Stablecoins – From the outside

Forms of Money, How They are Stored, How They Move

While exploring the impact of stablecoins on the future of money, I have found that public discussion of digital money often tends to conflate three things that are analytically distinct: the monetary instrument itself, the form in which it is stored or represented, and the infrastructure used to move it between parties. I believe that separating them assists understanding what is genuinely new about stablecoins and tokenised deposits, what is merely a change of form or rail, and where the real regulatory and systemic questions lie.

The three questions are:

• what is the money (the underlying claim and who stands behind it)?

• how is it held (the representation or storage form)? and

• how does it move (the payment rail or transmission infrastructure)?

Each has a different answer for central bank money, bank deposits, and fiat-backed stablecoins — and the differences matter at each level independently.

The Monetary Instrument

The monetary instrument is the underlying claim: i.e. the asset you actually own when you hold money. For central bank money, this is the liability of the central bank — a claim on the state that is backstopped by the sovereign’s taxing power and the central bank’s capacity to create reserves. For commercial bank deposits, it is a claim on an individual bank, convertible at par into central bank money on demand, and backstopped by deposit insurance, banking regulation, and lender-of-last-resort facilities. For a fiat-backed stablecoin, it is a claim on the issuer, redeemable for the reference fiat currency, and backstopped only by the reserve assets held and the legal framework governing redemption.

The monetary instrument is defined by who is liable (central bank, commercial bank, or stablecoin issuer), what backs that liability (sovereign authority, deposit insurance and capital, or reserve assets), and what rights the holder has (redemption at par, deposit insurance coverage, bankruptcy priority).

These are properties of the instrument regardless of how it is stored or how it is transmitted. A bank deposit is the same instrument whether it is accessed via a cheque book, a debit card, an online banking portal, or a tokenised deposit on a blockchain. The underlying claim — and its legal, regulatory, and credit characteristics — does not change because the representation changes.

The Representation and Storage Form

The representation form is how the monetary instrument is recorded, held, and evidenced. This is the dimension most directly affected by digitisation. Historically, representation forms have included: physical notes and coins (bearer instruments, value in the object); entries in a bank’s paper or electronic ledger (account-based, value in the record); and book entries in a central bank’s reserve account system (account-based, institutional access only).

Tokenisation is a change of representation form, not of monetary instrument. A tokenised deposit is the same bank deposit claim represented as a programmable token on a distributed ledger rather than as an entry in the bank’s conventional core banking system. The EBA (December 2024) is explicit on this point for EU law: a tokenised deposit remains a deposit for all legal and regulatory purposes.

The token is the envelope; the deposit is the contents. Similarly, a fiat-backed stablecoin token is the representation of a claim on the issuer — the token itself is not the money, it is the bearer instrument evidencing the money claim.

The representation form matters because it determines: programmability (can conditional logic be embedded?); composability (can the instrument interact with other on-chain instruments without conversion?); and bearer versus account-based character (does transfer require identity verification, or does possession of the token suffice?).

But changes in representation form do not, by themselves, change the nature of the underlying monetary claim or its regulatory treatment — though they may reveal that the regulatory framework was not designed with that representation in mind, creating classification gaps.

The Payment Rail

The payment rail is the infrastructure used to transmit value between parties: the pipes, protocols, and settlement systems through which money moves. The rail is analytically independent of both the instrument and its representation form. The same bank deposit can be transmitted via SWIFT (correspondent banking), Faster Payments (domestic push), RTGS (large-value settlement), a debit card network (Visa/Mastercard acquiring infrastructure), or a mobile payment app (M-Pesa, Venmo). The instrument does not change; the rail does.

For stablecoins, the blockchain is the payment rail. Solana, Ethereum, Tron, and Base are rails — infrastructure choices that determine transaction speed, cost, finality, programmability, and geographic accessibility. A USDC token on Solana and a USDC token on Ethereum represent the same underlying claim on Circle (the issuer) but travel on different rails with different properties. The rail choice affects the user experience and operational risk profile of a payment, but does not change what the USDC token is: a claim on Circle’s reserve pool, redeemable 1:1 for US dollars.

