Original source: Google
Original Title: “Beyond Stablecoins: The Evolution of Digital Currencies”
Editor’s note: Internet giant Google has officially announced its own native blockchain network, GCUL (Google Cloud Universal Ledger). From the introduction, we can roughly understand Google’s intention: due to the explosion of stablecoins and the potential trillion-dollar prospect, Google does not want to miss the wave of this next generation of Fintech, thus creating GCUL, a network more like a stablecoin consortium chain. Rich Widmann, head of Google Web3, stated that this is the result of years of research and development at Google, capable of providing financial institutions with a high-performance, trusted, neutral network that supports Python-based smart contracts. Google itself has also written an article to explain its thoughts on GCUL, as follows:
Stablecoins experienced significant growth in 2024, with trading volume three times that of the original trading volume, reaching an organic trading volume of $5 trillion and a total trading volume of $30 trillion (data source: Visa, Artemis). In comparison, PayPal’s annual transaction volume is about $1.6 trillion, while Visa’s annual transaction volume is about $13 trillion. The supply of stablecoins pegged to the US dollar has grown to over 1% of the total supply of dollars (M2) (data source: rwa.xyz). This surge clearly indicates that stablecoins have secured a place in the market.
The demand for better services is driving a significant transformation in the payment market, valued at nearly $3 trillion. Stablecoins eliminate the complexities, inefficiencies, and cost burdens of traditional payment systems, enabling seamless fund transfers between digital wallets. New solutions have also emerged in the capital markets to facilitate payments in digital asset trading, enhancing transparency and efficiency while reducing costs and settlement times.
This article discusses the evolving financial landscape and presents a solution that helps traditional finance and capital markets not only catch up but also lead the trend.
Private Currency: Similarities Between Paper Money and Stablecoins
Stablecoins share many similarities with privately issued banknotes that were widely used in the 18th and 19th centuries. Banks issued their own banknotes, with varying degrees of reliability and regulation. These banknotes made transactions easier, as they were more portable, easier to count, and redeemable without the need to weigh or assess the purity of gold. To increase trust in this new form of currency, banknotes were backed by reserve funds and promised to be redeemable for assets in the real world (most commonly precious metals). The number and liquidity of transaction wallets have significantly increased. Most banknotes were only recognized in the local area around the issuing bank. For remote settlements, they were exchanged for precious metals or cleared between banks. In exchange for these benefits, users accepted the default risk of a single bank and the value fluctuations based on the perceived solvency of the issuing bank.
partial reserve fund banking operations and regulation
Subsequently, the economy achieved significant growth, and financial innovation followed suit. Economic expansion requires a more flexible money supply. Banks observed that not all depositors would demand redemptions simultaneously, and thus realized they could profit by lending out a portion of their reserve funds. The fractional reserve banking system emerged, in which the amount of currency in circulation exceeds the reserves held by banks. Mismanagement, high-risk lending practices, fraud, and economic downturns led to bank runs, bankruptcies, crises, and losses for depositors. These failures prompted a strengthening of regulation and oversight over currency issuance. With the establishment and expansion of central bank charters, these regulations created a more centralized system, improved banking practices, established stricter rules, enhanced stability, and earned public trust in the monetary system.
Today’s Monetary System: The Currency of Commercial Banks and Central Banks
Our current monetary system adopts a dual currency model. The commercial bank money issued by commercial banks is essentially a liability (promissory note) of a specific bank, regulated and supervised comprehensively. Commercial banks operate on a fractional reserve basis, meaning they keep only a portion of deposits as reserves in central bank money and lend out the remainder. Central bank money is a liability of the central bank and is considered risk-free. Liabilities between banks are settled electronically in central bank money (through RTGS systems such as FedWire or Target2). The public can only conduct electronic transactions using commercial bank money, while transactions using cash (central bank physical currency) are decreasing. In a single currency, the money from all commercial banks is interchangeable. The focus of competition among banks is on services rather than the quality of the money they provide.
Today’s financial infrastructure: fragmented, complex, expensive, and slow
With the rise of computers and networks, currency transactions are recorded electronically, allowing for transactions without cash. Liquidity, accessibility, and product innovation have reached new heights. Solutions vary by country/region, and cross-border transactions still face economic and technical difficulties. Correspondent banking requires idle funds to be kept in partner banks, while the complexity of infrastructure forces banks to limit partnerships. As a result, banks are withdrawing from correspondent relationships (a 25% reduction over the past decade), which means longer payment chains, slower payment speeds, and higher payment costs. Convenient solutions that eliminate these complexities (such as global credit card networks) can be costly for businesses in terms of payment fees. Moreover, most improvements are focused on the front end, and innovation in payment processing infrastructure is progressing slowly.
