Authors: Xuesong Huang and Todd Keister
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The New York Innovation Center bridges the worlds of finance, technology, and innovation and generates insights into high-value central bank-related opportunities.
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Staff Reports
Stablecoins vs. Tokenized Deposits: The Narrow Banking Debate Revisited
Number 1179
February 2026
February 2026
JEL classification: E42, G21, G28
We study how the type of money used in blockchain-based trade affects interest rates, investment, and welfare. Stablecoins in our model are backed by safe assets, while banks issue deposits (both traditional and tokenized) to fund a portfolio of safe and risky assets. Deposit insurance creates a risk-shifting incentive for banks, and regulation increases banks’ costs. If regulatory costs are large and risk-shifting is limited, we show that allowing only tokenized deposits to be used in crypto trade raises welfare by expanding bank credit. If regulation is lighter and the risk-shifting incentive is strong, in contrast, allowing only stablecoins is desirable despite crowding out credit. In between these cases, allowing stablecoins and tokenized deposits to compete is optimal. The tradeoffs between these policies are reminiscent of both historical and recent debates over the desirability of narrow banking.
Author Disclosure Statement(s)
Xuesong Huang
The author declares that he has no relevant or material financial interests that relate to the research described in this paper. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.
Todd Keister
The author declares that he has no relevant or material financial interests that relate to the research described in this paper. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.
The author declares that he has no relevant or material financial interests that relate to the research described in this paper. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.
Todd Keister
The author declares that he has no relevant or material financial interests that relate to the research described in this paper. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.
Suggested Citation:
Huang, Xuesong, and Todd Keister. 2026. “Stablecoins vs. Tokenized Deposits: The Narrow Banking Debate Revisited.” Federal Reserve Bank of New York Staff Reports, no. 1179, February. https://doi.org/10.59576/sr.1179
Huang, Xuesong, and Todd Keister. 2026. “Stablecoins vs. Tokenized Deposits: The Narrow Banking Debate Revisited.” Federal Reserve Bank of New York Staff Reports, no. 1179, February. https://doi.org/10.59576/sr.1179
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