Person B borrows $100, all the coins move on the ledger.
The ledger could facilitate the transfer while the bank maintains an "IOU" for person A's $100. The bank would be betting that not everyone will come withdrawing at once, just like a regular bank.
Regulation is the only thing that can prevent this from being done with any sort of crypto. The same IOU-based business model as happened with cash, gold, etc, could very easily be implemented using the technology. If you don't like fractional reserve banking crypto isn't a magic bullet that makes it impossible, especially since the general public probably wouldn't be sophisticated enough to know how to stick to "true" crypto vs "IOU-based fractional crypto facades."
But generally regulatory regimes have decided that the productivity advancements offered by the investment-through-loans of major portions of deposits are worth the risks. I don't think the GENIUS act allows this, though, so there's one regard where stablecoins are more-regulated. I worry about the edge cases, though - seems like requiring stablecoins to be paid off preferentially incentives using them for deposits, which could harm circulation if the reserves or followed, or which could screw over non-stablecoin deposit-holders if an institution doesn't comply and then goes under.
(This is closer to how regular banking works than the naive "banks create money by incrementing a number in your account." After all, banks are generally either (a) expecting those loans to be spent or directly giving the money to third parties like car dealerships or home sellers - which is likely to physically move the money to other banks, institutions, or cash, not just recordings in their internal tables.)
As far as I understand, the backing assets aren't on-chain. I give tether $100, they create and issue me 100 USDT on-chain. But they can take my $100 and lend it out. Now whoever Tether loaned the $100 to has $100 and I have 100 USDT so $100 has been added to the money supply, just like with a normal bank.
Algorithmic stablecoins[1] don't have a one-for-one backing in real world assets so can in theory create new coins "from thin air". The amount they can do this depends on the exact algorithm and the backing assets, and the practicalities of unstable crypto pricing make this difficult in practice.
For example the well-known DAI stablecoin[2] is backed by a mix of crypto assets, but is overcollateralized to avoid problems when one of the backing assets drops in value. The is sort of the opposite of "creating money out of thin air"...
Non-algorithmic stablecoins can do it by being backed by "high quality loan assets", in which case the conventional, non-crypto credit creation mechanism applies.
I gave you the most dramatic example. So far no undercollateralized, algorithmically backed $1 stablecoin has sustained a reliable peg at scale over multiple years.
Zero. Nada. There was always somebody somewhere exploiting it.
TerraUSD
USN
USDN
Basic Cash
All failures so far, every time a death spiral.
FRAX started as algorithmic and had to move to over collateralization
Same with DAI
You really can’t call them like that once they become backed by USDC
There are defi loans for example. You take an asset like BTC and loan stablecoins against it.
The underlying asset can be rehypothecated, Celsius did this before going bust iirc.
Tether is also the underlying backer of crypto market cap, and has never done an audit of their assets. They've made loans to various crypto market participants.
In theory there are auto liquidation rules etc. In practice humans have not yet managed to create a financial system they can't make asset bubbles with
That’s not the same though. Banks literally make money out of thin air when they extend a loan (oversimplified of course). They can choose the time and place to do so without having to wait for “checkpoints”. They can even run themselves into the ground by creating too much money (if there is no reserve requirement).
Banks make bank-account-dollars (a form of IOU) but they can't make cash-dollars. When you withdraw, the bank has to give you cash-dollars from its pool and can't just print some. Only reason they're considered equivalent is... uh... because I said so? And they're legally allowed to denominate their bankdollars in dollars.
Anyone can print IOUs, but not everyone can legally call them dollars. That's the only advantage banks have over the rest of us.
Same on the blockchain but without the privilege of conflation. You can have a smart contract that has $100 of ether but trades in 200 shares valued at $10 each. But the blockchain systems prevent you from pretending that bank-ethers and cash-ethers are the same thing. You can label them the same but they're not the same and the system knows that. Even Wrapped ETH, a contract that literally just prints and destroys WETH 1-to-1 with the ETH it holds, i.e. a full-reserve zero-fee bank, isn't interchangeable with actual ETH.