The fragmented financial system has increased trade friction and slowed economic growth. The Economist estimates that by 2030, the macroeconomic impact of fragmented payment systems on the global economy will reach an astonishing loss of $2.8 trillion (2.6% of global GDP), equivalent to over 130 million jobs (4.3%).
Fragmentation and complexity have also harmed financial institutions. In 2022, the annual maintenance cost of outdated payment systems was $37 billion, and it is expected to rise to $57 billion by 2028 (IDC Financial Data Insights). Additionally, the inability to provide real-time payments has exacerbated direct revenue losses due to inefficiencies, security risks, and extremely high compliance costs (75% of banks are struggling to implement new payment services in outdated systems, with 47% of new accounts at fintech companies and neobanks).
High payment processing fees can hinder the international business growth of companies, affecting profitability and valuation. Companies that handle large volumes of payments are highly motivated to reduce their payment processing costs. For example, if we take Walmart, reducing its annual payment processing fees of about $10 billion (assuming an average payment processing fee rate of 1.5% on $700 billion in revenue) to $2 billion could increase earnings per share and stock price by over 40%.
New infrastructure, new possibilities
The experiments in the Web3 space have given rise to promising technologies such as distributed ledger (DLT). These technologies provide a new way for financial system transactions by offering a globally available always-on infrastructure, with advantages including: support for multiple currencies/multiple assets, atomic settlement, and programmability. The financial industry’s model has begun to shift from isolated databases and complex messaging to transparent, immutable shared ledgers. These modern networks simplify interactions and workflows, eliminating independent, costly, and slow reconciliation processes, while removing technological complexities that hinder speed and innovation.
Disruptor: Stablecoin
Stablecoins operate on decentralized ledgers, enabling near-instant, low-cost global transactions without the constraints of traditional banking (time, geographic location). This freedom and efficiency have propelled their explosive growth. High interest rates also make them very profitable. Profits, growth, and increasing confidence in the underlying technology are attracting investments from venture capital and payment processing companies. Stripe acquired Bridge, allowing online merchants to accept stablecoin payments. Additionally, Visa offers functionality for partner payments and settlements using stablecoins. Retailers (such as Whole Foods) are accepting and even encouraging stablecoin payments to reduce transaction fees and receive payments instantly (Atlanta Federal Reserve article). Consumers can acquire stablecoins in seconds (Coinbase integrated with ApplePay).
Stablecoins face many challenges.
· Regulation: Unlike traditional currencies, stablecoins lack comprehensive regulation and oversight. The United States is strengthening regulatory measures, while the European Union applies electronic money rules to electronic money tokens through MICAR. Deposit protection measures do not apply to stablecoins.
· Compliance: Ensuring adherence to anti-money laundering and sanctions laws is a challenging task when anonymous accounts conduct transactions on public blockchains (In 2024, 63% of the $51.3 billion in illegal transactions on public blockchains involved stablecoins).
· Fragmentation: There are numerous types of stablecoins operating on different blockchains, requiring complex bridging and conversion. This fragmentation results in a reliance on automated bots for arbitrage and liquidity management, with the trading of these bot accounts accounting for nearly 85% of the total trading volume (with an organic trading volume of $5 trillion and a total trading volume of $30 trillion).
· Infrastructure Scalability: In order to achieve widespread use, the underlying technology must be capable of handling a large volume of transactions. In 2024, there are approximately 6 billion stablecoin transactions, ACH transactions are about an order of magnitude higher, and card transactions are two orders of magnitude higher.
· Economics/Capital Efficiency: Currently, banks expand the money supply by lending out multiple times the amount of their reserves, thereby driving economic growth. The widespread use of stablecoins will shift banks’ reserve funds, significantly reducing their lending capacity and directly impacting profitability.
The direct challenges faced by stablecoins (issuer credibility, regulatory ambiguity, compliance/fraud, and fragmentation) are similar to those of early privately issued banknotes.
The large-scale adoption of stablecoins backed by full reserves would not only disrupt the banking and financial sectors but also the current economic system. Commercial banks issue credit, currency, and liquidity to support economic growth; central banks monitor and influence this process through monetary policy to directly manage inflation and indirectly pursue other policy objectives, such as employment, economic growth, and welfare. A significant transfer of reserve funds from banks to stablecoin issuers could reduce the supply of credit and increase the cost of credit. This would suppress economic activity, potentially lead to deflationary pressures, and pose challenges to the effectiveness of monetary policy implementation.
