3 days ago
Stablecoins Are Deposits — But Not Bank Deposits. That's The Point.
Some have argued — wrongly — that stablecoins are just bank deposits in disguise. A recent Financial Times op-ed went so far as to say that stablecoin issuers are essentially banks, and that issuing a redeemable token backed by assets is no different than bank deposit-taking.
It's a tempting analogy — especially for defenders of the banking status quo. But it's economically and legally false. And worse, it risks forcing 21st-century innovation into a 20th-century regulatory framework.
Here's what the comparison misses: the essence of traditional banking is fractional-reserve leverage.
When you deposit money in a bank, that money does not sit in a vault waiting for you to withdraw it. It becomes a loan to the bank — an IOU on the bank's balance sheet. The bank takes that money, combines it with others', and uses it to fund loans, make investments, and generate profit. It's a model that thrives on credit creation. In fact, most new money in the economy is created this way: when a bank issues a loan, it simultaneously creates a new deposit. This is how modern banking works — and why banks are inherently risky leveraged institutions.
Because only a fraction of deposits are kept in reserve, the system is inherently fragile. But to maintain confidence in this system, society has built an elaborate massive support structure: deposit insurance (like the FDIC in the U.S.), bank regulations, capital requirements, oversight, and the central bank's role as lender of last resort. These are necessary because if a bank gets it wrong — mismanages risk, faces a run, or makes bad bets — the consequences are systemic. Your money can become temporarily or permanently inaccessible, payment systems can seize up, and the real economy can be brought to a halt.
Now, contrast that with stablecoins.
When issued under thoughtful regulation — such as the EU's e-money framework or the U.S. GENIUS Act (Guiding and Empowering National Innovation for US Stablecoins) — stablecoins follow a very different model.
A well-designed stablecoin is fully backed 1:1 with safe, liquid assets like short-term government bonds or central bank reserves. The user's funds are legally safeguarded — not lent out, not co-mingled with the issuer's balance sheet, and not used for speculation or profit. There is no leverage. There is no maturity mismatch. There is no dependency on the solvency of a single bank.
That's not a bank deposit. That's digital cash — a new financial primitive for programmable, instant-value exchange. The funds are held. Not used.
This separation matters. Stablecoins allow us to unbundle the functions of banking. Payments no longer have to be tied to credit creation. Saving no longer needs to be subject to banks business risks. With digital cash, users can hold euros, dollars, or other currencies without being forced to lend them to a private bank.
The GENIUS Act gets this structure right. It specifies that stablecoin issuers must be non-banks or ring-fenced subsidiaries. It mandates that reserves be held in high-quality liquid assets — including U.S. Treasuries, and central bank reserves. No gambling with customer funds.
Critics might call this a handout to crypto. It's not. It's a deliberate choice to separate payment infrastructure from credit intermediation — something traditional banking has never been able to do. The goal is not to make crypto act like banks. It's to build something better than banks where appropriate.
Some regulators, however, still insist that stablecoin issuers park customer funds in commercial banks. But this defeats the purpose. If stablecoins are designed to eliminate exposure to bank credit risk, mandating they rely on banks makes no sense. That's like asking an electric car to carry a fuel tank just in case.
We need to regulate by risk, not form. If a financial instrument behaves like digital cash — fully reserved, off-balance sheet, instantly redeemable — it should be regulated as such. Not as a bank. Not as a security. Not as a speculative asset.
And the role of central banks remains vital. They should provide liquidity against safe collateral in times of stress, just as they do for banks. This isn't a bailout. It's sound financial architecture — a way to ensure liquidity without creating systemic fragility.
Here's the truth: Yes, stablecoins are deposits — but they're not bank deposits. And that makes all the difference. They don't belong in a bank's leverage engine, because they're not instruments of credit creation. Unlike bank money, they aren't propped up by a fragile web of trust, insurance schemes, and emergency backstops. They're built to be safer from the start.
Let's not confuse innovation with imitation. Stablecoins aren't trying to look like banks — they're trying to fix what's broken. For the first time, we have a choice: to hold digital money without lending it to a bank. That shift doesn't just give us more control — it makes the entire system safer.
The right regulation doesn't stunt innovation — it makes it safe to scale.
