Author: neira, Architect of Tempo’s Tokenized Financial Products
Compiled by Jiahuan, ChainCatcher
Most people believe that stablecoins are replicating the function of Eurodollars and driving further expansion of the offshore U.S. dollar system.
But that is not the case. Stablecoins primarily replace only certain functions within the existing system, particularly U.S. dollar balances needed for daily operations and settlements; in some areas most closely monitored by the Federal Reserve, they may even reduce the credit expansion multiplier effect.
What truly deserves to be asked is: What happens when financial intermediaries create a new layer of dollar claims on top of stablecoins?
This article will explain how this new collateralized financing channel works, what conditions it needs to meet to scale, and why its performance under stress has a fundamentally different structure than the traditional Eurodollar system.
Summary
Stablecoins introduce a tokenized private claim on the U.S. dollar. Even when the issuer, reserve assets, and primary settlement bank are all within the boundaries of U.S. law, or rely on banking and securities settlement infrastructure connected to the U.S., such claims may still become economically “offshore” in their circulation and use as collateral.
Enforceable collateral control opens a secured credit channel, but does not create a monetary claim. A true monetary event occurs only when another balance sheet funds, refinances, or accepts liability for the controlled tokens at a price close to par.
The discount is priced based on the gap between “effective control of the token” and “reliable conversion into bank dollars.” The source of elasticity differs: it comes from the balance sheet that issues liabilities against the token, as well as from third-party balance sheets that remain willing to treat this liability as an asset near its face value under stress.
Determinative factors include: who has effective control over the token, the legal and operational pathways through which it is converted into bank dollars, the actual cost involved, the duration, and whether the resulting claims can still be financed at close to par value if these pathways are obstructed.
Collateral USD is not a stablecoin itself. It is a second-layer liability, backed by another balance sheet, willing to open, fund, and maintain a controlled token balance near par value.
1. The Eurodollar system is a hierarchical structure of claims.
A true Eurodollar is a U.S. dollar-denominated bank liability held outside the direct jurisdiction of the Federal Reserve: it is a private commitment to deliver U.S. dollars, issued by a banking institution whose legal registration, regulatory treatment, and access to liquidity differ from those of banks within the United States.
More broadly, the offshore dollar system also includes dollar-denominated claims issued by dealers and market intermediaries, backed by collateral and derivatives. The unit of account is always the dollar, but the balance sheets issuing these claims lie outside the direct jurisdiction of central banks.
This market constitutes a system of private U.S. dollar balance sheets. An offshore institution can create a U.S. dollar claim by simultaneously recording a matching liability and asset. Final settlement may still pass through the U.S. payment system, but “creation” and “settlement” are institutionally separated.
This separation allows non-U.S. institutions to finance positions, hedge exposures, and settle transactions in U.S. dollars without constantly relying on domestic central bank money. But it also creates dependencies: on rollover capacity, interbank credit, dealer intermediation, and the ability to shift to higher-grade claims when settlement pressures intensify.
Claims are ranked according to the strength of the face value commitment, the quality of the backing assets, maturity, market liquidity, and the directness of access to higher-grade currencies. Under normal conditions, market-making and rollovers compress this ranking structure. Under stress, this compression reverses: counterparty limits tighten, maturities shorten, discounts widen, and the ranking structure reemerges through various operational constraints.
The elasticity comes from balance sheets that expand their dollar liabilities before imposing hard constraints on final settlement.
In the non-collateralized channel, offshore banks issue deposits, certificates of deposit, or interbank liabilities, and use the raised funds to invest in U.S. dollar assets. In the collateralized channel, dealers issue a U.S. dollar claim backed by collateral, with the discount rate determining how much financing the collateral can support.
In the derivatives channel, foreign exchange swaps and forward contracts create dollar funding not through an immediate visible deposit, but through commitments spanning time. The forward leg enables banks and non-bank institutions to convert their currency-level balance sheet capacity into dollar funding capacity. In contrast, a transferable stablecoin balance is merely a spot claim with no underlying forward funding market, and thus cannot replicate the above function at all.
In the context of Eurodollars, “offshore” primarily refers to the legal location of liabilities and balance sheet positioning. Stablecoins, however, acquire their “offshore” attribute through economic usage: even if the issuer and its reserves remain within the United States, or rely on banking and securities settlement infrastructure connected to the U.S., their circulation, custody, staking, and leverage chains may still operate outside the boundaries of U.S. law.
Therefore, the true comparison lies between the two chains: one being the stablecoin collateral chain, and the other the offshore U.S. dollar funding chain. Directly opposing “tokens” with “Eurodollar deposits” is a mismatched comparison.
