial banks issue credit, money, and liquidity to support economic growth; central banks monitor and influence this process through monetary policy to manage inflation directly and pursue other policy goals, such as employment, economic growth, and welfare, indirectly. A significant shift of reserves from banks to stablecoin issuers could reduce credit availability and increase its cost. This would dampen economic activity, potentially leading to deflationary pressures and challenging the effectiveness of monetary policy implementation.

Stablecoins offer clear benefits to users, particularly for cross-border transactions. Competition will drive innovation, expand use cases, and stimulate growth. Higher transaction volumes and increased stablecoin wallet adoption could lead to decreased deposits, reduced lending, and lower profitability for traditional banks. With maturing regulation, we could see fractional reserve stablecoin models emerge, blurring the lines between them and commercial bank money and further intensifying competition in payments.

Institutions and individuals now have a choice between traditional payment systems that are familiar and low-risk, but slow and costly or modern systems that are fast, cheap and convenient, and are improving quickly but come with new risks. Increasingly, they opt for the modern.

Payment providers also have a choice. They can dismiss these innovations as a niche market that will not impact the core customer base of traditional finance and focus on incremental improvements to existing products and systems. Alternatively, they can leverage their brand, regulatory experience, customer base, and networks to lead in the new payments era. By adopting new technologies and forming strategic partnerships, they can meet evolving customer expectations and drive growth.

There is a path to the next generation of payments - global, 24/7, multi-currency, and programmable - that does not require us to re-invent money, we just need to re-imagine the infrastructure. Commercial bank money and robust traditional finance regulation solve for stability, regulatory clarity, and capital efficiency of the existing financial system. Google Cloud provides the necessary infrastructure upgrade. 

Google Cloud Universal Ledger (GCUL) is a new platform to create innovative payments services and financial markets products. It simplifies the management of commercial bank money accounts and facilitates transfers via a distributed ledger, empowering financial institutions and intermediaries to meet the demands of their most discerning clients and compete effectively. 

GCUL is designed to be simple, flexible, and safe. Let's break that down:

• Simple: GCUL is provided as a service and accessible through a single API, simplifying integration for multiple currencies and assets. It eliminates the need to build and maintain infrastructure. Transaction fees are stable and transparent and invoiced monthly (unlike volatile upfront crypto gas fees). 
• Flexible: GCUL delivers unmatched performance and is capable of scaling to any use case. It's programmable, enabling payment automation and digital asset management. It integrates with the wallet of your choice. 
• Safe: GCUL is designed with compliance in mind (e.g. KYC-verified accounts, outsourcing compliant transaction fees). Operating as a private and permissioned system (with the potential to become more open as regulations evolve), it leverages Google's secure, reliable, durable, and privacy-focused technology. 

GCUL offers significant benefits to both clients and financial institutions. Clients experience near-instant transactions, especially for cross-border payments, along with low fees, 24/7 availability, and payment automation. Financial institutions, on the other hand, benefit from reduced infrastructure and operational costs through the elimination of reconciliation, fewer errors, simplified compliance, and decreased fraud. This frees up resources for the development of modern offerings. Financial institutions maintain full control of client relationships, leveraging their existing strengths, such as client networks, licenses, and regulatory processes.

Capital markets, similar to payments, have undergone a significant transformation through the adoption of electronic systems. Initially met with resistance, electronic trading ultimately revolutionized the industry. Real-time price information and expanded access fueled increased liquidity, resulting in faster execution, tighter spreads, and lower per-transaction costs. This, in turn, spurred further growth in market participants (especially individual investors), product and strategy innovation, and overall market volume. Despite much lower per-transaction prices, the industry as a whole expanded significantly, with advancements in electronic and algorithmic trading, market making, risk management, data analysis, and more.

However, payment challenges persist. Multi-day settlement cycles, rooted in the constraints of traditional payment systems, necessitate working capital and collateral for risk management. Digital assets and new market structures enabled by distributed ledger technology are hampered by the friction inherent in connecting traditional and new infrastructure. Separate asset and payment systems perpetuate fragmentation and complexity, preventing the industry from fully benefiting from these innovations.

Google Cloud's Universal Ledger (GCUL) addresses these challenges by providing a streamlined, secure platform for managing the entire digital asset lifecycle (e.g., bonds, funds, collateral). GCUL enables seamless and efficient digital asset issuance, management, and settlement. Its atomic settlement capabilities minimize risk and foster greater liquidity, unlocking new opportunities in capital markets. We are exploring how to move value with secure exchange mediums backed by bankruptcy-protected assets, such as central bank deposits or money market funds, offered by regulated institutions. These initiatives facilitate true 24/7 capital movement and drive the next wave of financial innovation.

The future of finance is digital, but it doesn't have to be fragmented or expensive. Google Cloud's Universal Ledger offers an easy-to-integrate, scalable, secure, and efficient solution. Built on a partnership model, it complements existing business models rather than competing with them. This design empowers our partners in financial services and capital markets to deliver value and drive innovation for their clients.

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