Stablecoins may use new technology, but they perform the same core functions as traditional banking — issuing redeemable liabilities, processing payments, and managing settlement risk — making them closer to narrow banks than to a genuinely new financial category. This blog from the Deputy Governor of the Central Bank of Chile argues that effective regulation must follow economic function rather than interface design, and that SupTech tools like real-time monitoring and algorithmic stress tests are essential for closing the supervisory gap.

Author: Alberto Naudon, Deputy Governor, Central Bank of Chile

This article represents the author’s personal perspectives.

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Stablecoins—particularly those fully backed, redeemable at par, and supported one-to-one by high-quality liquid assets—reframe traditional payment arrangements using updated terminology while leaving the underlying economics largely intact. They promise speed, programmability, and continuous operation, yet the core functions they perform mirror long-standing institutional arrangements. In essence, the wrapper changes, but the institution enduresⁱ. Recognizing this continuity is essential for building a regulatory and monetary framework suited to the digital age. 

Digital Money Does Not Travel 

Payment systems are often described using the metaphor of “rails” and “trains,” where money moves along an infrastructure. The analogy is intuitive, but misleading. It encourages the view that money is an object that travels through a network. 

Digital money is not an object. It is an accounting construct. 

The reason is simple. Unlike physical objects, digital information can be copied at zero cost. Preventing double-spending therefore requires payment systems to rely on centralized or coordinated records, not on the transfer of digital “tokens.” Every digital payment system—regardless of the underlying technology—requires three basic elements: 

1. an account where value is recorded, 

2. a messaging layer to update balances, and 

3. a settlement asset to extinguish obligations across different issuers. 

No blockchain or smart contract escapes this logic. Even in decentralized architectures, value is defined as a state in a ledger updated through consensusⁱⁱ. Once this is recognized, stablecoins appear far less exotic. Holding a stablecoin is not akin to owning a digital object; it is equivalent to holding a balance in an account maintained by an issuer. From and economic and institutional perspective, a stablecoin is closer to a bank deposit than to a bearer instrumentⁱⁱⁱ. 

Stablecoins as Liability Money — and as (Narrow) Banks

Understanding money as an account-based claim leads naturally to the insight that money is also someone’s liability. A bank deposit is a promise to redeem at par. Stablecoins fit squarely within this structure. They are digital claims on an issuer, backed by assets, and sustained by governance, operations, and rules. 

Stablecoins differ from traditional bank deposits in one important dimension: they lack elasticity. Because fully backed stablecoins must hold eligible assets—typically short-term government securities or cash equivalents—their supply expands only when the issuer acquires additional backing assets. This rigidity resembles the logic of narrow banking, where safety is enhanced at the cost of flexibility^iv. 

Stablecoins can unbundle functions that banks traditionally perform—issuance, custody, payments, compliance, and liquidity management—across multiple entities. But unbundling changes only who performs each function, not which functions the system requires. Someone must still issue a par-redeemable liability. Someone must still provide on-demand liquidity. Someone must still operate and maintain a payment system. The comparison with banks is therefore structural rather than rhetorical. 

Banks are often described primarily as credit intermediaries, yet they perform three distinct roles: issuing liquid liabilities, process payments, and extending credit. An important part of banking regulation addresses the first two, not the third. For example, liquidity requirements exist because banks issue redeemable liabilities; KYC and AML rules exist because banks process payments. The same logic applies to stablecoins. 

This perspective also clarifies why consumer instruments such as Starbucks cards are not money. They lack general acceptability and can be used only within a single commercial network. Stablecoins, by contrast, are designed to circulate broadly. In that respect, they are much closer to e-money or prepaid payment instruments—categories that many legal frameworks already treat in way that resemble narrow banking.  

Stablecoin issuers therefore fulfill two core banking functions: issuing short-term liabilities and operating payment rails. What they do not do is lend. Concerns about bank disintermediation arise precisely because stablecoins compete for the same transaction and store-of-value balances as deposits. That competitive pressure is not evidence of a new economic species; it is evidence of functional overlap. 

