The Economist has recently published an article pointing out that stablecoins are fueling a global shadow financial system, and they have never received as much attention as they do now. From the perspective of this shadow system, the Mefo bills used by Nazi Germany in the 1930s offer a comparable institutional model. By reviewing the historical development of Mefo bills, one can gain a clearer understanding of the systemic characteristics of stablecoins and make more informed predictions about their potential future trajectories and associated risks.

The Mefo bills were introduced in 1934. At the time, Hjalmar Schacht, head of the German central bank, wrote in his memoirs, “Public confidence in the state's ability to pay had been undermined by previous governments. I had therefore to find a way of extracting this fallow capital from the safe deposits and pockets where it now lay”. To that end, he devised a sophisticated system. Specifically, several of Germany’s largest industrial conglomerates jointly established a new “private” company, the Metallurgische Forschungsgesellschaft (MEFO). Its shareholders were heavy industry giants closely tied to military contracts. This company issued promissory notes known as Mefo bills that far exceeded its capital base. The Reichsbank, under Schacht’s leadership, guaranteed the discounting of these bills, effectively underwriting Germany’s rearmament. Although these notes were issued by a private company, they were in fact backed by the national treasury and offered an attractive 4% interest rate to lure private capital. Thus, the German government at that time was able to carry out a massive off-balance-sheet fiscal expansion, quietly increasing public spending without officially raising the budget deficit.

The mechanism of stablecoins bears a structural resemblance to this model. Today’s mainstream stablecoins, such as USDC and USDT, are issued by private companies, yet they are effectively subject to close official oversight. They are backed by reserve assets including U.S. dollar cash, short-term Treasury securities, and money market funds. This means stablecoins also have the capacity to absorb idle capital from the public and channel it into supporting U.S. government debt. In fact, U.S. Treasury Secretary Scott Bessent has projected that, in the long run, the growth of stablecoins could generate USD 2 trillion in new demand for U.S. Treasuries. Similarly, Citibank has estimated that by 2030, stablecoins may create demand for U.S. debt in the range of USD 1.6 trillion to USD 3.7 trillion. This kind of structural capital absorption may become a “lubricant” within the U.S. dollar debt system.

A deeper commonality lies in the "shadow attributes" embodied by both Mefo bills and stablecoins. Although Mefo bills were backed by state credit, their issuance by a private entity meant they were not recorded on the central bank’s balance sheet and successfully evaded international regulatory scrutiny. This "off-balance-sheet circulation" design enabled Germany to carry out large-scale fiscal expansion while temporarily avoiding the inflationary pressure typically associated with budget deficits. Notably, despite Germany’s massive military buildup and infrastructure investment between 1934 and 1939, its inflation rate remained relatively low. This was largely because Mefo bills were highly liquid and, in practice, functioned as a form of money in transactions between businesses. However, since they were not included in official monetary aggregates, they did not contribute to a rapid increase in the measured money supply.

Much like Mefo bills, stablecoins also exhibit the characteristics of shadow money. In practical terms, stablecoins function as digital vouchers or tokens that, in theory, can be used to purchase anything and can be traded anywhere. Given their reserve mechanism, stablecoins essentially transform low-liquidity money market assets such as short-term government bonds into highly liquid digital tokens. Because they are not liabilities of central banks and are excluded from traditional monetary aggregates, stablecoins expand the boundaries of usable market liquidity without altering the official structure of the money supply. When viewed through the lens of Modern Monetary Theory (MMT), stablecoins could potentially support large-scale fiscal expansion while maintaining price stability. In this sense, their operational logic closely mirrors that of the Mefo bills.

However, the eventual fate of most Mefo bills was default, and this offers a clear warning for the future of stablecoins. Mefo bills were issued with a five-year maturity and carried an annual interest rate of 4%, meaning they were, in theory, to be repaid by the German government upon maturity. In reality, however, the funds raised were heavily invested in military industries, infrastructure projects, and other sectors that could not generate short-term returns. As a result, Germany failed to produce sufficient fiscal revenue to repay the bills. When the repayment peak arrived, the government was unable to cover the massive obligations and was forced to repeatedly roll over the debt or convert it into other financial instruments. In the end, most Mefo bills were transferred onto the balance sheet of the German central bank and postponed for payment. Eventually, after the war, they were simply written off, amounting to a de facto sovereign default.

Stablecoins appear to be more resilient in this regard. They do not promise interest, nor do they have fixed maturity dates. Hence, theoretically, they are not subject to the same kind of concentrated redemption pressure. However, this does not mean they are free from risk. If financial markets experience volatility or the liquidity of reserve assets declines, user confidence could erode, triggering waves of mass redemptions. This would force issuers to rapidly liquidate large holdings of government bonds or cash reserves, potentially destabilizing the broader market. To avoid the same kind of collapse that befell the Mefo bills, stablecoins must continually strengthen their "circulation value". In other words, they must reduce users' incentive to redeem them for fiat currency. Since stablecoins do not pay interest, their appeal largely depends on their liquidity and convenience. This requires issuers to continuously improve settlement speed, cross-chain compatibility, and regulatory predictability to maintain trust and usability in the ecosystem.

Looking at the current development, U.S. dollar stablecoins hold a leading position in terms of transaction efficiency, regulatory pathways, and market acceptance. They offer near-instant on-chain settlement and low-cost transactions, while also benefiting from the U.S. dollar’s status as the world’s primary reserve currency, thereby granting them strong international acceptance. Moreover, with the U.S. actively advancing stablecoin regulatory legislation to provide legal clarity, the market is increasingly showing signs of consolidation around dollar-based stablecoins. In the future landscape of multi-currency competition, the global market is likely to evolve toward building a new payment and store-of-value system centered around U.S. dollar stablecoins.

Overall, from the perspective of shadow money, Germany’s Mefo bills eighty years ago offer an important structural reference for understanding stablecoins. Both function as highly liquid instruments and serve key roles as shadow currencies, the classical significance of modern stablecoins. History shows that such a mechanism can effectively absorb idle capital in society and support fiscal spending without increasing the official money supply or triggering inflation. However, the eventual collapse of the Mefo bills has a critical lesson for today’s world: to prevent potential redemption pressure, stablecoins must prioritize enhancing their liquidity in circulation. Following this logic, the central position of U.S. dollar stablecoins in the global market is likely to become even more entrenched.

Final analysis conclusion:

Essentially, stablecoins resemble the digital-era version of the Mefo bills issued by Germany before the outbreak of World War II as a form of off-balance-sheet finance and shadow money. This kind of mechanism offers significant advantages, but in the end, the debt must still be repaid. While stablecoins have a more flexible redemption structure, mitigating systemic risk requires close attention to their liquidity and acceptance. Given the global competitiveness of stablecoins, the market is likely to converge around U.S. dollar–based stablecoins.