Some implications

The conflation of rail and instrument is I believe the source of several analytical errors that appear in policy discussions. When commentators argue that stablecoins are ‘just a payment method’, they are (correctly) identifying that the blockchain is a rail, but they may also be (incorrectly) implying that this makes the stablecoin token equivalent to a bank deposit. Comparisons of stablecoin transactions with credit card payments are I think equally problematic. It is rare in my experience to see much discussion of how fast payment systems stack up against stablecoins in terms of cost and speed. The added cost and complexity of the on/off ramps with the traditional banking system may also be missing.

The rail properties of a blockchain — open access, programmability, pseudo-anonymous transfer, irreversible finality — are genuine and consequential differences from RTGS or card networks. But there are significant differences between a stablecoin and a bank deposit at the instrument-level: who is liable, what backs the claim, whether deposit insurance applies, and whether settlement occurs in central bank money.

A further rail-level property requires explicit treatment: settlement finality on public blockchains is probabilistic, not absolute. On proof-of-work networks, finality accumulates over multiple block confirmations; on proof-of-stake networks such as Ethereum, economic finality is reached after two checkpoint epochs (approximately 12–15 minutes), though transactions may be practically irreversible within one or two blocks in most conditions. Solana’s optimistic confirmation model offers near-instant practical finality but with a technically distinct guarantee than Ethereum’s checkpoint-based economic finality. This contrasts with RTGS systems (Fedwire, TARGET2, CHAPS) where settlement is legally final and irrevocable the moment it is posted to the central bank’s books.

The finality distinction has direct institutional adoption implications: settlement finality is a legal and operational requirement for securities settlement (Delivery vs. Payment), large-value interbank transactions, and any use case governed by the EU’s Settlement Finality Directive or equivalent. A public blockchain rail that cannot offer the same finality guarantee as an RTGS system is not a direct substitute for those use cases until either the regulatory framework recognises on-chain finality as legally equivalent, or wholesale CBDC rails provide a bridge between blockchain settlement and central bank money finality.

I suspect that I am only scratching the surface of this topic and I am straying way outside my area of expertise so treat the above with caution. I am writing it down to clarify for myself the extent to which I have an understanding of the topic.

Feedback welcome on anything I have wrong or that I am missing

Tony – From the Outside

Stablecoin regulation

I remain agnostic on the merits of stablecoins versus the traditional forms of digital money but I have been trying to educate myself. In that spirit I used a couple of Large Language Models to prepare a report on the the GENIUS Act and the CLARITY Act that together will define how the USA intends to regulate these instruments

The GENIUS Act, enacted in 2025, establishes prudential standards for stablecoin issuers, requiring one-to-one reserves and bank-like oversight to protect consumers. Its legislative partner, the CLARITY Act, seeks to organize the broader market by defining jurisdictional boundaries between the SEC and CFTC. The report emphasizes that while issuance is now governed by federal law, ongoing debates regarding interest-bearing stablecoins and Federal Reserve access remain critical hurdles.

I have attached the report for anyone else who might find it a useful reference point. I have done my best to check the results but it comes with the obvious disclaimer that it may still contain errors. The report started with a prompt I developed using “prompt cowboy” that I then fed into Claude to process. I then fed the Claude report into Gemini to fact check and I also used an AI tool called “refine” that has been developed to review papers for logical consistency.

Using these combined fact checking resources, I found at least ten major errors so the final draft is substantially better than Claude’s first effort but I encourage anyone using it to perform their own fact checking.

Tony – From the Outside

Claude Report – Genius Clarity Acts analysis 20260225.pdf Download

Stablecoins – what are they good for

Not a fan of crypto but this Odd Lots podcast offers a concise update on the use case for stablecoins.

Also concludes with an interesting summary of three things that crypto tends to mis about conventional finance, banking and money

omny.fm/shows/odd-lots/the-booming-crypto-use-case-thats-happening-right

Tony – From the Outside

Moneyness – it’s complicated

… arguably too complicated.

Interesting post here by JP Koning exploring the differences between the way PayPal’s two forms of payment mechanisms are regulated. His conclusion might surprise you.