Stablecoins bring significant benefits to users, especially in cross-border transactions. Competition will drive innovation, expand application scenarios, and stimulate growth. Increased trading volume and higher adoption rates of stablecoin wallets may lead to a decrease in deposits, reduced lending, and lower profitability for traditional banks. As regulation matures, we may see stablecoin models that reserve part of their funds, blurring the lines between them and commercial bank money, and further intensifying competition in the payments sector.
The Innovator’s Dilemma
Currently, institutions and individuals can choose traditional payment systems, which, although familiar and lower in risk, are slow and costly; they can also choose modern systems, which, while fast, cheap, convenient, and rapidly improving, also come with new risks. They are increasingly opting for modern systems.
Payment service providers also have the right to choose. They can view these innovations as niche markets that do 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 network to dominate the new payment era. By adopting new technologies and establishing strategic partnerships, they can meet evolving customer expectations and drive business growth.
Achieving better payments through evolution (rather than revolution)
We can achieve the next generation of payments through some means, namely global, around-the-clock, multi-currency, and programmable payments, without reinventing money, but simply rethinking the infrastructure. Commercial bank money and strong traditional financial regulation address the existing financial system’s stability, regulatory clarity, and capital efficiency issues. Google Cloud can provide the necessary infrastructure upgrades.
Google Cloud Universal Ledger (GCUL) is a brand new platform for creating innovative payment services and financial market products. It simplifies the management of commercial bank currency accounts and facilitates transfers through a distributed ledger, enabling financial institutions and intermediaries to meet the demands of the most discerning clients and effectively participate in competition.
GCUL aims to provide a simple, flexible, and secure experience. Let’s break it down:
Simple: GCUL is provided as a service, accessible through a single API, simplifying the integration of multiple currencies and assets. No need to build and maintain infrastructure. Transaction fees are stable and transparent, with monthly invoicing (unlike the highly volatile prepaid cryptocurrency transaction fees). Flexible: GCUL offers unparalleled performance and can scale according to any application scenario. It is programmable, supporting payment automation and digital asset management. It will integrate with the wallet of your choice. Secure: GCUL is designed with compliance in mind (e.g., accounts verified through KYC, transaction fees that comply with outsourcing regulations). It operates as a private, permissioned system (which may become more open as regulations evolve), leveraging Google’s secure, reliable, durable, and privacy-focused technology.
GCUL can provide significant advantages for clients and financial institutions. Clients can enjoy near-instant transactions (especially for cross-border payments), as well as benefits such as low fees, availability around the clock, and payment automation. On the other hand, financial institutions can reduce infrastructure and operational costs by eliminating reconciliation, reducing errors, simplifying compliance processes, and decreasing fraud, thereby benefitting from this. This frees up resources for developing modern products. Financial institutions leverage their existing advantages (such as client networks, licenses, and regulatory processes) to maintain comprehensive control over customer relationships.
Payment as a catalyst for the capital market
The situation in the capital market is similar to that in payment systems, having undergone significant changes through the adoption of electronic systems. Electronic trading was initially resisted, but ultimately it has transformed the entire industry. Real-time price information and broader access channels have increased liquidity, thereby accelerating execution speed, narrowing spreads, and reducing costs per trade. This, in turn, has stimulated further growth in market participants (especially individual investors), product and strategy innovation, and the overall market size. Despite the much lower price per trade, the entire industry has achieved significant expansion, with advancements in areas such as electronic and algorithmic trading, market making, risk management, and data analysis.
However, challenges still exist in payments. Due to the constraints of traditional payment systems, settlement cycles can take several days, requiring working capital and collateral for risk management. The digital assets supported by distributed ledger technology and the new market structure are hindered by the inherent friction between connecting traditional infrastructure and new infrastructure. The independent asset systems and payment systems have long perpetuated fragmentation and complexity, preventing the industry from fully benefiting from innovation.
Google Cloud Universal Ledger (GCUL) addresses these challenges by providing a simplified and secure platform to manage the entire lifecycle of digital assets (such as bonds, funds, and collateral). GCUL enables seamless and efficient issuance, management, and settlement of digital assets. Its atomic settlement feature minimizes risks and enhances liquidity, unlocking new opportunities in the capital markets. We are exploring how to utilize secure exchange mediums backed by bankruptcy-protected assets provided by regulators (such as central bank deposits or money market funds) to transfer value. These initiatives contribute to achieving true round-the-clock capital flow and drive the next wave of financial innovation.
