Stablecoins: A New Form of Money

Introduction

Stablecoins have rapidly emerged as a pivotal fintech innovation, blurring the lines between traditional banking and the crypto economy.

A stablecoin is a privately issued digital token riding on blockchain rails, designed to maintain a stable value (typically pegged 1:1 to a fiat currency, such as the US dollar). By offering price stability in an otherwise volatile crypto market, stablecoins serve as a bridge between traditional money and blockchain technology. They enable instant, programmable transactions while purporting to be as reliable in value as bank deposits or cash. Given their growing adoption (the total stablecoin market is now in the hundreds of billions of dollars) and use in payments and decentralized finance, regulators on both sides of the Atlantic are scrutinizing stablecoins as a new form of money.

This newsletter explores what stablecoins are, how they resemble banks and money market funds, and how they function as a new layer of money on top of bank money. It also examines the evolving regulatory landscape in Europe and provides brief commentary on the latest regulatory developments in the United States.

What Exactly Is a Stablecoin?

In essence, a stablecoin is a digital asset designed to function as stable-value “money” in digital form. Most stablecoins maintain stability by being backed by reserve assets. For example, a USD-pegged stablecoin token is typically backed by an issuer’s pool of dollar-denominated reserves such as bank deposits, U.S. Treasury bills, or other liquid safe assets. The issuer promises that holders can redeem the token on demand for 1 USD, which underpins its value. This combination of pooled reserves and a redemption promise is what stabilizes the token’s price at $1. It also means that stablecoins are fundamentally different from unbacked cryptocurrencies, such as Bitcoin.

Stablecoins are issued by identifiable legal entities, such as fintech companies or trusts, that take responsibility for maintaining the peg by managing reserves and honoring redemptions at par. Some well-known stablecoins include USDT (Tether) and USDC (Circle), both of which are primarily denominated in USD. Stablecoins are crucial in crypto markets as a medium of exchange and a store of value, offering liquidity comparable to cash for trading and lending in decentralized finance. Increasingly, they are promoted for use cases like payments, including cross-border transfers, where their blockchain-based 24/7 operability offers speed and cost benefits over traditional bank wires. In summary, a stablecoin seeks to combine the trust of fiat currency with the innovation of blockchain, creating what some refer to as “programmable dollars” on the internet.

Stablecoins Resembling Banks and Money Market Funds

Regulators and scholars have observed that stablecoins combine features of traditional banks and money market funds. In many ways, a stablecoin issuer operates like a narrow bank: it takes in customer funds (much like deposits) and, in return, issues a claim (the stablecoin token) redeemable at par value (parallel to commercial bank money). The issuer typically holds the funds in conservative reserve assets rather than lending them out, aiming to maintain a 1:1 backing. This model is analogous to a 100% reserve (narrow) bank or an e-money institution. Stablecoin issuers are effectively offering a “deposit-like” product tied to the U.S. dollar, making them “bank-like” in substance. The key difference is that until now, stablecoin issuers have generally not been licensed banks and do not have federal deposit insurance or routine access to central bank liquidity. This lack of a safety net makes their business model reminiscent of historical “free banking” or “private banking” systems, raising the same policy concern that unregulated deposit-taking can pose risks to consumers and financial stability.

Stablecoins also closely resemble money market mutual funds (MMFs) in economic function. A money market fund pools investors’ cash. It invests in short-term, highly liquid instruments, aiming to maintain a stable net asset value in fiat money terms (e.g., $1 per unit) – in effect creating a money-like asset for investors. Similarly, stablecoin issuers invest their reserve pool in short-term, safe instruments (such as T-bills, commercial paper, or bank deposits) so that each token maintains a stable value in fiat currency terms, e.g., $1 per unit. Researchers at the Federal Reserve have found that, “in several important ways, stablecoins closely resemble [ ...] money-market mutual funds,” with both providing “safe, money-like assets” to the market.

Critically, both stablecoins and MMFs face liquidity and run risk: they promise near-instant redemption at par, yet their backing assets might become illiquid or fall in value under stress. Just as MMFs can “break the buck,” a stablecoin can fail to maintain its peg if reserves are insufficient or confidence evaporates. Studies document that stablecoins experience “flight-to-safety” runs akin to MMF runs, with investors moving from perceived riskier stablecoins to safer ones during crypto-market stress, and accelerated redemptions whenever a stablecoin’s price slips below $1. Two notable stablecoin “runs” occurred in 2022 and 2023, demonstrating these dynamics.