Here is a link to his post

jpkoning.blogspot.com/2023/09/there-are-now-two-types-of-paypal.html

This is the short version if you are time poor

Which type of PayPal dollar is safer for the public to use? If you listen to Congresswoman Maxine Waters, who in response to PayPal’s announcement fretted that PayPal’s crypto-based dollars would not able to “guarantee consumer protections,” you’d assume the traditional non-crypto version is the safer one. And I think that fits with most peoples’ preconceptions of crypto. Not so, oddly enough. It’s the PayPal dollars hosted on crypto databases that are the safer of the two, if not along every dimension, at least in terms of the degree to which customers are protected by: 1) the quality of underlying assets; 2) their seniority (or ranking relative to other creditors); and 3) transparency.

Let me know what I (and JP) might be missing

Tony – From the Outside

The stablecoin business model

JP Koning offers an interesting post here speculating on the reason why Wise can pay interest to its USD users but USDC can or does not. The extract below captures his main argument …

It’s possible that some USDC users might be willing to give up their ID in order to receive the interest and protection from Circle’s bank. But that would interfere with the usefulness of USDC. One reason why USDC is popular is because it can be plugged into various pseudonymous financial machines (like Uniswap or Curve). If a user chooses to collect interest from an underlying bank, that means giving up the ability to put their USDC into these machines.

This may represent a permanent stablecoin tradeoff. Users of stablecoins such as USDC can get either native interest or no-ID services from financial machines, but they can’t get both no-ID services and interest.

Let me know what I am missing

Tony – From the Outside

Moneyness: Zelle vs Interac e-Transfer, or why it’s so difficult to kickstart a payments network in the U.S.

One of the mysteries of life is why a country as advanced as the USA seems to be so far behind in its payment system. JP Koning suggests that the answer lies in part in the large number of banks that is a feature of the US system.

— Read on jpkoning.blogspot.com/2023/04/zelle-vs-interac-e-transfer-or-why-its.html

Tony – From The Outside

Banking requires mystery

Matt Levine, like me, loves discussing stable-coin business models. In a recent opinion column he concludes that there is at least some prima facie evidence that transparency is not rewarded. At least not in the short run.

I have covered this ground in previous posts but at a time when the banking industry is seemingly demonstrating a perennial incapacity to learn from past mistakes, it is worth examining again the lessons to be drawn on the role of information and transparency in banking.

So starting with the basics …

Most of the leading crypto stablecoins have a pretty simple model: You give some stablecoin issuer $1, the issuer keeps the dollar and gives you back a dollar-denominated stablecoin, and the issuer promises to redeem the stablecoin for a dollar when you want. Meanwhile, the issuer has to hang on to the dollar.

Next he dives down a bit into the mechanics of how you might go about this. Matt identifies two basic models …

1.The issuer can try to work nicely with US regulators, get various licenses, and park its money in some combination of Treasury bills, other safe liquid assets, and accounts at regulated US banks.

2. The issuer can be a total mystery! The money is somewhere! Probably! But you’ll never find out where.

In practice Matt argues we have two examples of these different strategies …

USDC, the stablecoin of Circle, is probably the leading example of the first option. USDT, the stablecoin of Tether, is probably the leading example of the second option.

Matt, like me, is a traditional finance guy who struggles with the crypto trust model…

Me, I am a guy from traditional finance, and I’ve always been a bit puzzled that everyone in crypto trusts Tether so completely. You could put your money in a stablecoin that transparently keeps it in regulated banks, or you could put your money in Tether, which is very cagy and sometimes gets up to absolutely wild stuff with the money. Why choose Tether?

But over the recent weekend (11-12 Mar 2023) of banking turmoil USDC’s transparent strategy saw USDC depegged while USDT did not. The interesting question here is whether Tether is being rewarded for better portfolio risk management choices or something else was going on.

Matt sums up …

One possible understanding of this situation is that Circle made some bad credit decisions with its portfolio (putting billions of dollars into a rickety US bank), while Tether made excellent credit decisions with its portfolio (putting billions of dollars into whatever it is putting billions of dollars into). And, by extension, the traditional regulated US banking system isn’t that safe, and Tether’s more complicated exposures are actually better than keeping the money in the bank.

