Payment stablecoins are set to become an important financial instrument. Their impact on the financial system will depend on whether the issuers can purchase assets (i) only with bank deposits or (ii) also by issuing liabilities widely accepted as means of payment. In this second case, stablecoin issuers would be sharing banks’ ‘exorbitant privilege’ of creating money ‘out of thin air’. In examining the two scenarios, this column embeds stablecoins in key mechanisms of money creation, considers their potential role in markets for eligible backing assets, highlights their issuers’ interaction with banks, and outlines implications for regulation.

Payment stablecoins are set to become important financial instruments (TBAC 2025). This prospect has prompted recent regulatory initiatives for fully backed fiat currency-pegged stablecoins usable as means of payment (e.g. Bank of England 2025, Swiss Federal Council 2025, European Union 2023, US House Committee on Financial Services 2025). It has also spurred policy discussions about possible implications for monetary policy transmission, monetary sovereignty, financial stability, and market integrity (BIS 2025, Bindseil 2025).

In this column, we argue that the implications of payment stablecoins depend on how their issuers will be able to purchase assets. In one scenario, the purchase would be conducted with bank deposits acquired through coin issuance. In another scenario – more likely when stablecoins are a widely accepted means of payment – stablecoin issuers would also be able to purchase assets with new units of their own liabilities. In this second case, money would be created ‘out of thin air’ and stablecoin issuers would enjoy ‘payment elasticity’ (Mehrling 2020), i.e. the capacity to meet financing needs by issuing means of payment at will – an ‘exorbitant privilege’ hitherto reserved to banks (and central banks). 

We proceed as follows. We first remind readers of the mechanics of money creation, highlighting some conclusions often lost in translation. We then explain how, in each of the above scenarios, stablecoin issuers can influence not just the aggregate stock of means of payment (money) but also the money supply, i.e. money in the hands of entities other than means-of-payment issuer.  The effect could be either direct or result from the central bank’s response, as required by its operational framework. We finally discuss how stablecoin issuers’ payment elasticity may shape their role in the financial system and the attendant implications for regulation.

Money creation 101

Textbooks give the impression that the only way banks can create money is by lending. Indeed, a bank lends by creating a deposit – new units of means of payment.

Yet, money creation is a more general phenomenon: it occurs as soon as a bank makes any purchase by issuing a deposit (e.g. Goodhart 2017). The purchase could be of a bond, a derivative instrument, any other real or financial asset – on the primary or secondary market – or even just goods or labour services (paying wages). In other words, a bank does not need to lend to create deposits (Table 1, first and second rows). The identity of the deposit recipient then determines whether the means of payment counts as part of the money supply: it does only when this entity is not an issuer of a means of payment – the ‘non-bank public’.

Table 1 Banks’ money creation 101: Selected examples

Importantly, even if the recipient of the deposit transfers it to another bank, interbank settlement ensures that the deposit is not destroyed. A salient example is the use of a bank deposit to acquire a mutual fund share. This entails a reshuffling, not a destruction, of deposits (Table 1, third row). 

Deposits can only be destroyed in two ways: if borrowers repay loans or banks sell assets – i.e. the bank’s balance sheet contracts; or if economic agents shift away from deposits into other types of bank liabilities – for example, bonds or deposits that are not means of payment.

The final configuration of deposits in the system will depend on the incentives to hold them. These incentives would reflect key drivers of portfolio decisions, notably relative asset prices and economic activity. Such drivers underpin the general equilibrium effects that may lead to an expansion or contraction of banks’ balance sheets.  

Enter stablecoins

How do payment stablecoins fit into these mechanisms of money creation and destruction?

First, a shift of the public out of deposits into stablecoins does not reduce deposits and may also increase the money supply in the first instance – i.e. before general equilibrium effects. Much like the mutual fund example above, outstanding bank deposits are not extinguished: the public holds less deposits and more stablecoins; stablecoin issuers hold more bank deposits (Table 2, first row).  The overall amount of money (deposits plus payment stablecoins) will necessarily increase. The money supply would only increase if stablecoins issuers then used the deposits to purchase assets from an entity that is not a means-of-payment issuer. The public will then end up holding more stablecoins and the original amount of bank deposits.

Table 2 Stablecoins and money creation

Note: In these examples, NBEs do not include SCIs.

Second, allowing or requiring stablecoin issuers to hold central bank reserves would influence the stock of money and the money supply also through the central bank’s response. This response, in turn, depends on the operational framework for setting interest rates (e.g. Borio 2023). All else equal, as stablecoin issuers convert bank deposits into central bank reserves, bank deposits contract – much like the effect of converting deposits into cash. This amounts to a reduction in banks’ reserves holdings at the central bank (Table 2, second row) due to ‘autonomous factors’, which the central bank may or may not need to offset (‘sterilise’). In an ‘abundant reserves’ framework, the central bank can remain passive as long as the stock of excess bank reserves is sufficiently large. But in a ‘scarce reserves’ framework, the central bank would need to sterilise. This would restore the original volume of deposits if and only if it was done by purchasing assets from a non-bank (Table 2, third row). In this case, the overall effect would be an increase in the money supply – triggered by stablecoin issuers just placing funds with the central bank.

Finally, when a stablecoin is widely accepted as means of payment. its issuer would be able pay for asset purchases with its own liabilities. The stablecoin issuer would thus enjoy an exorbitant privilege, as it would not need to rely on a deposit transfer but could execute the purchase on its own initiative. The mechanism would parallel banks’ payment elasticity (Table 1, first two rows), with stablecoin issuance replacing bank deposits. In the crypto space, Tether seems to have already exploited such elasticity by initiating purchases of Bitcoin (Griffin and Shams 2020). Ultimately, the exorbitant privilege would boost stablecoin issuers’ ability to generate money, with constraints stemming only from the general equilibrium effects described above and regulation.

Stablecoins’ exorbitant privilege and regulation

The degree to which stablecoin issuers will be able to gain and exploit the exorbitant privilege depends on design features.

A necessary condition for general acceptability of the coins as means of payment is that they be plugged into wholesale payment systems. Otherwise, asset expansion would be constrained by the issuers’ ability to attract bank deposits. In this context, the tokenisation of traditional assets is especially important (e.g. Fink and Goldstein 2025). In addition, the possibility of paying interest on stablecoins would enhance their appeal relative to bank deposits as a liquid store of value, thus influencing the general equilibrium effects. 

Given general acceptance, the broader the set of eligible assets, the greater the scope for stablecoin issuers to exploit their exorbitant privilege. The current set would allow them to participate in segments of government bond markets and/or to offer bank funding. If further private sector assets enter this set, the scope of the privilege would greatly expand. By contrast, whether the instrument takes the form of a security or a loan may be less relevant. For instance, stablecoin issuers could structure securities purchases in the primary market as revolving facilities, similar to bank credit lines.

All this has implications for the appropriate regulatory response. The more the issuers of widely adopted payment stablecoins exploit their exorbitant privilege, the more would they become akin to banks. This may strengthen their case to obtain access to central bank liquidity facilities (Aldasoro et al. 2023). It would also make it imperative to more closely align stablecoins’ regulation with that of banks – for example, with respect to capital requirements, stress tests, and surveillance by central banks. To be sure, the justification for regulation is multifaceted. And given the current eligible set of backing assets, stablecoin issuers are more like ‘narrow banks’. That said, the combination of financing capabilities with the issuance of means of payment has always been considered a defining feature of ‘banks’ and a key rationale for prudential regulation.  Exorbitant privilege must always come with greater discipline.

Source : VOXeu