Without deposit insurance or lender-of-last-resort support, stablecoins rely solely on their reserves and market confidence to prevent a run – much like an uninsured bank or an MMF. Regulators worry that a loss of confidence in a major stablecoin could trigger fire-sales of reserve assets or broader contagion in financial markets, analogous to the 2008 run on the Reserve Primary Fund (an MMF) that required government intervention. This concern is not theoretical: when a top stablecoin (USDC) temporarily de-pegged in March 2023 after some of its cash reserves were trapped in a failed bank, investors rushed to redeem or switch to alternatives, illustrating the systemic risk potential. In recognition of these similarities, U.S. policymakers have debated whether stablecoins should be regulated like banks (for safety) or like money market funds (as securities) – or perhaps as a hybrid of both.

A New Layer of Money on Top of Bank Money

Stablecoins can be viewed as a new layer in the monetary hierarchy, stacked above traditional bank deposits. In the modern two-tier monetary system, the safest settlement asset is central bank money (e.g., reserves and cash), on top of which commercial banks issue deposits that the public uses as money. Stablecoins introduce another tier: they are private digital tokens whose value is anchored to bank deposits or similar assets held in reserve. In practical terms, when a user buys $100 of a USD stablecoin, they typically transfer $100 from their bank account to the issuer. The issuer then holds that $100 (often depositing it in a bank or safe securities) and gives the user 100 tokens. The user now holds “money” in the form of stablecoins, which are redeemable claims on the issuer’s bank-held funds. The stablecoin thus piggybacks on the trust of bank money (or government debt) but circulates on crypto networks outside the regular banking system. This stacking of claims has led observers to dub stablecoins a “digital eurodollar” phenomenon – effectively exporting dollars outside U.S. banking channels.

One implication of this new layer of private money is the potential for disintermediation of traditional banks. If users en masse convert bank deposits into stablecoins, commercial banks could face funding outflows (much like during the growth of money market funds in the past). In extreme scenarios, a rapid flight of deposits into stablecoins (perceived as safer or more useful for certain payments) could create a form of narrow banking, where stablecoin issuers hold huge sums in central bank reserves or treasuries while banks lose retail deposits. Regulators have noted this risk: a dramatic expansion of stablecoins, especially those backed by ultra-safe assets like Treasuries, will cause deposit flight at banks and create narrow banking concerns. Moreover, central banks are concerned about monetary sovereignty if locally circulating stablecoins (often tied to the USD) replace domestic currency usage. Stablecoins thus raise macro-financial questions by introducing a parallel payments layer that is outside traditional bank regulatory perimeters yet still fundamentally connected to bank money (since their value and stability derive from holdings of bank deposits or central bank instruments).

At the same time, stablecoins demonstrate how innovation can enhance the money ecosystem by offering programmability, global reach, and 24/7 operability on top of bank money. They represent digital cash, enabling use-cases like automated escrow via smart contracts and near-instant cross-border transfers. This potential has driven interest from major companies (even traditional payment processors and banks) in issuing or utilizing stablecoins. Stablecoins occupy a hybrid space: economically akin to bank deposits and MMF shares, legally a new class of digital bearer instrument, and functionally a new layer of money that leverages the existing monetary base while operating in novel fintech infrastructure.

European Regulatory Landscape (MiCA and More)

Europe has enacted a comprehensive regulatory regime for stablecoins as part of the EU’s Markets in Crypto-Assets Regulation, commonly known as MiCA. MiCA (Regulation (EU) 2023/1114) was passed in 2023 and represents the first unified legal framework for crypto assets in a major jurisdiction.

Crucially, MiCA dedicates special provisions to stablecoins, which it terms “asset-referenced tokens” (ARTs) and “electronic money tokens” (EMTs).

An “e-money token” under MiCA refers to any crypto-asset that purports to maintain a stable value by reference to a single official currency (effectively, fiat-pegged stablecoins like a EUR-backed or USD-backed token).

An “asset-referenced token” is a broader category that encompasses stablecoins referencing multiple currencies, commodities, or other assets as their value benchmark.

