Stablecoins Behave Like Money, But Are They Built Like It?

Stablecoins, the GENIUS Act, and the unfinished reform of America’s monetary plumbing.

In the midst of another crypto winter, one class of crypto asset has quietly maintained its value: stablecoins. As the chart above shows, dollar-backed stablecoins like USDC and Tether have largely held their peg near $1.00 even as other crypto assets — including Bitcoin — have fallen almost 50 percent.

Of course, stablecoins are designed to be stable. But they have not always lived up to that billing. As the chart reveals, there have been periods when stablecoins fell below par, reminding us that the $1 peg is not absolute. Even so, the fact that they have recently held their ground while other risk assets have sold off is notable. Stablecoins, at least for now, have behaved like money.

This was the starting point of my recent conversation with Dan Awrey on Macro Musings. He makes the case that we are now living through an historical unbundling of money and payments. For hundreds of years, banking brought money, payments, and credit together in one institutional setting. That bundling was the result of trial, error, crisis, and reform over a long time frame.

Technology, however, is now rapidly pulling payments away from banks. Venmo, PayPal, USDC, Tether, and other payment innovations have created faster and more programmable payment instruments, often outside the traditional banking system. The payments side is innovating quickly. The legal and institutional foundations that make money safe and able to maintain a fixed nominal value — resolution regimes, central bank access, and interoperable payment rails — are moving much more slowly. That gap is where the fragility lies.

Fortunately, Dan has carefully thought through these challenges and written a book that responds to them: Beyond Banks: Technology, Regulation, and the Future of Money In the remainder of this newsletter, I will outline his proposed solution, assess what the GENIUS Act did accomplish, and explain why the Fed’s proposed “skinny” master account, while important, falls short of his ideal. Before jumping in, here is a brief video clip of Dan outlining these challenges:

An Incomplete Payment Revolution: Dan’s Ideal Approach versus the GENIUS Act

At its core, the problem Dan identifies is not that stablecoins are inherently volatile but that the institutional foundations supporting them are incomplete. Payments technology has advanced rapidly, while the legal and monetary infrastructure that makes money truly safe has lagged behind. This mismatch creates what Dan calls “Gresham’s New Law”: good payments drive out good money. Consumers gravitate toward faster, cheaper, more programmable payment instruments, even if those instruments sit outside the resolution regimes, central bank access, and interoperable payment structure that historically made bank deposits stable. Monetary activity, in other words, is slowly migrating outside the institutions built to keep it safe.

Some want to turn back the clock on these payment innovations, but the horse is already out of the barn. The important question, then, is how to update the monetary plumbing in order to allow these innovators to operate safely and efficiently. To that end, Dan offers a detailed blueprint in his book that comprises two main parts.

Make Nonbank Money Safe

The first part of his reform is making nonbank money safe. Dan would amend the Federal Reserve Act (FRA) to expand eligibility for Fed master accounts beyond traditional banks and create a new category of federally chartered “payment institutions.” These institutions would be licensed and supervised by the Fed. They would function as narrow payment entities — no maturity transformation, no lending of customer funds, no shadow banking activities, and no Discount Window access — with 100 percent reserves held at the Fed. In short, if you issue money, you do not get to use that money to take risks.

Making money safe also requires fixing what Dan calls the “bankruptcy problem.” As he noted on the podcast, money can only maintain a fixed nominal value if users can rely on immediate access to it even when the issuing firm fails. Traditional Chapter 7 or 11 bankruptcy would not provide that certainty. Accordingly, Dan’s proposal exempts payment entities from conventional bankruptcy, appoints the Fed as receiver, and requires customer funds to be returned within one business day.

Make Infrastructure Interoperable and Safe

The second part of Dan’s reform focuses on the payments side. Granting master account access is necessary, but it is not sufficient. Dan would require equal, non-discriminatory access to the Fed’s payment rails for these new “payment institutions” and impose open-access and interoperability requirements on core financial market infrastructure. The goal is to prevent incumbents from erecting technical or institutional barriers that fragment the payment system.

In Dan’s framework, preserving the singleness of money matters. Different forms of digital dollars should remain exchangeable at par and seamlessly transferable across networks. Without open access and interoperability, the system risks splintering into siloed platforms and eroding the unity that makes a dollar a dollar.

Dan’s Ideal versus the GENIUS Act

So how does the GENIUS Act compare to Dan’s ideal vision of reform laid out above? In the podcast he outlined three areas where it falls short.

