Why 'Just Like Cash' Is a Dangerous Accounting Fiction for Stablecoins

Stablecoins are not cash. They are redeemable liabilities on a custodian's balance sheet, a distinction that matters during a bank-run scenario like the one that collapsed Terra's UST.

DeFi protocols compound this risk by treating USDC and DAI as risk-free assets, creating a systemic contagion vector. A failure at Circle or MakerDAO would propagate instantly through protocols like Aave and Compound.

The 'cash' accounting model is a liability. It ignores the counterparty risk embedded in the issuer's reserves and the oracle risk in algorithmic designs, creating a false sense of security for integrators.

Stablecoins are bearer assets. A USDC token is a cryptographic proof of ownership on-chain, not an entry in a centralized ledger. This is the fundamental accounting mismatch where the problem begins.

Custodians treat them as deposits. Entities like Circle and Tether manage reserves as if they hold customer deposits, but the on-chain token is a self-custodied asset. This creates a liability mismatch between the token and the reserve.

The fiction enables fractional reserve. Treating tokens as deposits allows issuers to engage in maturity transformation and credit creation with reserve assets, a practice that collapsed Terra/Luna.

Evidence: The 2023 Silicon Valley Bank collapse proved this. Circle's $3.3B was trapped because its 'cash-equivalent' reserves were illiquid bank deposits, not the instant-settlement asset users believed they held.

Fiat-backed stablecoins are not cash. They are bearer certificates for a claim on a custodian's bank account. This creates a legal and operational mismatch where the on-chain token is treated as final settlement, while the underlying asset requires traditional banking rails and manual compliance checks.

The redemption bottleneck is fatal. A bank run on Tether or USDC cannot be satisfied at blockchain speed. The settlement finality illusion collapses when redemption requires KYC/AML checks, wire transfers, and custodian business hours, exposing the system to liquidity crises during stress.

Proof-of-reserves is insufficient. Merkle-tree attestations from Circle or Paxos prove custody at a point in time but do not prove liability fungibility or instant redeemability. They cannot audit off-chain banking agreements or the custodian's own counterparty risk, a flaw exploited in the SVB collapse.

Evidence: The March 2023 USDC depeg demonstrated this. While the token traded, redemptions were halted due to SVB's failure, proving the cash equivalence is a fiction. The system's resilience depends on the slowest, most opaque traditional finance link.

Stablecoins are not cash. Accounting standards like GAAP treat them as cash equivalents, but this ignores the settlement risk in their underlying blockchain infrastructure. A transaction on Ethereum or Solana is not final until probabilistic confirmation, creating a window where value can be double-spent or reversed in a reorg.

Liquidity is not solvency. The deep liquidity on Uniswap or Curve masks the fact that stablecoin redemption is a promise, not a guarantee. The 2022 depeg of TerraUSD proved that algorithmic and even collateralized models can break under stress, turning liquid assets into illiquid claims overnight.

The custodial stack adds risk. Most enterprise users access stablecoins via custodians like Coinbase or Fireblocks, adding another layer of counterparty risk and operational delay. Your on-chain balance is only as good as the custodian's ability to process a withdrawal request during a crisis.

Evidence: During the USDC depeg, Circle honored redemptions at $1, but the on-chain market price fell to $0.88. This spread represented the market pricing the liquidity and execution risk of actually converting USDC to dollars through the sanctioned banking channels.