Stablecoin Myth Busting

Written by Jai Massari and Alexandra Steinberg Barrage

Author

Open Banker
March 11, 2025

Jai Massari is co-founder and Chief Legal Officer of Lightspark Group Inc., a company building modern payments on the Bitcoin Lightning Network. Previously, Jai was a partner in the Financial Institutions Group of Davis Polk & Wardwell LLP, resident in its Washington, DC office. She is a Fellow of the Berkeley Center for Law and Business and lecturer at Berkeley Law. She is a Trustee of the Board of the Practicing Law Institute.

Alexandra Steinberg Barrage is a former FDIC executive and now Partner in the Financial Services practice of Troutman Pepper Locke LLP. Prior to joining the FDIC, Alex was a bankruptcy lawyer representing debtors and creditors’ committees in large bankruptcy cases. She has served as co-chair of the American Bankruptcy Institute’s Legislation Committee.

Open Banker curates and shares policy perspectives in the evolving landscape of financial services for free.

Stablecoin policy is red hot in Washington. Wonks of all stripes have re-emerged from the crypto winter with views on a proposed federal framework. 

Despite progress, some of these views are still based on fundamental misconceptions about what stablecoins are, what they can be, and what risks they might pose.1 If these myths persist and become the basis for law and policy – or a basis not to enact new laws – the United States will squander an opportunity to thoughtfully and efficiently legislate, protect consumers, and regain the lead in the future of payments. 

Stablecoins as Digital Cash

A key benefit of cash is that it is always on, always works, and works instantly. Stablecoins, like cash, are always on. The public blockchains on which stablecoins are issued enable trustless, peer-to-peer transactions on a real-time, gross basis, operating 24/7 and globally. Stablecoin transactions do not rely on central banks or complex interbank clearing and settlement networks. 

Today, stablecoins are not widely accepted as digital cash–rightly so. With proper regulation, they could be. The core features of stablecoins must be supported by sound law and regulation so that users and markets have confidence that stablecoins are protected by legal certainty and strong operational infrastructure. The money value of a stablecoin must be fully backed by high-quality liquid assets (HQLA), such as insured bank deposits and U.S. Treasuries. Stablecoins must be redeemable for their face value both in normal times and in the event of an issuer’s bankruptcy. The insolvency framework for stablecoin issuers must therefore provide a clear path for holders to recover maximum value as quickly as possible. The money value and quality of stablecoins should not depend on FDIC insurance or the credit quality of their issuer.

Only then will they be widely and unequivocally accepted as payment instruments and become a new kind of digital cash, uniquely suited for open and modern payments. Their potential is widely recognized by banks, card networks, payment firms, and crypto market participants who are vigorously exploring use cases.2

Two stablecoin bills are currently under consideration in Congress, the GENIUS Act and the STABLE Act.3 Both go a long way toward a clear and comprehensive legal framework – particularly when compared to the current patchwork of state and federal laws that regulate stablecoin issuance today. We are confident that with some thoughtful and measured improvements these bills will gain bipartisan agreement and support stablecoins as good digital cash. 

Myth 1: Stablecoins are like deposits, and their issuance is inherently riskier than bank deposit taking. Recent bills fail to address this risk and would pose “grave and unacceptable dangers” to consumers, investors, our financial system, and the economy.4

The myth is that stablecoins are volatile deposit-like instruments, raising the same risks but not subject to the same regulation. They are neither. Drawing apples-to-apples comparisons between fundamentally different economic and regulatory models leads to faulty conclusions and bad policy. Indeed, the fundamental design of well-regulated stablecoins is focused on mitigating some of the risks associated with bank deposits. 

Let’s start with what a deposit is. A traditional, fractional reserve bank takes your $1 deposit and can lend or invest that dollar in a wide range of permissible assets, for example, business and consumer loans and corporate debt. The bank is currently not required to keep any percentage in cash reserves.5 As a depositor, you have a right to withdraw your $1 from the bank on demand. You take on some risk that there could be a mismatch between the bank’s obligation to pay you back and the bank’s cash reserve (i.e., the ability to convert its long-term loans and investments into cash). This risk is counterbalanced by the fact that your bank is supervised and highly regulated, including that it is subject to liquidity, capital, and risk management requirements. Plus you are afforded the benefits of federal deposit insurance.  

