Tokenized Deposits: How I Learned to Stop Worrying and Love Stablecoins

Abstract

Stablecoins are crypto assets sold on the promise or understanding that they are redeemable for fiat currency at par. Like bank deposits, they may be used for payments, and may pose risks to the financial system. Like banks, stablecoin issuers exchange money for claims on assets and engage in maturity transformation by using those short-term funding to fund longer-term investments and can run. And to protect against runs, some commentators have argued that stablecoins should be insured, much as how the Federal Deposit Insurance Corporation (FDIC) insures bank deposits up to $250,000 per person if banks fail.

This article is the first to examine the prudence, legality, and feasibility of insuring stablecoins, and concludes that only tokenized deposit stablecoins—digital representations of traditional bank deposits that trade over private, permissioned blockchains—address the myriad concerns posed by stablecoins. First, it examines stablecoins’ risks and the benefits that would be brought with deposit insurance, concluding that stablecoins should be prohibited unless insured and regulated. Next, it evaluates the application of FDIC insurance to stablecoins, identifying two potential means of insuring stablecoins—insuring stablecoins as bank deposits and insuring stablecoins issued by banks—and concludes that the former would not fulfill the policy rationales for deposit insurance and the latter is likely not permissible. This article further finds that the FDIC would face operational challenges in insuring stablecoins, and that incorporating traditional stablecoins into the national payments system would be detrimental. It concludes by noting that tokenized deposit stablecoins are the optimal stablecoins from a financial stability and payments perspective; however, they appear to be no better—but at least not worse—than the existing payment system.

Keywords: stablecoins, deposit insurance