Stablecoins Are the Eurodollar Rerun — One Layer Up

The Eurodollar has a famous origin legend. The story is set in the 1950s, at the height of the Cold War. A Soviet-bloc bank held dollars on deposit in the United States. Fearing the money would be frozen, it moved them to London, so the tale runs. The bank's telex address was 'Eurbank.' From this, they say, came the name 'Eurodollar.' A vivid story — but the literature does not bear the legend out. Its ultimate source is a single popular book from 1982. No peer-reviewed record has ever adopted the anecdote as a core driver of the market.

The origin the actual record points to is far more mundane. June 1955; the protagonist is Midland Bank of London. The bank worked a gap in the rules. It was the first to gather dollar deposits in London — an ordinary arbitrage, done to make money. Legend or regulatory arbitrage, one thing holds constant: a dollar that lives beyond the reach of the country that issues it — this piece calls it the 'second dollar.' And now another second dollar is growing. This time on-chain — on the blockchain ledger. The stablecoin: an on-chain digital dollar token that claims to hold its value pegged to one dollar.

Two Orthodoxies Meet Head-On

Two stories square off over the stablecoin. Let me build each in its strongest form.

The first is the crypto narrative. The stablecoin is a new money born of the blockchain. A decentralized money that passes through no central administrator like a bank. It skips the banks and runs around the clock. An innovation traditional finance never had — and, at once, a threat. Regulation is only now giving chase.

The second is the narrative of the industry and its regulators. Nothing to worry about. A regulated payment stablecoin is fully reserved — meaning it stacks up Treasuries and cash at 100 percent against every dollar it takes in. It is not built, as a bank is, to churn money and manufacture crises. This time is different.

To adjudicate between the two, you have to go back half a century. The Eurodollar — dollar deposits sitting in bank accounts outside the United States, in places like London. A dollar that lives where the regulation of the country that prints it (the United States) cannot reach. The stablecoin is not the first dollar to grow up outside the rules. There was one seventy years ago. And we already know the road it walked.

The Axis Isn't Technology — It's Whether It Creates Credit

The crypto narrative tests the stablecoin as 'technology' — is it decentralized, is it blockchain. But through the lens of monetary history it looks otherwise. The real axis dividing the two generations lies elsewhere: whether the offshore dollar creates credit. More precisely, whether it performs maturity and credit transformation — borrowing short to lend long, which I'll unpack in a moment.

Say a bank takes in $100,000 in deposits. It lends $90,000 of that back out. Now two monies circulate in the world at once — the original $100,000 deposit and the newly lent $90,000. Money 'that wasn't there' has multiplied. This is fractional-reserve credit creation.

The opposite is to lock away in the vault exactly what you took in, no more. Take in $100,000 and hold $100,000 untouched. No new money appears. This is full reserve.

One more piece attaches here: maturity and credit transformation. A bank takes in a three-month deposit and writes a thirty-year mortgage with it. Lending long out of money borrowed short — that is maturity transformation. Running risky loans off safe deposits that can be withdrawn at any moment — that is credit transformation. This transformation is what makes a bank a bank. It is also what leaves it vulnerable to crisis. Because if depositors all rush to pull their money out at once, the long loans are not yet repaid.

Now consider minting fresh tokens on top of reserve assets. This too, broadly, is a kind of creation — it lays one more claim (the right to be repaid) on the same dollar. Minting a new token is like pinning one more name-tag on the same money — that is creation. It differs from transformation, which lends out someone else's money. And the on-chain machinery we'll see later works in exactly that way. So the question 'does it create credit' has to be narrowed one notch further. What divides the two generations is not creation in this broad sense. It is one thing inside it: transformation. Whether it funds long assets with short liabilities — that is the true fork in the road.

Transformation always drags one question behind it — who rescues it when it fails? That last line of defense is the lender of last resort: the mechanism by which, when a crisis dries up the money, a central bank supplies fresh liquidity. Yet on the absence of this defense the two generations are identical. The Eurodollar had none until 2008. The stablecoin has none to this day. So this is not an axis that divides them. It is, rather, a condition they both carry. And the lender-of-last-resort question only gets asked when there is transformation.

Both Generations Were Born in the Same Place

Start by conceding the resemblances — and conceding them strongly. The two generations share the same gene — the gene of having been born where domestic regulation does not reach.