Stablecoins, in contrast, must be fully reserved. When you buy a 1 USD stablecoin from an issuer for $1, the issuer must hold at least $1 in HQLA in reserve, plus a tailored capital and liquidity buffer to address any residual market and credit risk of the reserve and operational risk. All this so the issuer can buy back the stablecoin and return your $1 on short notice. Indeed, the purpose of the reserve is so that the issuer has sufficient liquidity available to redeem all outstanding stablecoins at any time – without the need for deposit insurance or other backstops. 

This model turns myth #1 on its head. When well regulated – with full reserve requirements, as both bills require – stablecoins are not “inherently riskier” than traditional bank deposit taking, particularly in terms of run and contagion risk.

Stablecoin issuance is also more transparent than deposit taking. State laws expect some stablecoin issuers to publish monthly attestations detailing their reserve composition, stablecoins issued and outstanding, and where and how reserve assets are held.6 In contrast, banks file Call Reports quarterly and, as noted above, are no longer subject to any reserve requirements. Holders and depositors are protected in both scenarios, in different ways.

Myth #1 has a basis in stories from the crypto winter, March 2023 bank failures, and credible reports of lightly regulated issuers that failed to fully back their stablecoins with HQLA.7 Most issuers are not yet subject to comprehensive regulation designed for stablecoins.8 Others have been the subject of serious criminal enforcement actions in the United States and abroad.9 Ironically, the failure of Silicon Valley Bank taught us that a tweet-sparked bank run10 can imperil a stablecoin issuer.11

These issues are a clarion call for comprehensive and uniform stablecoin regulation, not the opposite.12 A holder of stablecoins should be no worse off than a bank depositor, even if the regulatory structure underpinning each form of money is different.

Myth 2: Stablecoins will displace bank deposits and thus the money creation function of banks.13 

This myth boils down to a fear that stablecoins will eat the world of money. Banks will issue so many stablecoins that they will meaningfully supplant deposits and lending – the predominant means through which commercial banks create most of our money supply. This idea is unsupported by both the economics of stablecoin issuance and the economics for stablecoin holders. 

In a world with full stablecoin reserve requirements, stablecoins will be more expensive for banks than traditional deposits. When a bank invests deposits in corporate debt, credit card loans, or 30-year mortgages, that investment generates higher returns than the HQLA of stablecoin reserves.14 For stablecoin users, holding stablecoins is expensive compared to interest-bearing deposits, money market funds, and other yield-bearing assets. So banks and users will hold only the amount of stablecoins they need for their immediate transactional needs. 

Stablecoins will complement, not displace, deposits, with demand driven by the aggregate need for fast transactional money.15 Because stablecoins are relatively expensive to issue, we should expect to see stablecoin issuers mint only as many stablecoins as needed to support that demand.16 And because stablecoins are expensive for users to hold, they will treat stablecoins as a substitute for some checking account balances – needed in the short term for transactions – not savings accounts and certainly not investment accounts.17

Myth 3: The failure of a stablecoin issuer requires the appointment of a dedicated receiver like the FDIC, even where stablecoins are not subject to deposit insurance; the bankruptcy process is unworkable and “will end up very badly for investors, any which way.”18

This myth requires us to believe that the only safe way to resolve stablecoin issuers is through a special resolution regime administered by the Federal Deposit Insurance Corporation or National Credit Union Administration.19 This too quickly lands on FDIC resolution as better than U.S. bankruptcy. To the contrary, we think there are several clear advantages to a bankruptcy regime over an FDIC resolution process.

Yes, customer assets have not been sufficiently protected in crypto-winter trading platform bankruptcies. Even absent fraud, customer assets can be deemed property of the debtor’s estate, catching customers in drawn-out bankruptcy proceedings, with mixed success, and at high cost.20 This treatment is bad enough when it comes to crypto investment assets; it is unacceptable in the context of stablecoins because they are meant to act as good digital money. It is therefore critical that stablecoin laws provide maximum clarity and legal certainty for stablecoin holders. 

And FDIC resolution will be the reality for stablecoin issuers that are deposit-taking banks.21 This makes sense – the FDIC as deposit insurer has a special interest in ensuring that insured depositors have access to their money if their bank fails. The FDIC has specific expertise in this process. 

But we do not think that an FDIC receivership process for stablecoin issuers will necessarily be better or faster, especially where stablecoins are not subject to deposit insurance.22 The priorities and mechanics of stablecoin resolution are entirely different from that of a deposit-taking bank. We should assume no going concern value with a failed stablecoin issuer, as we might with a failed bank. Therefore the priority must be on liquidating all reserve assets and paying out stablecoin holders as quickly as possible and as much as possible. In this scenario, we see no reason why customers would be better protected in FDIC resolution versus bankruptcy. 