This two-tier categorization is designed to capture all forms of stable value crypto-assets, whether currency-backed (like a crypto Euro or crypto Dollar) or backed by a basket (like the initially proposed Libra/Diem, which inspired much of the MiCA regulation).

Authorization and prudential rules

Under MiCA, any issuer of an asset-referenced token or e-money token in the EU is required to obtain authorization and will be subject to ongoing supervision.

For e-money tokens (single-currency stablecoins), only certain licensed entities can be issuers – essentially credit institutions (banks) or electronic money institutions already authorized under the EU E-Money Directive. This ensures that issuance of, say, a euro stablecoin is handled by entities already within the financial regulatory perimeter, preserving confidence and oversight.

For asset-referenced tokens, a new authorization regime is created: issuers must obtain approval from a national competent authority (with input from the European Banking Authority for significant tokens) and meet bespoke prudential requirements. These include holding sufficient own funds (capital), establishing appropriate governance and risk management, disclosing the stabilization mechanism and reserve assets in a detailed white paper, and ensuring robust custody for reserve assets.

All stablecoin issuers must also guarantee redemption rights – holders of an e-money token have a legal right to redeem it at par value at any time in fiat currency, much like being able to cash out an account. This mirrors protections in traditional e-money and payment services law.

One key rule in MiCA is the explicit ban on interest for stablecoins. MiCA prohibits issuers (and crypto-asset service providers) from granting any interest or other benefits to stablecoin holders related to the length of time the token is held. This prohibition applies to both e-money tokens and asset-referenced tokens. The policy reasoning is to prevent stablecoin issuers from behaving like banks; in other words, to stop them from competing with bank deposits by offering yield, which could undermine the banking system or mislead consumers into thinking stablecoins are risk-free interest-bearing accounts. Article 45 of MiCA codifies this ban, drawing a clear line: holding a stablecoin should not generate a return in itself. (Notably, this does not outlaw DeFi lending or third-party yield on stablecoins, as long as the issuer is not the one paying interest. The ban targets the issuer and related service providers, thereby also blocking crypto exchanges or wallet providers from effectively time-deposit schemes on stable balances.)

MiCA also introduces the concept of “significant” stablecoins, which are large-scale tokens subject to even stricter oversight. Criteria such as the size of the reserve, number of users, and market cap or transaction volume can lead regulators to designate a stablecoin as significant, in which case the European Banking Authority (EBA) will have direct supervisory powers and can impose additional requirements. For instance, significant stablecoins may face higher capital requirements or more frequent reporting. In extreme cases, authorities could even limit their issuance or use if they pose a threat to monetary stability. (An example in policy discussions was to cap the volume of stablecoin transactions if it grew too high relative to payment systems, though the final MiCA text avoids hard caps in favor of supervisory discretion.)

MiCA’s stablecoin regime became applicable in June 2024. (MiCA became Norwegian law effective on 1 July 2025). By the end of 2024, all stablecoin issuers offering tokens in the EU were expected to comply with MiCA (or cease operations in Europe). As of mid-2025, any firm issuing a euro-pegged stablecoin or offering a dollar stablecoin to EU clients must be licensed and follow MiCA’s rules, from maintaining full reserve backing and par redemption to white paper disclosures and capital buffers, or face enforcement. The European approach essentially integrates stablecoins into the existing regulatory framework for money: a crypto-euro is treated similarly to electronic money, and other stable-value tokens are regulated in a manner akin to a new financial instrument, ensuring that consumer protection and financial stability principles are upheld.

It is worth noting that Europe’s stance has been influenced by earlier concerns, such as Facebook’s Libra proposal in 2019, which raised alarm about an unregulated global stablecoin. By moving early with MiCA, the EU aims to foster innovation by clarifying the rules and mitigate risks by requiring authorization, maintaining 1:1 liquid reserves, ensuring safekeeping of assets, granting redemption rights, and prohibiting interest for stablecoins as core safeguards. These principles closely align with recommendations from global standard-setters such as the Financial Stability Board. A comparison across jurisdictions reveals a growing consensus on key stablecoin regulatory standards, including the licensing of issuers, full reserve backing, secure custody of reserves, redemption at par, and no interest paid to holders, which are common themes in the EU, UK, and emerging U.S. frameworks. Where regimes may differ is in structural details – e.g., the EU confines issuance to EU entities (extraterritorial reach for any token offered in EU). In contrast, the U.S. may allow both state and federal issuers (a more pluralistic approach), and the UK is tailoring its own rules in parallel. However, the direction is clear: stablecoins are being formalized into law as a new class of regulated instrument, to harness their benefits (faster, cheaper payments and financial innovation) without undermining financial stability or monetary order.