First, birth. The Eurodollar came out of regulatory arbitrage — profiting by dodging the rules. The story runs like this. The United States had a rule called Regulation Q, a cap that put a ceiling on the interest a bank could pay on deposits. In the late 1960s, market rates climbed above that ceiling. And so the money leaked to ceiling-free London. Money draining out of domestic deposits moved over almost intact — as Eurodollar borrowing from foreign branches.Between January and July 1969, US banks' domestic CD (negotiable certificate of deposit) liabilities fell by $9.3 billion while the same banks' Eurodollar borrowing against their foreign branches rose by $8.6 billion — the two mesh almost exactly. Even Milton Friedman, the economist who founded monetarism, made the point. "The most important regulation is Regulation Q," he wrote — every time the cap bit, the Eurodollar grew more attractive.

The stablecoin's birth is a little different. There was no ceiling to dodge. It filled an empty space where there was no regulation to begin with. It grew outside the banks, in the void that banking law had never touched. Regulatory arbitrage (leaking away from a rule that exists) and filling a regulatory void (moving into the place of a rule that does not) are different mechanisms. That difference has to be conceded honestly. Still, they land in the same place — both were born where domestic regulation failed to reach.

Second, both drain into US Treasuries. On the stablecoin side the evidence here runs deep. Tether alone holds roughly $141 billion in US Treasuries (direct and indirect combined). Counted as a country, that would rank seventeenth in the world — more than Korea, Saudi Arabia, or Germany. Eurodollars and petrodollars, too, are often said to loop back into US Treasuries. But this is only corroborating evidence: this piece's ledger did not measure that bridge precisely. As the sister piece The Reason Bitcoin Can't Be a Monetary Standard Isn't Volatility noted, oil money's return into Treasuries was real. But it was a device that underwrote demand, not one that anchored the value of the dollar.

Third, both trace the same arc: crisis, supervision, and absorption. The Eurodollar was, in the end, dragged onshore (inside the regulated system). In 1981 the United States created the International Banking Facility (IBF) — a device that absorbed the offshore Euromarket into domestic books. It also hardened central-bank swap lines into a standing regime. A swap line is an arrangement for central banks to exchange dollars with one another in a pinch; opened as a crisis measure, it was made permanent in 2013.

The stablecoin walks the same road. In 2025 the United States pulled it inside the system with the GENIUS Act, a federal law that mandates 100 percent full reserve for payment stablecoins. The EU did the same in 2024 with MiCA, the European Union's unified crypto-asset regulation.

But They Split on Whether They Create Credit

Having conceded the resemblance strongly, I'll state the divergence strongly too. But I have to be clear about which layer they split on. The base layer of the regulated issuer — the bottom layer the issuer directly manages. On this one layer, the two are different species.

The Eurodollar bank performed transformation. It took in short dollar deposits and funded long dollar assets. Short liabilities → long assets → maturity mismatch. When the short funding stops rolling in, the rollover jams — rolling over meaning to refinance a maturing debt with fresh debt. This vulnerability blew open in 2007–08. The dollar hole European banks had to fill was at least $1.0 to $1.2 trillion — on the order of a mid-sized country's annual economic output. As markets froze, the US Federal Reserve finally stepped in, taking on the role of lender of last resort for the offshore dollar through its swap lines. It was a crisis made by transformation.

The base of a regulated payment stablecoin is different. The GENIUS Act mandates 100 percent full reserve against the amount issued — meaning you stack up safe assets only to the extent of what you took in. What is permitted is roughly cash and very short-dated Treasuries. Rehypothecation — running the reserve assets out as loans — is barred in principle. Rehypothecation means pledging assets held in custody as collateral again and putting them to work.The permitted assets are roughly cash, short-dated Treasuries with a residual maturity within 93 days, and repurchase agreements (repos) — briefly borrowing against Treasury collateral and repaying it. Even the ban on rehypothecation has limited exceptions.

So the fact that this base does not transform is not something discovered empirically. It is the product of a law that forced it so. The law flatly defines a payment stablecoin as "an obligation to redeem at a fixed monetary value." Given the very definition, that it does not transform is true by definition. Full reserve is not the stablecoin's nature. It is a product of regulation.

To be exact, though, what the base switches off is credit transformation. Maturity and liquidity transformation do not vanish entirely. A demand liability must be repaid immediately at face value (demand = paid out the moment it is demanded). A Treasury, by contrast, sells only at market price. A small gap remains between the two. But because the reserve assets are locked into very short maturities, that gap comes to no more than a trifle.Because the reserve Treasuries are limited to a residual maturity within 93 days, the gap between face value and market price is not large. So what divides the species is not this residual transformation. It is credit transformation alone.