Bankruptcy is a well established judicial process. Legal protections are afforded by the Bankruptcy Code for all types of businesses (other than banks). Unlike an administrative resolution process, bankruptcy cases are public and transparent – stakeholders can track developments in near real-time using a free and public claims website. Parties-in-interest can appear before the bankruptcy court, and bankruptcy court judges are imminently capable of handling cases of different sizes and complexity.

But to work, we need a modified Bankruptcy Code – one that provides better and faster customer recovery. By making relatively discrete modifications and clarifications to the existing Bankruptcy Code, Congress has the opportunity to hardwire sensible protections so that redeeming holders can be paid back sooner, facilitating orderly resolution, strengthening consumer protections, and ensuring that the public has confidence ex ante that stablecoins are good digital cash. Amendments to the Code should provide that:

  • The segregated reserves backing the stablecoin are not property of the issuer’s bankruptcy estate and, therefore, are not subject to the ordinary (and slow) bankruptcy claims process;

  • Priority claims by a stablecoin holder are limited to stablecoin reserves, not general estate property (to which the holder would not have legal title);

  • Customer protections would cover U.S. holders regardless of whether the debtor issues or circulates stablecoins in the U.S., or is a U.S. or non-U.S. based issuer;

  • The debtor files a motion on the first day of the bankruptcy case requesting expedited relief so that the bankruptcy court can identify the reserves ready to be immediately liquidated to satisfy stablecoin redemptions. The automatic stay, which applies upon the bankruptcy filing, would then be lifted in the early days of the case assuming the bankruptcy court makes this finding. This process would allow holders to get paid ratably and quickly based on available reserves.

  • The trustee and creditors of the issuer's bankruptcy estate would be able to make claims against only estate property, not against reserves; and

  • Any redemptions that occur prior to the bankruptcy filing cannot be unwound or clawed back,except for cases of intentional fraud.

The GENIUS and STABLE Acts take us part of the way. They both require that stablecoin reserves be segregated from the issuer’s proprietary assets and held or custodied at banks, for the benefit of holders, not general creditors of the issuer’s bankruptcy estate. But they must do more.

Like all mythos, fears about stablecoins are not always grounded in fact. Congress should design clear protections that put these myths to rest for good.

The opinions shared in this article are the author’s own and do not reflect the views of any organization they are affiliated with.

1   This article is about “payment stablecoins,” which are national currency-denominated stablecoins issued by a legal entity issuer, backed by safe and liquid assets denominated in the same currency as the stablecoin, and issued and redeemed for national currency to maintain a peg to a national currency face value. Other types of stablecoins should be subject to different rules because they will have different uses and are subject to different risks.

2 Jackie Dresch, Visa Introduces the Visa Tokenized Asset Platform, VISA (Oct. 3, 2024); Sheryl Estrada, Bank of America’s CEO Says Stablecoins are Coming Very Soon, FORTUNE (Feb. 26, 2025); Stripe Completes Bridge Acquisition, Stripe (Feb. 4, 2025); Stablecoins and the New Payments Landscape, Coinbase (Aug. 5, 2024).

3   Stablecoin Transparency and Accountability for a Better Ledger Economy Act of 2025, https://files.constantcontact.com/9f2b5e3d701/6c1f8aa0-095c-4a22-9982-2f4380d0b531.pdf; Guiding and Establishing National Innovation for U.S. Stablecoins of 2025, https://www.hagerty.senate.gov/wp-content/uploads/2025/02/GENIUS-Act.pdf.

4  Hilary Allen, Donald Trump’s crypto embrace is a threat to Wall Street, Fin. Times (Mar. 6, 2025) (“With the imprimatur of the government and the light patina of regulation, stablecoins will increasingly compete with bank deposits as a place for people to park their cash. But of course, stablecoins are much riskier.”); Arthur E Wilmarth, Jr., Senate Stablecoin Bill is Deeply Flawed, Am. Banker (Mar. 6, 2025).

5 Board of Governors of the Federal Reserve System, Reserve Requirements, Fed. Rsrv. (Nov. 26, 2024) (noting the Board’s announcement to eliminate reserve requirements for all depository institutions effective March 26, 2020).