A Eurodollar deposit, from its inception, lands on a bank’s balance sheet capable of expanding credit: it carries elasticity from the very first entry. In contrast, a stablecoin is born on an issuer’s balance sheet that promises to back it with reserves, so at birth it merely provides “substitution”—elasticity emerges later, elsewhere.
A stablecoin is only related to elasticity when another intermediary offers a financiable liability against it, and more balance sheets accept that liability at a price close to par.
2. Stablecoins disrupt a specific layer within the offshore U.S. dollar system.
Stablecoins alter the composition of claims within certain layers of the offshore U.S. dollar system. The system itself remains unchanged.
The most obvious substitution occurs when holders desire a transferable USD balance rather than access to a full USD balance sheet. Exchanges, brokers, payment companies, and certain corporate treasury departments can hold stablecoins as settlement inventory. In this use case, tokens assume part of the function previously fulfilled by offshore operating deposits.
The change in the balance sheet here is direct. The user replaces their original claim against an offshore bank with a claim against the stablecoin issuer. The bank loses this liability, and the issuer gains a token liability matched by its reserve portfolio.
The composition of these reserves determines where the displaced funding demand ultimately emerges. If the reserves remain in the form of bank deposits, the banking system recaptures some of that funding. If the reserves shift to Treasury securities or repurchase agreements, pressure moves to the sovereign collateral market and dealer intermediation. This substitution merely reroutes the “dependence on banks” rather than eliminating it.
This substitution is strongest at the operational balance level: exchange inventories, broker settlement balances, payment float, and corporate working capital. It weakens at the wholesale banking finance level, where term deposits, certificates of deposit, and interbank lending create a maturity structure.
In foreign exchange swaps, it has almost no presence: forward commitments and cross-currency balance sheet capabilities together generate dollar funding, in which spot tokens play no role. At the dealer level, stablecoins can qualify as eligible assets, but they remain subject to the real constraints that matter: capital, settlement capacity, counterparty limits, and collateral inventory. None of these constraints can be replaced by them.
Stablecoins accepted as collateral can support an additional dollar claim. However, until another balance sheet is willing to fund, roll over, or hold this claim close to par value, it remains only secured credit.
3. A USD balance does not create USD balance sheet capacity
The offshore U.S. dollar system serves two distinct needs.
One demand is for “dollar balances”: a claim that can be stored and transferred for payments. In scenarios where transfer friction is the main constraint, stablecoins align well with this need.
Another is the demand for “dollar balance sheet capacity”: the ability to access financing, margin, hedging, or maturity transformation. This capacity resides with banks, dealers, and funds. It consumes capital, liquidity, and counterparty limits, and is withdrawn when conditions tighten.
There is a third demand, superior to the first two: the demand for a type of claim that other balance sheets are willing to treat as an asset near par value, without having to re-audit the underlying collateral each time. Users need a USD balance. Leveraged funds need financing capacity. Cash pools or second-layer capital providers need a claim they can hold at near par value. Only by addressing this third demand does the collateral channel truly matter.
There are three tests that distinguish between these layers.
Transferability. The holder can transfer this dollar claim. Stablecoins easily pass this test.
Financing capability. Intermediaries are willing to extend loans, provide margin, or offer credit against this receivable. Stablecoins can pass this test only under conditions of eligibility, control, and discount constraints.
Currency acceptance. Can the claims created by this intermediary be financed or held close to par value? Only at this stage do stablecoins acquire systemic significance.
The substitution at the corporate level follows the same gradient: substitution is strongest for settlement balances and weakest for relationship banking. A tokenized balance can replace the portion of operating deposits used for value transfer. But it cannot replace anything behind the majority of corporate cash positions: overdraft facilities, foreign exchange credit lines, correspondent banks, intraday liquidity providers, sanctions compliance interfaces, or credit relationships.
Tokens are responsible for transferring claims. The balance sheet is responsible for providing flexibility.
4. From deposit elasticity to discount elasticity
In traditional offshore channels, elasticity originates from a bank liability.
(offshore bank)
The depositor holds a monetary claim, while the bank gains access to usable funds. Flexibility arises on the liability side of an expandable balance sheet.
The issuance of stablecoins creates a more narrow structure.
(Stablecoin issuer)
Holders receive a transferable claim, while the issuer holds the reserve. As long as the issuer maintains a “narrow scope,” no second private U.S. dollar claim is created: only the form and location of the first claim change.
