Stablecoins

Stablecoins are bank deposits (FT)

In the FT, Robert Armstrong argues the case that stablecoins are deposits and stablecoin issuers are banks.

A stablecoin issuer is a bank and a stablecoin is a bank deposit. This is not complicated. If you hand me money and I invest it, and in return I give you something that is a liability for me and an asset for you, and that is redeemable by you on demand and at par, I am a bank and the thing I have handed you is a deposit.

He then supports his argument by referencing the Genius Act recently agreed by the Senate.

The central feature of the act as currently written is the requirement the deposits/stablecoins be backed 1:1 by one of the following reserve assets: US dollars, US central bank reserves, “demand deposits . . . at an insured depository institution”, “Treasury bills, notes, or bonds with a remaining maturity of 93 days or less”, Treasury bill repo or reverse repo agreements, or shares in money market funds that invest only in the other permitted assets.

… the act specifies that a stablecoin “is not a deposit . . . including a deposit recorded using distributed ledger technology”, but it’s important not to get caught up in terminology. If it quacks like a duck, and so on.

The question of whether stablecoins are banks requires analytical rigor, not rhetorical flourishes. The gold standard for this analysis remains E. Gerald Corrigan's 1982 paper Are Banks Special? - a framework I've referenced numerous times because it cuts through definitional confusion to focus on economic function. If you've followed me for a while, you'll know I've referenced it numerous times. Let’s look systematically at the arguments.

What Are Banks?

Corrigan’s core definitional test of a bank:

A bank is any institution that is authorized to issue deposits which are payable on demand at par and readily transferable to third parties.

Armstrong aligns closely with Corrigan’s definition.

If you hand me money and I invest it, and in return I give you something that is a liability for me and an asset for you, and that is redeemable by you on demand and at par, I am a bank…

Evaluating Against Corrigan's Three Special Traits

Corrigan emphasized that banks had three traits that made them “special.”

1. Banks offer transaction accounts.

2. Banks are the backup source of liquidity for all other institutions.

3. Banks are the transmission belt for monetary policy.

Transaction Accounts

Armstrong's entire premise is that stablecoins are essentially transaction accounts. There is a critical tension between Armstrong's argument and Corrigan's framework: Armstrong treats any par-redeemable liability as equivalent to a bank deposit, while Corrigan specifically distinguished between contractual promises and institutional guarantees.

In his 1982 essay, Corrigan states that a functional transaction account should be: payable on demand at par and readily transferable to a third party

Corrigan spends considerable time discussing money market funds.

the critical distinction relative to a bank transaction account appears to be the extent to which the liabilities in question are payable at par. In the case of a bank deposit, deposit insurance, the capital of the bank, and the banks' access to alternative sources of short-run funding provide assurances that a depositor can withdraw dollar-for-dollar from the bank the principal amount deposited—even when changes in interest rates may have reduced the market value of bank assets.

Armstrong appears to ignore the source of the redemption par guarantee.

It doesn't matter if that thing also works as an intermediary in a crypto market, a token in a cross-border payment app or gets you a gumball out of a gumball machine. I'm a bank, you're a depositor, and we're in this together.

Stablecoins, like MMMFs, seem to lack bank capital and Fed access for liquidity. It relies strictly on assets. Corrigan’s "at par" requires institutional backing (deposit insurance, bank capital, Fed discount window). Armstrong instead treats contractual promises of par redemption as equivalent to institutionally-backed guarantees.

Backup Source of Liquidity

Corrigan viewed banks as the backup source of liquidity for all other institutions, financial and nonfinancial. This role was tied to their ability to create transaction deposits through lending and their broader access to funding markets, including the central bank.

Armstrong's article discusses stablecoins facilitating faster transactions, such as cross-border payments, and serving a liquidity function within specific ecosystems, it doesn't portray stablecoin issuers as fulfilling the broad, systemic backup liquidity role for the entire economy in the way Corrigan described for traditional banks.

Banks serve as the primary backup source of liquidity for all other financial and non-financial institutions, as is witnessed every time there is a crisis. During financial stress, institutions turn to banks when other funding sources dry up. Banks can fulfill this role because of their deposit-creation ability and relationship with the central bank.

Stablecoins facilitate liquidity within crypto ecosystems but don't serve the broader economy. They lack the credit creation capacity that makes banks true liquidity providers. No access to Fed facilities means they can't fulfill the systemic backup role.

In this way, stablecoin issuers are not banks.

Transmission Belt for Monetary Policy

Corrigan argued that banks are the transmission belt for monetary policy, largely due to reserve requirements and their direct relationship with the central bank's operations.

Fed Gov. Olson, in a 2006 speech Are Banks Still Special?, later elaborates that even if indirect now, banks still play a role in transmitting policy actions and providing access to the wholesale payments system.

Armstrong doesn’t address this, and I think it is pretty clear that they are not the direct, first-order transition mechanism.

Does Armstrong Pass The Corrigan Tests?