6 See Virtual Currency Guidance, N.Y. Dept. of Fin. Servs. (June 8, 2022).

7 See Anderson v. Tether Holdings Ltd., No. 21-CV-10613, 3 (S.D.N.Y. Aug. 4, 2023) (“On March 31, 2021, Tether released a mandated financial disclosure that represented it had cash reserves totaling 3.87% of the value of the USDT in circulation, with the rest of Tether's reserves comprised of large proportions of commercial paper holdings, ‘corporate bonds, funds and precious metals,’ and ‘secured loans.’”).

8 See Francisco Rodrigues, Tether Names Simon McWilliams as CFO Amid Push for Full Audit, CoinDesk (Mar. 3, 2025); Sean Stein Smith, Why Questions About Tether’s Reserve Assets Still Matter, Forbes (Jan. 21, 2024).

10 Emily Peck, Twitter Fueled Run on Silicon Valley Bank, New Paper Finds, AXIOS (Apr. 24, 2023).

12 E.g., Hilary Allen, Donald Trump’s crypto embrace is a threat to Wall Street, Fin. Times (Mar. 6, 2025) (warning against moving forward with U.S. stablecoin legislation); 

13 Martin J. Gruenberg, FDIC Acting Chairman, Remarks at the Brookings Institution on The Prudential Regulation of Crypto-Assets (Oct. 20, 2022) (“The development of a payment stablecoin could fundamentally alter the landscape of banking. … possibly leading to forms of credit disintermediation that could harm the viability of many U.S. banks and potentially create a foundation for a new type of shadow banking. … The potential for non-bank stablecoins to disintermediate community banks from their local communities is an issue that should also be carefully explored and considered.”); President’s Working Group on Financial Markets, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency, Report on Stablecoins (Nov. 1, 2021) (“If insured depository institutions lose retail deposits to stablecoins, and the reserve assets that back stablecoins do not support credit creation, the aggregate growth of stablecoins could increase borrowing costs and impair credit availability in the real economy.”); see also Mark J. Flannery, How the Rise of Stablecoins Could Threaten Traditional Banks’ Lending Capacity, 4 (Jan. 17, 2023).

14 For example, today a bank can earn 6.6% for a typical mortgage loan, versus 4.3% for an investment in three-month Treasuries. https://www.bloomberg.com/markets/rates-bonds/government-bonds/us

15 This is also why stablecoin issuers are different from regular narrow banks. The business model of those efforts was focused on a federal reserve member bank sharing interest on excess reserves or returns on Treasury holdings with deposit holders. See Press Release, Fed. Rsrv., Federal Reserve Board issues advance notice of proposed rulemaking seeking public comment on whether to amend Regulation D to lower certain interest rates paid on balances at Federal Reserve Banks (Mar. 6, 2019). The business of stablecoin issuers should be focused on supporting innovative new payment use cases. 

17 We acknowledge that the balance would be different for interest-bearing stablecoins, where the economic incentives for issuers and holders change. Interest-bearing stablecoins may be a closer substitute for a range of deposit products and investment products, analogous to money market mutual funds. For these kinds of stablecoins, the trade-offs and impacts on money creation will be different. We will need to more carefully understand their potential substitutability and consequences for bank money creation. 

18 Id.

19 See Exploring Bipartisan Legislative Frameworks for Digital Assets, Hearing Before the Subcommittee on Digital Assets of the Committee on Banking, Housing and Urban Affairs, U.S. Senate, 118th Cong. 5-6 (2025), Statement of Tim Massad (noting a stablecoin regulatory framework “should involve the appointment of a dedicated receiver, and it should be designed to work for federal and state-chartered issuers. . .”); see also Waters stablecoin bill at 37-8 (proposing a dedicated resolution process involving the FDIC and NCUA as federal receiver).

20 See generally, Deborah Kovsky-Apap, et al., Whose Crypto Is It, Anyway?, Troutman Pepper Locke LLP (Aug. 3, 2022).

21 Federal non-depository banks would theoretically be resolved by the Office of the Comptroller of the Currency; state non-depository banks by the state banking regulators. Neither set of regulators has significant experience in conducting bank resolutions. We therefore question whether this is the right result, as expertise and experience is necessary for fast and efficient resolution processes. 

22 See Waters stablecoin bill at 37 (proposing a dedicated resolution process involving a federal receiver and prohibiting the use of any federal deposit insurance funds for stablecoin issuer receivership).

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