The collateral channel begins the moment tokens are used for financing. The discount rate determines how much financing the controlled tokens can support:
X = V_token × (1 − h)
Here, X is the layer-two financing capacity, V_token is the market value of the controlled token, and h is the discount rate. The accounting must distinguish between four balance sheets.
The situation regarding collateral intermediaries depends on the legal form of control. Pledging and title transfer are not the same balance sheet.
(Collateral intermediary: staking structure)
Under the collateralization structure, the borrower remains the owner of the tokens. The intermediary does not own the full token balance; instead, it holds a secured claim for amount X and has control or enforcement rights over collateral valued at V. Its balance sheet exposure is X, while legal protection covers V. The excess collateral, V − X, remains economically owned by the borrower unless otherwise allocated by default and liquidation mechanisms.
(Collateral Intermediary: Ownership Transfer Structure)
Under the ownership transfer structure, the intermediary holds the actual tokens. Assuming the token value is 100 and the loan amount is 90, the intermediary controls the full 100 token balance, while the borrower retains the economic surplus through the right to reclaim equivalent collateral or the remaining value upon repayment.
The intermediary’s total legal control is V, and its net economic exposure is X. The difference V − X is not freely disposable equity; it is the borrower’s residual protection, embedded in the obligation to return equivalent collateral or settle any surplus after liquidation.
If this loan is funded with existing cash, the intermediary may not have expanded its liabilities—it simply exchanged cash for a secured exposure or an ownership transfer exposure. If this loan is funded by issuing platform balances, notes, repurchase-like claims, or other short-term liabilities, then the intermediary has expanded its balance sheet.
Therefore, the issue of currency is not merely about whether ownership is transferred; it depends on how this loan is financed and whether the resulting liability is accepted at close to par value.
This distinction is important because the mechanisms of enforcement differ between the two. In pledge, the lender’s enforcement rights rely on perfected security interests, priority claims, and the right to liquidate collateral still associated with the borrower. In transfer of title, the intermediary may have stronger control, rehypothecation rights, or liquidation rights, but also bears a more explicit obligation: to return collateral of equivalent value once the exposure is settled.
(Layer 2 funding party)
Monetary elasticity is strongest in the second scenario: where fund providers finance the claim by issuing their own liabilities close to par value. In the first scenario, the system merely reallocates existing cash to a token-backed claim, without necessarily expanding the stock of private dollar liabilities.
The act of issuance itself creates nothing beyond the token. Collateralized credit advances value against the token. Only when the lender’s claim becomes an asset on another balance sheet, funded at close to par value, is the line of money crossed. The step from secured lending to money creation occurs here—and nowhere earlier.
The discount prices the gap between “effective control of the token” and “reliable conversion into bank dollars,” converting collateral value into financing capacity. The elasticity itself arises from the liability issued against the token and the willingness of another balance sheet to fund that liability at close to par value.
5. Institutional conditions for the collateral channel
Four conditions determine whether a second-layer claim can be financed at a price close to par.
Legal control. Holds an enforceable priority claim over the borrower, the borrower’s creditors, the custodian, the platform, and any bankruptcy estate involved. In contrast, when dealing with the issuer, the key questions are: redemption eligibility, transferability, freeze rights, account status, blacklist risk, and the legal standing of token holders’ claims. Lenders must clearly understand whether this arrangement constitutes a pledge, transfer of ownership, custodial control, smart contract lock-in, or a hybrid platform claim—each form confers different rights in the event of default.
Control of operations. The liquidation path and redemption path must be clearly distinguished. Liquidation depends on secondary market depth, market maker balance sheets, and access to trading venues. Redemption depends on issuer rules, whitelists, settlement banks, bank operating hours, and the timing of redemption. Treating these two exit paths as equivalent in a discount is imprecise.
The rigor of the discount. The discount must account for: issuer risk, reserve composition, settlement bank access, redemption eligibility, custody structure, legal enforceability, market depth, on-chain finality, operational suspension rights, counterparty risk with borrowers, market maker concentration, and the time required to convert the token into bank USD.
The durability of financing. Third parties are willing to fund the lender’s receivable without having to re-evaluate the token, borrower, and full monetization pathway from scratch each time. Whether the original lender feels secure about the collateral has never been the determining factor. As long as each funding party must analyze each collateralized loan individually, the result is bilateral guaranteed credit, rather than a claim trading near par value.
Financing near par value is tied to maturity. A claim that can be lent overnight is not the same as one that can withstand multi-day redemption delays, periodic capital outflows, or investor runs. Monetary quality is not just a matter of price—it is also a matter of timing.