First, bankruptcy remains a serious vulnerability. GENIUS improves creditor priority but leaves stablecoin issuers inside the traditional Chapter 7 and 11 framework. That means redemptions could still be frozen while courts sort out claims, and legal uncertainty could surround the treatment of reserve assets. As Dan argues, money must remain usable even when the issuing firm fails. Without a bespoke resolution regime, stablecoins remain exposed to the kind of delay and uncertainty that can trigger destabilizing runs.

Second, GENIUS largely sidesteps the infrastructure question. It focuses on reserve quality and disclosure but says little about open access or interoperability across payment networks. Nor does it reform payment system governance. For Dan, this omission matters: without open, interoperable infrastructure, digital dollars risk splintering into siloed platforms and weakening the singleness of money.

Third, GENIUS does not provide stablecoin issuers with direct access to Fed master accounts. As a result, issuers must continue to rely on commercial banks and intermediated Treasury markets to manage reserves and meet redemptions. In a stress scenario involving a major issuer like Tether or Circle, Dan suspects the Fed would likely intervene ex post — through Section 13(3) emergency lending or expanded repo facilities — not to bail out crypto per se, but to prevent disruption in Treasury markets or the broader dollar system.

A recent MIT Digital Currency Initiative paper, The Hidden Plumbing of Stablecoins, makes many of the same points and extends them further. While acknowledging that the GENIUS Act substantially strengthens reserve quality and disclosure, the authors argue that maintaining par depends not only on asset quality but on the functioning of Treasury and repo markets, dealer balance-sheet capacity, and the operational reliability of blockchain infrastructure. Even conservatively backed stablecoins, they show, can face stress when redemption surges collide with market bottlenecks or technical disruptions. In other words, GENIUS treats stability largely as a balance-sheet problem. The MIT analysis suggests it is also a market-structure and infrastructure problem.

Skinny Fed Master Accounts to the Rescue?

Given these limitations of the GENIUS Act, it is fortunate that the Fed has proposed a “skinny” Fed master accounts or what it more formally calls a Payment Account. This special purpose payment account (SPPA) would provide eligible institutions direct access to Federal Reserve payment services, but only in a tightly constrained, payments-only form.

Under the proposal, the SPPA would be used solely for clearing and settlement. It would not pay interest, offer discount window access, or permit intraday credit. Balances would be capped overnight at the lesser of $500 million or 10 percent of total assets.

Dan noted on the podcast that the proposal does not expand statutory eligibility; only institutions already legally eligible for Fed accounts under existing law could apply. However, Dan also noted that if he were at the Fed he would be advising stablecoins to get OCC trust charters, which would make them legally eligible under existing law.

And, as it turns out, this exactly what we have been seeing recently. There was a large increase in OCC trust charter application by blockchain-related fintech firms in 2025 after the passage of the GENIUS Act. This can be seen in the figure below (source). There is likely to many more applications in 2026.

To be clear, the SPPA is a far cry from Dan’s vision of his proposed “payment institution” getting Master Account access. Still, it is a step in the right direction, and the Board of Governors invited comments on its proposal. In my own submission, I focused on two main recommendations.

First, the Fed should not pay interest on payment account balances. Stablecoins are more likely to displace physical currency than traditional bank deposits. Because currency is a zero-interest liability that generates seigniorage revenue for the Fed, widespread adoption of dollar-based stablecoins could gradually erode that low-cost funding base. Keeping SPPA balances non-interest-bearing would help offset that displacement and preserve the Fed’s earnings capacity, an important safeguard for its operational independence.

Second, the overnight balance cap should not be fixed or arbitrary. Rather than imposing a blunt ceiling — such as the proposed $500 million or 10 percent of assets — the limit should be calibrated dynamically to stressed short-horizon liquidity needs and the structural displacement of physical currency. A properly designed balance cap would ensure continuity of payments during stress while allowing interest-free balances to scale with evolving payment demand.

Taken together, these recommendations place my approach somewhere between the Fed’s current proposal and Awrey’s ideal model. As the table below illustrates, Awrey’s framework calls for full Master Account access, strict structural constraints, and bespoke resolution — a clean narrow-payments tier anchored at the Fed. The Fed’s SPPA, by contrast, offers limited settlement access with tight caps and no statutory change. My proposal accepts the SPPA’s constrained structure but adjusts it to better reflect monetary realities: preserve seigniorage, allow balances to scale with payment demand, and ensure liquidity during stress.

Conclusion

Stablecoins may have held their peg through this crypto winter, but the real question is whether the system supporting them can hold through a financial storm. Payment innovation is not slowing down. The choice is whether to deliberately anchor it to the monetary system or wait until the next crisis forces our hand. As they say, the time to strengthen the plumbing is before the pipes burst.