Stablecoins vs. Tokenized Deposits: The Narrow Banking Debate Revisited

Xuesong Huang () and Todd Keister
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Todd Keister: https://www.newyorkfed.org/research/economists/Keister

No 1179, Staff Reports from Federal Reserve Bank of New York

Abstract: We study how the type of money used in blockchain-based trade affects interest rates, investment, and welfare. Stablecoins in our model are backed by safe assets, while banks issue deposits (both traditional and tokenized) to fund a portfolio of safe and risky assets. Deposit insurance creates a risk-shifting incentive for banks, and regulation increases banks’ costs. If regulatory costs are large and risk-shifting is limited, we show that allowing only tokenized deposits to be used in crypto trade raises welfare by expanding bank credit. If regulation is lighter and the risk-shifting incentive is strong, in contrast, allowing only stablecoins is desirable despite crowding out credit. In between these cases, allowing stablecoins and tokenized deposits to compete is optimal. The tradeoffs between these policies are reminiscent of both historical and recent debates over the desirability of narrow banking.

Keywords: stablecoins; money creation; narrow banking; bank regulation (search for similar items in EconPapers)
JEL-codes: E42 G21 G28 (search for similar items in EconPapers)
Pages: 43
Date: 2026-02-01
New Economics Papers: this item is included in nep-mon and nep-reg
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DOI: 10.59576/sr.1179

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