United States´ Regulatory Landscape

In the U.S., stablecoins have historically operated within a patchwork regulatory oversight framework. Previously, no comprehensive federal law existed specifically tailored for stablecoin issuance. Instead, issuers navigated existing laws, obtaining state licenses—for instance, from New York’s Department of Financial Services (NYDFS) as limited-purpose trust companies or under BitLicense regulations—or operating under state money transmitter laws and in regulatory gray areas. Notably, the largest stablecoin (Tether’s USDT) remains issued by an offshore entity with limited U.S. oversight, whereas the second-largest (Circle’s USDC) operates under clear U.S. state regulatory supervision.

However, on July 18, 2025, President Trump signed the Guiding and Establishing National Innovation for U.S. Stablecoins Act of 2025 (the "GENIUS Act") into law. This marks a significant shift, establishing the first-ever federal framework explicitly for "payment stablecoins." The GENIUS Act introduces a federal licensing requirement, creating the category of Permitted Payment Stablecoin Issuers (PPSIs). Under this regime, stablecoin issuers must maintain reserves composed exclusively of cash or U.S. Treasury securities, with stringent monthly disclosures, regular audits, and mandated prioritization of holder claims in insolvency scenarios. It further prohibits interest payments on regulated stablecoins. It imposes robust anti-money laundering (AML) and know-your-customer (KYC) requirements under the Bank Secrecy Act, while barring issuers from making misleading statements regarding government backing.

The GENIUS Act also clarifies that payment stablecoins are exempt from classification as bank liabilities or securities, thereby streamlining oversight primarily through the Office of the Comptroller of the Currency (OCC) and relevant state agencies. Additionally, it establishes phased compliance periods of 18 to 36 months and provides a pathway for foreign issuers to achieve regulatory equivalency.

Two other significant bills concerning digital assets and central bank digital currencies (CBDCs) are currently advancing through the U.S. legislative process. The Digital Asset Market Structure and Investor Protection Act (the "Clarity Act") aims to clarify regulatory oversight between the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC), creating a clear framework for digital asset markets. It was passed by the House of Representatives on July 17, 2025, and is now awaiting Senate consideration.

The CBDC Anti-Surveillance State Act (the "Anti-CBDC Act") seeks to prohibit the Federal Reserve from issuing a retail central bank digital currency due to concerns over privacy and potential government surveillance. This bill was initially passed by the House on May 23, 2024, and passed again on July 17, 2025, during the House's "Crypto Week." It is currently referred to the Senate Banking Committee but has not yet progressed further.

Conclusion

Stablecoins represent a fascinating development in the evolution of money – they are at once old and new. In function, they echo familiar forms of money and finance: bank deposits, e-money, money market funds, even prepaid cards. In form, they are entirely new: cryptographic tokens transacted on decentralized ledgers. This duality has placed them squarely in a regulatory gray area, which lawmakers and regulators are now working to clarify. A legal lens reveals that stablecoins straddle regulatory domains, including banking law, securities/investment law, and payments law, without neatly fitting into any one category. The regulatory responses in the U.S. and Europe aim to craft a sui generis framework that acknowledges the hybrid nature of stablecoins. Europe’s MiCA has set the pace by directly addressing stablecoins with bespoke rules, treating them as a new type of financial instrument that requires prudential safeguards. The United States, through the recently adopted GENIUS Act, and the proposed Clarity Act and Anti-CBDC Act, is converging on an approach to bring stablecoin issuers inside the regulated perimeter (whether via banking licenses or special charters) and to impose bank-like prudential discipline and transparency on them – all while clarifying that properly backed stablecoins are payment tools, not securities.

In conclusion, stablecoins can be viewed as a new layer of private money built on top of the banking system, offering exciting possibilities for faster and programmable payments, while also introducing well-known risks associated with banking and finance. The regulatory answers now being formulated aim to embrace innovation while mitigating risks.