News Archives: October, 2025
The NY Fed's Liberty Street Economics blog published a piece titled, "A Historical Perspective on Stablecoins." It states, "Digital currencies have grown rapidly in recent years. In July 2025, Congress passed the 'Guiding and Establishing National Innovation for U.S. Stablecoins Act' (GENIUS) Act, establishing the first comprehensive federal framework governing the issuance of stablecoins. In this post, we place stablecoins in a historical perspective by comparing them to national bank notes, a form of privately issued money that circulated in the United States from 1863 through 1935."
A section titled, "What Are Stablecoins?" says, "Stablecoins are digital currencies designed to maintain a stable nominal value by being pegged to a benchmark such as the U.S. dollar. Stablecoins aim to combine decentralized payment systems' technological advantages -- such as digital methods of recording transactions (i.e., digital ledgers/blockchains) and of representing traditional assets (e.g., tokenization) -- with the convenience of traditional forms of money."
It continues, "The GENIUS Act gives fiat-backed stablecoins a clear legal foundation in the United States. Under the Act, permitted payment stablecoin issuers (PPSIs), such as federally regulated banks, approved nonbanks, or qualifying state-chartered entities, are authorized to issue stablecoins. Stablecoins under the Act must be fully backed one-to-one by safe, liquid assets such as U.S. dollars, short-term Treasury securities, uninsured deposits at commercial banks, or cash equivalents. Issuers may not pay interest or yields on stablecoin balances, and holders enjoy priority claims in bankruptcy. To promote transparency, issuers must provide monthly public disclosures of their reserves."
The blog comments, "Stablecoins may feel novel but, conceptually, they echo an earlier era of U.S. financial history. From 1863 to 1935, 'national bank notes' circulated widely as a form of private money that was backed by public debt. Authorized by the National Banking Acts of 1863 and 1864, these notes were issued by national banks, which were commercial banks chartered under federal law."
It asks, "How did note issuance by national banks work? A bank could apply for a national bank charter by the Office of the Comptroller of the Currency if it fulfilled a set of requirements such as having a minimum amount of capital. Once the bank was granted a national bank charter, it could use its capital to purchase government bonds. To print notes, the bank then had to deposit with the Treasury U.S. government bonds that were eligible for note issuance. National bank notes were redeemable in lawful money such as specie (coin) or greenbacks (paper money issued by the Treasury directly)."
The blog then says, "The original motive of the National Banking Acts was twofold. First, the issuance of national bank notes was intended to create a uniform currency. Before the National Banking Era (1863-1913), during the so-called Free Banking Era (1837-1863), banks were typically legally required to back any note issuance with bonds of the state governments.... Providing a currency for circulation through the newly formed national banking system was an attempt to create a uniform currency in which bank notes had the same value in all parts of the country."
It adds, "Second, directly connecting the issuance of national bank notes to federal government bonds was a means to increase demand for the bonds. The federal government saw a large rise in its expenses during the Civil War, and, to finance those expenses, it desired to issue government bonds. Thus, it was expedient to create a currency based on its own debt."
A section titled, "What Can History Teach Us About the Potential Success of Stablecoins?" says, "These historical details show that national bank notes and stablecoins have many commonalities. Similar to national bank notes, stablecoins under the GENIUS Act are privately issued but can be partially or fully backed by government securities. Moreover, they are issued by many private entities that are granted a charter to earn seigniorage from holding government bonds. Like national banks, issuers of stablecoins can also engage in other lines of business. Finally, stablecoins, like national bank notes, promise to be redeemable at par and the one-to-one convertibility with government money is supposed to be maintained even when the issuer fails and defaults on other liabilities that are not stablecoins."
The piece tells us, "National bank notes were initially successful for two main reasons. First, given that they were traded at the same price as greenbacks and specie, they were a more useful form of money than other circulating notes. Second, bank notes faced little competition from other forms of money, such as bank deposits. Before the rise of deposit insurance, deposits were often risky investments and, historically, not a widely accepted form of payment."
It says, "However, as the interbank system in the U.S. developed, the use of deposits for payments became increasingly common. While national bank notes represented around 20 percent of total bank assets by the end of 1880, that share declined thereafter.... The decline in bank notes was mirrored by the increase in deposits. This pattern is in line with a decline in the demand for bank notes and the rise of bank deposits as an alternative source of money."
The update adds, "Bank deposits had an advantage over national bank notes in that they were able to earn interest. And while deposits remained risky investments, they became increasingly attractive as payment systems improved. Eventually, most households and firms that desired to hold money for transaction purposes held deposits rather than national bank notes, and they either used checks or wired money from bank to bank to make payments, rather than carrying notes."