Armstrong’s argument is compelling, but ultimately stablecoin issuers fall short of Corrigan’s full definition of a bank, stablecoins are deposit-substitutes. This innovation is closer to deposits and banking than are MMMFs, but still not quite a Corrigan-defined bank.

Policy Implications

This analysis has important regulatory implications. If stablecoins are deposit-substitutes that lack institutional backing, they present the risks of banking without the safeguards. The GENIUS Act's approach of creating a bespoke regulatory framework - neither full banking regulation nor benign neglect - acknowledges this hybrid nature. However, the Circle/SVB episode suggests that market stress will force stablecoins into the banking safety net whether regulators plan for it or not.

But What Really Is A Bank?

In a reaction to the Armstrong post, Dan Davies asks If stablecoins are banks, what’s a bank? (FT). Dan proposes a different framework for defining what a bank is, thereby offering a new perspective on whether stablecoins should be considered banks.

The definition of a bank, whether you look in Lombard Street or the Capital Requirements Regulations, seems to be based on two characteristics: it takes deposits from the public, and it makes loans. So everything really depends on how strict you’re going to be about these two criteria.

This contrasts with Corrigan's primary definition of a bank, which was heavily focused on the liability side—specifically, the issuance of transaction accounts "payable on demand at par and readily transferable to third parties". While Corrigan certainly considered the asset side crucial for risk management and the integrity of the deposit-taking function, his definition of a bank was anchored more firmly in its unique liability products.

While Davies’ framework is simplified, it offers a useful heuristic for thinking about regulatory perimeters. His Bank Alignment Chart, with its "Strict," "Neutral," and "Permissive" categories, is helpful in thinking about HOW different categories should be legislated and overseen.

Thoughts On The Genius Act

The Guiding and Establishing National Innovation for US Stablecoins (Genius) Act is presented as a legislative framework intended to provide "light-touch regulation" for stablecoin issuers, treating them as a "new kind of bank" or "banking lite." I don’t particularly like the reference to banking, but given the nature of stablecoins as being between banking and money-funds, a bespoke regime is probably called for here. Many of these rules actually make sense.

Segregation of “Reserves”

As stated earlier, stablecoin “reserves” are different from bank reserves. Under the GENIUS Act of 2025, if a bank issues a permitted payment stablecoin, the reserves backing these stablecoins are required to be segregated from the bank's general assets.1 This segregation ensures that, in the event of the bank's insolvency, stablecoin holders have a priority claim to these specific reserve assets, ahead of other creditors.

These reserves must be held in a manner that prevents co-mingling with other assets and ensures they are identifiable and insulated in the event of insolvency. Furthermore, the Act prohibits issuers from pledging, rehypothecating, or reusing these reserves, except under specific circumstances related to margin or custody services obligations or creating liquidity to meet redemption requests.2

Think of these reserves similarly to customer segregated assets at a brokerage firm under SIPA — legally distinct from the firm’s proprietary assets and protected from general creditor claims.

Presumably, the bank supervisors will exempt these assets from the calculation of many of the existing bank and BHC regulatory ratios.

Supervisory Oversight

A stablecoin issuer does not need to be a bank, but a banking organization may in theory be a stable coin issuer. The Act does not specify whether a stablecoin can be issued by a bank, or must be done through an affiliated non-bank subsidiary; presumably then banks are not per se precluded from being stablecoin issuers.

Presumably if issued by an entity supervised by the Federal Reserve (e.g., a Bank Holding Company, Financial Holding Company, or their non-bank subsidiaries), it would need to be deemed “financial in nature, incidental to banking, or complimentary to existing banking authority” if issued by a Financial Holding Company (FHC) or "closely related to banking" if issued by a non-FHC bank holding company.

Now, adding to the complexity, the Act stipulates that stablecoin regulators, with the Comptroller of the Currency (OCC) designated as the federal regulator for non-bank issuers, should establish regulations covering capital requirements, reserve asset diversification, and risk management. Presumably, but not necessarily, they will work in concert with the Fed.

But what about State-chartered institutions? What about credit unions? Can state-chartered banks only issue stablecoins from an affiliated non-bank subsidiary (subject to OCC jurisdiction)? Presumably the states will essentially copy the Act, but can they set rules different from those the OCC derives? Is there Federal preemption here?

Sec 6. (a)(1)(A) states:

Each permitted payment stablecoin issuer that is a subsidiary of an insured depository institution shall be subject to supervision by the primary Federal payment stablecoin regulator in the same manner as such insured depository institution.

So I think this means the OCC has preemption authority (but don’t quote me).

Further, it looks like a state-chartered institution that seeks to issue stablecoins must transition to Federal Reserve Regulation.3 So presumably ILCs would need to become BHCs.

So a couple of implications (or inferences) from all of this. Clarifying that the OCC is the main supervisor and rulemaker (and not the Fed) is further evidence that stablecoins are not “money” and are not “deposits.” Giving the OCC broader supervisory authority, even where the traditional rules of the road would dictate shared authority with the Fed and FDIC is clearly a streamlining of the process, and a definite hint at the possible realignment of supervisory authority into a more consolidated form.