Atlanta Fed Posts Paper on Stablecoins
The Federal Reserve Bank of Atlanta recently published a paper on "Fiat-Backed Stablecoins and Narrow Banking." Its summary says, "Devastated by the misery of millions of people during the Great Depression caused by the collapse of the entire US financial system, a group of economists at the University of Chicago sought to reform the banking sector. The 'Chicago plan' suggested a replacement of 'fractional-reserve banks' with 'full-reserve banks' (also called 'narrow banks' and 'limited-purpose banks'). Most economists dismiss this idea. However, the rising popularity of stablecoins and the 2025 GENIUS Act in the US introduce this form of banking to the general public. The goal of this note is to analyze the similarities and differences between the narrow banking proposal and the fast-growing fiat-backed stablecoins." The paper explains, "[T]he general idea is to reduce or eliminate the possibility of bank failures, bank runs, and the resulting government bailouts by securing depositors' money even during a run on the bank. Why would anyone want to write an essay in 2026 on a 1933 proposal for a banking reform? The answer is that the new form of banking called 'fiat-backed stablecoins' resembles the idea of narrow banking that originated more than 80 years ago. This short essay does not attempt to provide a comprehensive survey of the literature on the wide variety of stablecoins. My only intention is to draw attention to some similarities between fiat-backed stablecoins and narrow banking." The piece says, "`It is too early to predict whether stablecoins will eventually grow to the level of trillions of dollars -- closer to the levels that are held in traditional bank deposits. So far, the major use of stablecoins involves buying and selling other crypto assets rather than making daily payments. There is some potential for stablecoins to reduce the high costs of cross-border payments by bypassing the legacy high-cost cross-border payment rails that currently use traditional banks." It adds, "Fiat-backed stablecoins and narrow banks share very similar characteristics with respect to their reserve requirements and the services that they provide (and do not provide). In that sense, they bear similar risks. However, stablecoins rely on additional 'moving parts' that narrow banks do not have, which make them riskier. The additional 'moving parts' involved in each payment made with stablecoins include: (i) the conversion of national currencies, such as the USD, to newly minted issuer-specific stablecoins; (ii) the reverse process of converting stablecoins back to a national currency; (iii) the use of one or multiple digital wallets and exchanges to store and transact with other parties via a blockchain (distributed ledger); and (iv) observed price deviations from the 1:1 pegged currency. In addition to these four risks, because issuers of stablecoins store their cash reserves in traditional fractional-reserve banks, they also face exposure to runs on these banks."