It comments, "This dynamic between national bank notes and bank deposits is a cautionary tale for the potential rise of stablecoins. Currently, most retail deposits pay little interest. Moreover, banks charge considerable fees for large instant payments such as wire fees. However, as stablecoins become more commonly used, the traditional centralized payment system may move to become more attractive in response. To avoid losing valuable deposits, banks may start to offer better terms on deposits or offer both higher interest and better payment services, just as they did during the National Banking Era. Alternatively, bank deposits may become 'tokenized' themselves."
They also tell us, "Thus, at least for domestic payments, the footprint of stablecoins may be limited given that many potential retail depositors may stick with bank deposits. For international payments, because the scope for improvements in the efficiency of the international payment system is itself more limited, demand for stablecoins may be highest from international investors that either require seamless cross-border payments, otherwise have no access to reliable forms of money, or prefer decentralized payment systems for other reasons."
The blog concludes, "Stablecoins under the GENIUS Act share important features with national bank notes: both are forms of private money backed by federal government debt. The historical experience of national bank notes illustrates that stablecoins may have a large potential to increase the demand for U.S. government debt. However, at the same time, the demise of national bank notes and the rise of bank deposits also suggest that other forms of money may become more attractive as a consequence of the new competition. While this would arguably be a desirable effect of the GENIUS Act, it may also induce a natural upper limit for the growth of the market for stablecoins themselves."
Crane Data published its latest Weekly Money Fund Portfolio Holdings statistics Tuesday, which track a shifting subset of our monthly Portfolio Holdings collection. The most recent cut (with data as of September 26) includes Holdings information from 55 money funds (down 19 from a week ago), or $3.709 trillion (down from $4.310 trillion) of the $7.730 trillion in total money fund assets (or 48.0%) tracked by Crane Data. (Note: Our Weekly MFPH are e-mail only and aren't available on the website. See our latest Monthly Money Fund Portfolio Holdings here and our September 11 News, "Sept. Money Fund Portfolio Holdings: Repo Plummets, Treasuries Surge.")
Our latest Weekly MFPH Composition summary shows Government assets dominating the holdings list with Treasuries totaling $1.870 trillion (down from $2.082 trillion a week ago), or 50.4%; Repurchase Agreements (Repo) totaling $1.227 trillion (down from $1.468 trillion a week ago), or 33.1%, and Government Agency securities totaling $296.4 billion (down from $376.6 billion a week ago), or 8.0%. Commercial Paper (CP) totaled $150.7 billion (down from $178.5 billion a week ago), or 4.1%. Certificates of Deposit (CDs) totaled $74.4 billion (down from $91.1 billion a week ago), or 2.0%. The Other category accounted for $54.4 billion or 1.5%, while VRDNs accounted for $36.3 billion or 1.0%.
The Ten Largest Issuers in our Weekly Holdings product include: the US Treasury with $1.870 trillion (50.4% of total holdings), Fixed Income Clearing Corp with $431.7B (11.6%), the Federal Home Loan Bank with $194.8B (5.3%), JP Morgan with $117.9B (3.2%), BNP Paribas with $88.7B (2.4%), RBC with $84.4B (2.3%), Citi with $73.4B (2.0%), Federal Farm Credit Bank with $70.6B (1.9%), Wells Fargo with $67.2B (1.8%) and Barclays PLC with $55.6B (1.5%).
The Ten Largest Funds tracked in our latest Weekly include: JPMorgan US Govt MM ($303.6B), Fidelity Inv MM: Govt Port ($284.1B), JPMorgan 100% US Treas MMkt ($266.3B), Goldman Sachs FS Govt ($234.7B), BlackRock Lq FedFund ($176.8B), State Street Inst US Govt ($170.0B), BlackRock Lq Treas Tr ($167.9B), Fidelity Inv MM: MM Port ($165.0B), Morgan Stanley Inst Liq Govt ($159.9B) and Dreyfus Govt Cash Mgmt ($155.6B). (Let us know if you'd like to see our latest domestic U.S. and/or "offshore" Weekly Portfolio Holdings collection and summary.)
In other news, the Federal Reserve Bank of New York posted two briefs on the topic of the 2023 Bank Run on its "Liberty Street Economics" blog. The first, "Reading the Panic: How Investors Perceived Bank Risk During the 2023 Bank Run," tells us, "The bank run that started in March 2023 in the U.S. occurred at an unusually rapid pace, suggesting that depositors were surprised by these events. Given that public data revealed bank vulnerabilities as early as 2022:Q1, were other market participants also surprised? In this post, based on a recent paper, we develop a new, high-frequency measure of bank balance sheet risk to examine how stock market investors' risk sensitivity evolved around the run. We find that stock market investors only became attentive to bank risk after the run and only to the risk of a limited number (less than one-third) of publicly traded banks. Surprisingly, investors seem to have mostly focused on media exposure and not fundamentals when evaluating bank risk. In a companion post, we examine how the Federal Reserve's liquidity support affected investor risk perceptions."