What about the absence of a lender of last resort? As we saw, it is a condition the two carry together. It is not an axis that divides the species.

So does switching off transformation make the risk disappear? No. The risk merely changes seats. In the Eurodollar, the risk sat in the interbank funding chain. In the full-reserve base, the risk moves to the reserve assets and the redemption window.

March 2023 is the live case. USDC had parked $3.3 billion of its reserves at Silicon Valley Bank (SVB). And then SVB failed. When that became known, USDC depegged — a depeg being the break of the one-to-one peg. At one point a dollar fell as low as $0.8774 — down about 12 percent.

What was the pathogen? Not fractional lending, and not the quality of the Treasuries. Most of the reserves were short-dated Treasuries, and those were fine. The trouble lay on the cash side. Of all places, about a third of that cash had been massed at a single failed bank (SVB). In short, where the reserve assets were placed was the disease — custody and counterparty risk.

In the end the US Treasury, the Fed, and the FDIC stepped in, announcing they would guarantee SVB's deposits in full. And the day after the announcement, the peg came back.

Of the six attributes the table lays out, five are backdrop. The heart is one: the credit-creation column. The Eurodollar multiplied dollar claims of its own through fractional reserve and transformation. The regulated stablecoin base closed that road with full reserve. The rest of the differences — reserve structure, the shape of the crisis, the absence of a backstop — all flow from this one axis.

But all of this, so far, is the story of the 'one base layer.' Go up a layer and the picture inverts.

Neither Full Reserve, nor Offshoreness, nor Scale Breaks the Comparison

Five objections strike at this comparison.

Objection one — full reserve is only a snapshot; the stablecoin already creates credit. Look at the DeFi lending markets. DeFi (decentralized finance) is finance in which deposits and loans clear automatically through code, with no intermediary bank; on-chain lending markets like Aave and Compound are the archetypes. Deposit a stablecoin here and that money is lent out again to someone else. And what happens if the borrower deposits it once more? Debt stacks in layers on the same collateral — leverage (using debt to swell the stakes). On top of that, Tether historically was not fully reserved. Before regulation, there were times its reserves were not intact.The 2021 New York Attorney General (NYAG) settlement stated that over the 2017–2019 window Tether's reserves were not intact. In short, the objection runs, the Eurodollar's fractional-reserve pyramid is being rebuilt on-chain.

This objection is right. And precisely because it is right, it points exactly to where this piece's conclusion is headed. The crux is where the credit pyramid grows. The answer is not the regulated payment-stablecoin base, but the DeFi and rehypothecation layer above it.

The evidence closest to transformation is Aave's rehypothecation loop. A deposited stablecoin is lent out again. That loan is deposited again, and layers stack on the same collateral. It amounts to running longer positions off money deposited short. So maturity and liquidity fall out of alignment. When the utilization rate spikes, run risk follows — withdrawals jamming all at once. But this leverage is still over-collateralized: to borrow, you must post more collateral than you borrow. So it has not completed the Eurodollar's uncollateralized transformation. It is closer to the seed, the near-form, of it.

Here comes the strongest counter. As long as trustless design forces over-collateralization, this seed may never germinate at all. Trustless means a design in which code enforces the rules without anyone having to trust anyone else.The term of art is "trustless." That may be so. But an over-collateralized pyramid, too, will see a run once its utilization freezes. This piece's bet rides not on uncollateralized transformation but on exactly that point: whether it sheds the collateral and scales up — that is the true pressure point.

MakerDAO's PSM is a different character. It is not fractional-reserve transformation. It is 1:1 creation — laying a new claim on the same dollar. And it was the channel of contagion that carried the 2023 USDC shock over into DAI.The PSM (Peg Stability Module) is a swap window that mints an equal amount of fresh DAI when you deposit USDC. Because the deposited USDC stays locked while the new DAI circulates, it differs in character from fractional-reserve transformation, which runs reserves out as loans. When USDC wavered in March 2023, the shock spread into DAI through this window. So this objection does not break the comparison. Rather, it pins down which path the rerun will take. Tether's failure to hold full reserve before regulation fits this picture too. But the pathogen then was not the quality of the reserve assets. It was reserves quietly siphoned off and lent to its affiliate Bitfinex. The full-reserve principle went unobserved until regulation forced it. That is exactly why a mandate like GENIUS was needed.

