- Important insight: A major criticism of stablecoins dates back to the free banking era, when individual banks printed their own banknotes. But this era of private money bears little resemblance to the modern reality of stablecoin issuance.
- What’s at stake: As the US moves toward a federal framework for stablecoins, it would be a mistake to let fear of “private money” overwhelm the policy debate.
- Looking ahead: Stablecoins pose risks, and these risks deserve serious treatment. However, they do not decide the case against stablecoins.
As the US moves toward a federal framework for stablecoins, it would be a mistake to let fear of “private money” overwhelm the policy debate. A frequently cited comparison is the free banking era, a time before modern banking regulation in which private money circulated with uneven and often problematic results. From this story, critics argue that stablecoins threaten the “uniformity of money” and are inherently destabilizing.
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This argument draws the wrong lessons from history. At best, they highlight the regulatory and design issues that stablecoins raise, including questions about reserves, repayment, liquidity, and supervision. These are precisely the questions that financial regulation is supposed to address.
Viewed from this perspective, the passage of the GENIUS Act represents an important shift in the debate. Congress has moved the debate beyond the threshold question of whether stablecoins should exist. The question is whether regulation can make stablecoins sufficiently secure and reliable to function alongside other forms of private money in the modern financial system. History suggests the answer is yes.
The main problem with free banking was not just private issuance. It was an issue without standardized reserve requirements, credible redemption mechanisms, oversight or effective disclosure. The resulting system was fragmented, opaque and prone to instability. Private money has not been abolished. It was brought into a regulatory framework.
Over time, policymakers developed deposit insurance, capital requirements, liquidity standards, and settlement systems. Modern bank deposits remain private liabilities, yet consumers rarely ask whether a dollar deposited in one bank is worth a dollar deposited in another bank. Regulation has not eliminated risk, but it has created the conditions for private money to function at scale.
The same lesson followed from the 2008 financial crisis. Policymakers did not conclude that banks or money market funds were fundamentally incompatible with financial stability. They tightened capital regulations, introduced liquidity requirements and reformed the regulation of money market funds. Stablecoins should be viewed in the same framework.
A more useful perspective than the term “private money” is moneyness: how exactly an instrument functions like money in practice. Money is not a sure thing. What matters is whether the instrument is reliable, redeemable, transferable and trustworthy. These qualities are created through laws, regulations and institutional design.
The GENIUS Act meaningfully moves stablecoins in this direction. Payment stablecoins must be backed one-to-one by highly liquid assets such as cash, bank deposits and short-term US Treasury bonds. The law establishes reserve reporting requirements, independent audits, statutory redemption rights and regulatory oversight. Bankruptcy protection will also be introduced, giving priority to stablecoin holders.
The law does not make stablecoins the same as bank deposits or central bank money. Nor should it. Modern monetary systems already contain several forms of money with different legal structures and risk profiles. The relevant question is whether stablecoins can function safely and effectively within this system.
The stablecoin run risk deserves a direct answer. The concern is real, but is often overstated. This risk should also not be assessed based on bank run risk.
Unlike banks, regulated stablecoins generally do not participate in maturity transformation, which leads to destabilizing deposit flows. They do not finance long-term loan portfolios with short-term liabilities. Its reserve assets are designed to be liquidated or redeemed under stress, although operational and liquidity risks remain.
The same goes for the “uniformity of money” argument, the idea that stablecoins fail because they occasionally trade above or below par. The modern monetary system does not fulfill an idealized idea of singleness. Prepaid cards, gift cards, transit cards and credit instruments are already part of everyday commerce, and none of them are completely interchangeable in all contexts. Like the newspaper Single Minded? Stablecoins and the unity of money argues that singleness is better understood as a spectrum rather than a binary condition, and that it is a means to an end that promotes efficiency, trust and stability, rather than an end in itself. If complete uniformity were the standard, many well-known payment instruments would fail. The relevant objective is whether the system provides users with sufficient trust, stability and efficiency. Regulations like the GENIUS Act are intended to achieve these goals.
Former Federal Reserve Vice Chair for Supervision Michael Barr has raised concerns about the composition of reserves, uninsured deposits, repurchase agreements and operational risks. These concerns should not be dismissed out of hand. They address reserve design, liquidity management, operational resilience and supervisory architecture.
Foreign issuers, cross-border supervision and stablecoin interactions with the banking system also remain challenges. But these are design questions, not existential objections. Whether stablecoin frameworks will be successful depends on implementation, supervision and market discipline, as it does for banks, money market funds and other financial institutions.
The free banking era led to banking regulation. The 2008 crisis led to reforms in banks and money market funds. Regulation of stablecoins now occurs in real time.
Stablecoins pose risks, and these risks deserve serious treatment. However, they do not decide the case against stablecoins. The more useful discussion concerns the rules that stablecoins need to be reliable in practice: clear reserves, credible redemption rights, robust supervision and legal protection for holders. The Genius Act and its regulations are intended to create the framework for this reliability and trust.
https://www.americanbanker.com/opinion/yes-stablecoins-are-private-money-and-no-that-is-not-a-problem