The first blog asks, "How Risky Were Banks Before the Bank Run?" It responds, "We emphasize two balance sheet features that turned out to be particularly problematic during the bank run: the share in total assets of uninsured deposits (denoted UID) and the share in total assets of unrealized losses on securities held in accounts not intended for trading (denoted Losses). High values of UID proved to be risky as they were concentrated in certain sectors, which heightened the risk of rapid withdrawals. When Losses are high (typically when interest rates are increasing, as in 2022) and ultimately realized, bank capital is more likely to be eroded below regulatory limits."
They tell us, "At the individual bank level, we find that the betas increased during the run for about a third of all publicly traded banks. Thus, investor concerns about bank risk were seemingly not broad-based. What characterized this limited set of banks? Surprisingly, we find that balance sheet variables as of 2022:Q3 or Q4 fail to predict which banks had significantly higher betas during the run. In other words, banks perceived as riskier by investors during the run were seemingly not the ones with worse fundamentals in 2022."
The piece adds, "If fundamentals did not drive investor attention, then what did? We consider whether news coverage facilitated the coordination of investor attention on certain banks. Such a possibility has previously been found in the context of bank failures. We define a bank's news coverage as the number of articles about a bank on a given day divided by the bank's assets, to account for larger banks having more publications.... When some distressed banks were put on a downgrade watch by Moody's after the markets closed on March 13, [publications] spiked for all distressed banks. Media interest surged again when the distressed banks were downgraded starting on April 14. In general, it appears that increases in [articles] are associated with risk events."
Finally, it says, "During the bank run of 2023, news flows were at least as important as underlying bank fundamentals in driving investor perceptions of bank risk. News coverage, even when stale, appeared to have served as a coordination device, helping investors focus collectively on certain banks. These results imply that investors may be unable to quickly process information in a crisis, potentially making market price dynamics noisier, to the detriment of market participants and policymakers. However, as investor attention was focused on a few banks rather than a broad swathe of the banking sector, the contagion was contained. Liquidity support by the Federal Reserve may also have limited contagion, a topic we examine in our companion post."
The second blog, "Calming the Panic: Investor Risk Perceptions and the Fed's Emergency Lending during the 2023 Bank Run," states, "In a companion post, we showed that during the bank run of spring 2023 investors were seemingly not concerned about bank risk broadly but rather became sensitized to the risk of only about a third of all publicly traded banks. In this post, we investigate how the Federal Reserve's liquidity support affected investor risk perceptions during the run. We find that the announcement of the Fed's novel Bank Term Funding Program (BTFP), and subsequent borrowings from the program, substantially reduced investor risk perceptions. However, borrowings from the Fed's traditional discount window (DW) had no such effect."
Discussing "The Fed's Liquidity Support Programs During the 2023 Bank Run," it says, " "The Federal Reserve deployed two main liquidity facilities during the bank run, with different designs. The BTFP, announced on March 12, 2023, allowed banks to borrow against the face value of securities eligible for purchase by the Federal Reserve Banks in open market operations (OMO) -- such as U.S. Treasuries, U.S. agency securities, and U.S. agency mortgage-backed securities -- with a maturity of up to one year. Banks that had suffered capital losses on these securities when rising rates reduced their prices could post them as collateral to the BTFP and obtain funding equal to their full face value. In contrast, the DW, a long-established liquidity facility, provided short-term funds against the market value of eligible securities, which is lower than the par value for underwater securities. However, the DW accepts a wider range of collateral (both liquid and illiquid) than the BTFP. During this period, neither facility applied a haircut to the borrowing amount."
The update explains, "We find that investor perception of risks from uninsured deposits and unrealized losses on securities (measured by the UID and Losses betas, respectively, as explained in our companion post) increased with OMO losses in the two weeks prior to the BTFP announcement but decreased with OMO losses in the two weeks following the announcement. For banks with high OMO losses, this decline was substantial. For example, for banks in the 90th percentile of OMO losses, the BTFP announcement almost fully offsets the increased risk perceptions in the two weeks prior to the announcement."
The second article adds, "The BTFP strongly reduced investor risk perceptions of banks that carried large amounts of unrealized losses on underwater liquid securities on their books. By credibly committing to lending against the face value of these securities, the Federal Reserve mitigated the market's concern about the banks being forced to realize losses on their securities portfolios. The announcement of this backstop was enough to calm investor nerves, even before banks used the facility. In contrast to the BTFP, the traditional DW facility did not affect investor concerns about bank risk, suggesting that liquidity programs targeting the specific causes of a crisis may be more effective."
It concludes, "Despite these beneficial effects, there are likely limits to BTFP-style interventions. Distressed banks benefited most from the BTFP, and similar results were found in prior research on the Federal Reserve's liquidity facilities during the global financial crisis of 2008. Thus, liquidity programs may slow down the resolution of distressed banks, thereby limiting market discipline. On the other hand, resolution of distressed banks during a crisis may have contagious effects even on safer banks, and so delaying such resolutions till the crisis is over may be prudent."