Objection two aims at the axis itself. What if the Eurodollar never created credit either? There is a view that reads the Eurodollar as mere intermediation — that the incoming dollar just circulates round and round between banks. On that reading, the amount actually newly created is close to a multiplier of one — the multiplier being how many times the total balance grew relative to the initial deposit. If the multiplier is close to one, the claim goes, there is nothing to distinguish it from a full-reserve stablecoin.

But this one is overturned on the facts. The skepticism is commonly attributed to Friedman. Yet read the original directly and it says the opposite. Friedman treated Eurodollar creation as a reality wrought by 'a bookkeeper's pen.' He concluded that even at the extreme where the multiplier is close to one, the world's dollar money supply really did grow.Friedman misattribution, corrected · The received claim that 'the multiplier ≈ 1, so net creation is negligible' actually originates not with Friedman (1969) but with the Klopstock (1968) line he was rebutting. Friedman explicitly split 'creation' (the bookkeeper's pen) from 'the multiplier' — under an assumed 10% reserve ratio, the created share was 90% in both scenarios, while only the multiplier varied from 1 to 10 depending on the assumption about fund leakage. Sources f6b·f6c·f6d·f6e·f6f. And our axis was never the size of the multiplier in the first place. It is transformation. However contested the multiplier, one fact does not change — the Eurodollar bank funded long loans with short deposits, and had neither reserve requirement nor lender of last resort. And the regulated stablecoin base, by design, does not perform exactly that transformation. So wherever the multiplier debate lands, the axis divides the two here too, precisely.

Objection three — the stablecoin is not offshore. The Eurodollar's definition is offshoreness: it lives in London, outside the Fed's jurisdiction. The stablecoin looks like the opposite. It faces the United States from birth. It is federally regulated under GENIUS. Issuers put up US Treasuries as collateral. So the objection runs that the very category 'second dollar outside the rules' is wrong.

Here 'offshore' has to be redefined. The stablecoin's offshoreness is not geographic. It is jurisdictional and technological. It lived outside the banks, on-chain around the clock, in the regulatory void before GENIUS. A large share of its users, too, are outside the United States. It is a 'digital dollarization' that rides the dollar demand of emerging markets (as the sister piece The Reason Bitcoin Can't Be a Monetary Standard Isn't Volatility noted). And something more important: absorption is the end of a lineage, not the negation of one. The Eurodollar, too, was in the end dragged onshore by the IBF and the swap lines. Onshore absorption is the terminus of the road the second dollar has walked. It is not evidence that it was never a second dollar. If anything, the stablecoin is being absorbed faster. That speed is the next story.

Objection four is scale — isn't the stablecoin a rounding error in the Treasury market? Total stablecoin market capitalization is about $304 billion. The US Treasury market is over $30 trillion. Set against it, that is under 1 percent. Strip out only the Treasuries the stablecoin actually holds and the share falls to 0.46 percent. By the 1970s–80s the Eurocurrency market was already in the trillions. Measured against that, the stablecoin looks more meager still (the figures then were gross estimates with wide variance, so the comparison is by order of magnitude only). So the objection runs that it is premature to invoke systemic risk.

That the scale is small is true. But that is exactly why this comparison is not about 'today's crisis' but about 'structure and trajectory.' The Eurodollar, too, was small in the early 1960s, before Reg Q detonated. And though the accumulated stock is small, in flow terms it is already a big player. In 2024 stablecoins net-bought roughly $40 billion in short-dated Treasuries — more, that year, than the purchases of Japan, Singapore, or Germany, each. The Treasury Borrowing Advisory Committee (TBAC) nailed this demand down in the present tense, not the future: "materially heightened demand." So look not at the accumulated share but at the marginal footprint. The feedback is still small. But it is a new channel that runs straight into Treasuries — the reserve asset.

Objection five — why the Eurodollar at all; isn't it just an on-chain MMF? There is a lens that reads the stablecoin as an on-chain narrow bank. A narrow bank is one that does not run its deposits out as loans — it backs them 100 percent with safe assets only.The term of art is "narrow bank." There is also a lens that reads it as a money market fund (MMF). An MMF is a fund that invests only in ultra-short safe assets to hold its one-dollar value. The 2023 USDC depeg, on this view, is the spitting image of an MMF breaking the buck. Half of that is right. The shape of a run massing on the reserve assets shows up well through the MMF lens too. The MMF, too, has a post-2008 arc of regulatory absorption. That current of being dragged inside the system is not the Eurodollar's alone. But there is something the MMF lens misses: where this second dollar came from (a regulatory-arbitrage birth), why it lives outside jurisdiction (offshoreness), and what grows on top of it (the transformation layer). The Eurodollar lens is valuable precisely because it lights up that offshore birth and that transformation layer together.