Another possible understanding, though, is that banking requires mystery! My point, in the first section of this column, was that too much transparency can add to the fragility of a bank, that the Fed is providing a valuable service by ignoring banks’ mark-to-market losses. Circle does not provide that service. Circle keeps its money in a bank with financial statements, and that bank fails, and Circle dutifully puts out a statement saying “whoops we had $3.3 billion in the failed bank,” and people naturally panic and USDC depegs. You have no idea where Tether keeps its money, so you have no idea if anything went wrong. This has generally struck me as bad, but it might have some advantages.

Tony – From the Outside

What does “proof of reserves” prove?

Frances Coppola argues in a recent post that proof of reserves as practised by the crypto finance community proves nothing. I would be interested to read any rebuttals, but the arguments she advances in support of this claim looks pretty sound to me.

Frances starts with the observation that the concept of “reserves” is not well understood even in conventional banking.

In the banking world, we have now, after many years of confusion, broadly reached agreement that the term “reserves” specifically means the liquidity that banks need to settle deposit withdrawals and make payments. This liquidity is narrowly defined as central bank deposits and physical currency – what is usually known as “base money” or M0, and we could perhaps also (though, strictly speaking, incorrectly) deem “cash”.
“Proof of reserves is proof of nothing” Coppola Comment 16 Feb 2023

This certainly rings true to me. I often see “reserves” confused with capital when reserves are really a liquidity tool. If you are still reading, I suspect you are ready to jump ship fearing a pedantic discussion of obscure banking terminology. Bear with me.

If you have even a glancing interested in crypto you will probably have encountered the complaint that traditional banks engage in the dubious (if not outrightly nefarious) practice of fractional reserve banking. A full discussion of the pros and cons of fractional reserve banking is a topic for another day. The key point for this post is that the crypto community will frequently claim that their crypto alternative for a TradFi activity like deposit taking is fully reserved and hence safer.

The published “proof of reserves” is intended therefore to demonstrate that the activity being measured (e.g. a stablecoin) is in fact fully reserved and hence much safer than bank deposits which are only fractionally reserved. Some of the cryptographic processes (e.g. Merkle trees) employed to allow customers to verify that their account balance is included in the proof are interesting but Frances’ post lists a number of big picture concerns with the crypto claim:

The assets implicitly classified as reserves in the crypto proof do not meet the standards of risk and liquidity applied to reserves included in the banking measure; they are not really “reserves” at all as the concept is commonly understood in conventional banking
As a result the crypto entity may in fact be engaging in fractional reserve banking just like a conventional bank but with riskier less liquid assets and much less liquidity and capital
The crypto proof of “reserves” held against customer liabilities also says nothing about the extent to which the crypto entity has taken on other liabilities which may also have a claim on the assets that are claimed to be fully covering the customer deposits.

Crypto people complain that traditional banks don’t have 100% cash backing for their deposits, then claim stablecoins, exchanges and crypto lenders are “fully reserved” even if their assets consist largely of illiquid loans and securities. But this is actually what the asset base of traditional banks looks like.

Let me know what I missing ….

Tony – From the Outside

Moneyness: Let’s stop regulating crypto exchanges like Western Union

J.P. Koning offers an interesting contribution to the crypto regulation debate focussing on the problem with using money transmitter licences to manage businesses which are very different to the ones the framework was designed for …

The collapse of cryptocurrency exchange FTX has been gut-wrenching for its customers, not only those who used its flagship offshore exchange in the Bahamas but also U.S. customers of Chicago-based FTX US.

But there is a silver lining to the FTX debacle. It may put an end to the way that cryptocurrency exchanges are regulated – or, more accurately, misregulated – in the U.S.

U.S.-based cryptocurrency exchanges including Coinbase, FTX US, and Bianca.US are overseen on a state-by-state basis as money transmitters.

— Read on jpkoning.blogspot.com/2022/11/lets-stop-regulating-crypto-exchanges.html

Tony – From the Outside

The empire strikes back?

There is a lot written about how bad the US payment system is and why crypto solutions are the future. Against that background, Tom Noyes recently published an interesting post setting out his thoughts on a project JPM Chase is running to reengineer their payment system. Tom’s posts are normally restricted to subscribers but he has unlocked the first in a 5 part series exploring what JPM Chase is doing.

His post is definitely worth reading if you are interested in the future of banking. The short version is that the traditional banking system is not sitting still while crypto and fintech attempt to eat its lunch.

Tony – From the Outside