When the White House published its stablecoin paper in April, it made an argument that jars with intuition. Stablecoins, it claimed, do not displace bank deposits. The Council of Economic Advisers traced what happens when a consumer converts dollars into stablecoins. The deposits do not disappear. They move. If the stablecoin issuer buys Treasury bills with the proceeds, the cash ends up in the bank account of the dealer who sold them. If the issuer holds cash, the deposits sit at the issuer’s bank. Either way, aggregate deposits in the banking system are effectively unchanged. At least in the first instance.
That reasoning is sound as far as it goes. The corollary, however, is significant. If bank deposits remain unchanged and there are now also stablecoins in circulation, stablecoin issuance amounts to money creation.
One of the key differences with banks is they have greater balance sheet flexibility. Banks create money every time they make a loan or buy an asset. Stablecoin issuers are not supposed to work the same way. They are more demand driven. Yet there is an aspect of the GENIUS Act that may allow them far greater balance sheet flexibility, and to do so at scale. The issue has not been raised in the OCC’s current rulemaking on stablecoins. Nor did the banking associations flag it in their comment letters. A Ledger Insights analysis of the GENIUS Act text and the OCC rulemaking record identifies a money creation gap that appears to have gone unnoticed.
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