One more. You might ask whether 'a full-reserve base plus a credit layer on top' is, after all, just a restatement of the fractional-reserve bank's multiplier. It is not. The multiplier is a story about the regulated banking system. The second dollar is a species born, from the start, outside regulatory jurisdiction. That birth is the starting point of this lens.

Regulation Can't Abolish the Second Dollar — It Pushes It One Layer Up

Regulation did not abolish the second dollar. It only pushed it one layer up.

At the base layer the species split, because GENIUS's full-reserve mandate switched transformation off. But on top of that very full-reserve token, something else unfolds. Aave's rehypothecation loop rebuilds fractional-reserve-like leverage. Above it, the PSM lays a new claim on the same dollar through 1:1 creation. It was this path, too, that carried the 2023 USDC shock over into DAI. This is not a worry for the distant future. But it is still over-collateralized. So the ancestral species — Eurodollar-type fractional-reserve transformation — has not fully returned. It is at the stage where the seed has begun to grow. Whether it sheds the collateral and scales up — that is the threshold.

So the risk splits three ways. First, settlement risk is eliminated by on-chain atomic settlement. Atomic settlement binds delivery and payment into a single instant, so that one side can never execute alone.This is confined to on-chain DvP (Delivery versus Payment). Second, reserve-asset and redemption risk is transferred to the base. Third, Eurodollar-type transformation risk is regenerated in the DeFi layer above. The direction is the crux. The risk does not spread sideways — it does not move to another issuer. It climbs upward — to another layer. What 'this time is different' missed is not the extinction of risk. It is exactly this vertical migration.

So the word 'rerun' is only half right. The base is a different species, so it suffers a different disease — the quality of the reserve assets and the redemption gate. The upper layer is the ancestral species, so the old disease returns — transformation and the fractional-reserve-like. 'This time is different (safe)' and 'a perfect repeat of history' are both wrong.

It is not only the species that diverges. The timetable differs too. But I have to be honest about what is being measured. Measure the whole arc, from birth to absorption. The Eurodollar took from Midland in 1955 to the swap lines' permanence in 2013 — fifty-eight years. The stablecoin reached GENIUS in little more than a decade. Roughly five times faster. But narrow the window and it reverses. Measured from the outbreak of a crisis to the arrival of a law, the stablecoin is if anything slower. For the Eurodollar it was little more than half a year from the 1974 Herstatt affair to the founding of the Basel supervisory committee (Herstatt is the settlement accident explained just below). For the stablecoin it took two years, from the 2023 USDC depeg to GENIUS in 2025. So the compression holds only across the whole arc. You cannot call it fast on the strength of 'two years.'

And even that 'five times' is not measured all the way to the terminus. The Eurodollar closed its arc with a lender of last resort — the swap lines. But the stablecoin has no such backstop yet. Since the endpoint is open, the compression ratio, too, is provisional.

In one thing the stablecoin is better: settlement. There is a thing called Herstatt risk. Foreign-exchange trades carry a time lag. If one side has sent its money and the counterparty fails in the interval, the money sent is lost. It takes its name from the archetype case: the 1974 failure of West Germany's Herstatt Bank. On-chain atomic settlement binds delivery and payment into a single instant, and so eliminates that lag itself. It does not move the risk; it removes it at the source. But this removal comes with a condition. It is complete only when both legs of the settlement are on-chain (on-chain DvP). Let an off-chain exchange, a cross-chain bridge, or a fiat leg enter, and the Herstatt-type lag seeps back in. And this is, at most, a side branch. The main conclusion still rests on the migration of the credit layer.

The common question, "will the risk transfer going forward," has the wrong tense. The transfer has already begun. The real point to watch lies elsewhere: whether the layer migration already under way stays a local experiment, or crosses the over-collateralization threshold and grows to systemic scale. Whether the DeFi layer's Eurodollar-type credit creation grows from today's handful of cases into a whole-system risk — whether it sheds the collateral and scales up — that is what matters.

Here is where I place my bet. The next second-dollar accident will not blow up on the books of a regulated issuer. It will blow up in the DeFi layer above. The pathogen will not be a loan quietly extended, but a fractional-reserve-like pyramid stacked through rehypothecation. If I am wrong, this sentence will be graded a few years from now. The stablecoin is retracing, five times faster, the evolution the Eurodollar underwent across half a century. Regulation always catches up to the second dollar late. And at the very moment it catches up, the thing moves one layer up.