The real test is: after the borrower, issuer, custodian, exchange, and settlement bank each become independent sources of risk, whether the liability issued against the token remains an asset close to its face value. Whether the token can be staked is the simplest part.
6. Transmission of Pressure in the Collateral Channel
Pressure in the offshore dollar system manifests as upward movement along the hierarchy. Weaker counterparties lose access to funding. Repo lenders widen haircuts. Dealers begin to ration balance sheet capacity. Assets previously treated as cash equivalents now require explicit liquidity support.
In a collateral channel built on stablecoins, the senior claims fail first. The underlying token represents the issuer’s promise to redeem for bank dollars. The senior claim represents the intermediary’s promise to provide near-par liquidity backed by that token. The former may still be solvent, while the latter has lost its money-like status.
Under normal circumstances, tokens trade at par with minimal discounts, intermediaries extend credit as usual, and second-layer claims are treated as cash-like. No one routinely verifies the full redemption and liquidation pathways. The vulnerability lies in the layer above the issuer.
The first to break is often an adjustment to the collateral terms, long before any run on the token occurs. A lender increases the haircut, and the borrower receives a margin call. A borrower unable to raise cash or provide additional collateral forces the intermediary to liquidate, redeem, or internally finance the position. Second-layer claims immediately become highly balance-sheet-intensive.
The arithmetic here is unforgiving. A token balance financed at a 2% discount supports 98 in credit:
100 × (1 − 0.02) = 98
At a 15% discount and a secondary market price of $0.99, the lendable value decreases to $84.15:
99 × (1 − 0.15) = 84.15
The missing 13.85 must be made up from somewhere:
98 − 84.15 = 13.85
Either a margin top-up, a forced liquidation, an internal fund transfer, or a broken layer-two claim.
This static formula measures the first layer of funding loss, but the true pressure mechanism is dynamic. V_token and h are not independent variables. A higher discount reduces the lendable value and triggers margin calls that may force token sales. Forced sales, in turn, depress the secondary market price of the token. A lower price then “justifies” further increasing the discount, creating a new funding gap.
X_t = V_t (1 − h_t)
For minor changes:
ΔA ≈ (1 − h_t) ΔV − V_t Δh
Under pressure, these two movements move in the same direction. Δh rises as lenders demand more protection; ΔV falls as the margin call process itself generates sellers. Thus, the discount is not merely a measure of risk—it can become a mechanism for transmitting risk.
The exit path turns a financing issue into a market depth problem. The redemption path turns it into a banking channel issue. Internal financing keeps it as an intermediary capital problem, which is precisely where it becomes expensive. Transferring the debt to another funding party only works if the debt continues to trade close to par value.
The exit of a trader or platform removes an entity that had been converting collateral into near-par value funds by exploiting the time lag between warehousing and redemption. This is distinct from a decline in liquidity. Once this warehousing stops, the hierarchy immediately reemerges.
Unlike the mature offshore dollar system, the stablecoin collateral chain lacks a standardized “last dealer” mechanism or central bank swap facility for liabilities issued on top of tokens. The underlying tokens may have reserves, but second-layer claims often have only their own financing markets.
Reserve quality supports the ability of underlying receivables to be repaid, but it provides no guarantee of “par liquidity” if redemption channels, settlement banks, or secondary market depth fail. An issuer maintaining adequate reserves and the collapse of the credit system built upon those reserves can coexist.
7. Conclusion
This analogy to Eurodollars holds only within certain limits. A stablecoin is a tokenized private claim on the U.S. dollar, and even if the issuer and reserves remain within U.S. legal boundaries or rely on banking and securities settlement infrastructure connected to the U.S., its use may still become offshore in economic substance.
Reserve quality supports the ability of underlying receivables to be repaid. The leverage, margin, platform credit, and guaranteed liabilities built on top of it must answer a different set of criteria.
Collateral eligibility is not the same as currency acceptance: A token-backed loan remains just a loan until the lender’s claim becomes an asset near its face value in others’ eyes.
The eurodollar system’s deposit channel begins with a bank liability and expands through deposit creation, interbank financing, and the forward dollar market. The collateral channel for stablecoins begins with a controlled tokenized asset and only expands when an intermediary issues a liability against that token, and another balance sheet treats that liability as money-like.
The issuer controls the underlying commitment, the collateral intermediary issues a second commitment, and the funding party determines whether this second commitment possesses monetary characteristics. The discount prices the distance between “token control” and “bank dollar exchange.” Under stress, it is precisely this distance that expands first.
Dollar collateral only truly exists when the claim built on the stablecoin survives the transition from “token liquidity” to “bank dollar liquidity.”