None of this is an argument against stablecoins as such. On the contrary, competition can push incumbent institutions to improve speed, availability, and cross-border services. But competition does not eliminate the need for coherent classification and regulation. 

No Credit Risk Does Not Mean No Risk

Because the backing assets of fully collateralized stablecoins are generally high-quality government liabilities, credit risk is minimal. But risk does not disappear. 

Liquidity risk remains: sudden or large-scale redemptions can strain even portfolios of safe assets. Operational risks—from cyber incidents to valuation errors—persist. Governance failures can undermine confidence rapidly. 

History offers reminders. Money market funds, despite holding seemingly safe assets, “broke the buck” in 2008 and experienced severe stress again in 2020. Maintaining par convertibility depends not only on asset composition but on liquidity management, credible redemption arrangements, and appropriate regulation. Stablecoins inherit the same vulnerabilities^v. 

The Settlement Problem 

Settlement exists for a simple reason: no one wants to hold large exposures to a private issuer. 

Maintaining a small bank deposit—or a small stablecoin balance—is typically acceptable. Holding $100 million is different. At that scale, exposure to a private balance sheet becomes material, and the natural response is to redeem into central bank money, government securities, or another asset free of liquidity and governance risk. 

The same dynamic applies between institutions. When customers of different banks transact, the banks accumulate mutual claims that must be settled. Settlement occurs in central bank money, the safest and most widely accepted asset, preserving the singleness of money^vi. 

Stablecoins face identical challenges. When multiple issuers operate in parallel, payments between their users generate cross-exposures. These cannot be safely settled in stablecoins themselves, as doing so merely transfers exposure from one issuer to another. The predominance of government assets in stablecoin reserves implicitly acknowledges the state as the provider of the safest settlement asset. 

Some authorities have explored this conclusion explicitly. In the United Kingdom, the Bank of England has consulted on a proposed regulatory regime under which certain systemic stablecoin issuers would be required to hold a portion of their backing assets in central bank reserves, to integrate with RTGS systems, and potentially to have access to central bank liquidity facilities. From a regulatory and risk-management perspective, this proposal reflects the view that issuing par-redeemable payment liabilities and managing settlement risk entails safeguards similar to those applied to payment banks^vii. 

Regulation, Arbitrage, and Supervision 

Stablecoins often gain traction in settings where traditional payment channels face regulatory or operational frictions. They dominate crypto trading partly because banks impose limits on transfers to crypto platforms. In cross-border payments, their appeal reflects the fact that they can operate, in practice, much like lightly regulated foreign checking accounts. While technology plays a role, part of this attractiveness also reflects differences in regulatory treatment and compliance requirements relative to traditional payment system. 

Regulation is never neutral. It shapes incentives for banks and stablecoin issuers alike. The relevant question is not whether regulation influences outcomes, but whether it classifies activities correctly. Treating functionally similar activities differently simply because they rely on different technologies is not neutrality—it is misclassification. 

Where technology does make a meaningful difference is in supervision. Stablecoin arrangements can generate granular, time-stamped data in real time. Machine-readable reserve reports, API-based attestations, and automated reconciliation between on-chain liabilities and off-chain assets can strengthen oversight, turning technology into a tool for better regulation rather than a mechanism to evade it.  

Old Problems, Familiar Institutions 

Stablecoins repackage payment functions using new language and modern architectures. They bring speed, programmability, and continuous operation. What they do not introduce is a new institutional category. 

An entity that issues par-redeemable liabilities and operates a payment system performs banking functions, whether its liabilities are called deposits, e-money, or tokens. Technology may change the interface, but not the economics. 

Effective regulation begins by recognizing that continuity—not to suppress innovation, but to anchor it. The wrapper may evolve; the institution persists. Acknowledging this is not a barrier to progress, but a precondition for making innovation durable. 

References

Bank for International Settlements (2025). The next-generation monetary and financial system. 

Bank of England (2025). Proposed Regulatory Regime for Sterling-denominated stablecoins. 

Clouse, J. A. (2024). A Field Guide to Monetary Policy Implementation Issues in a New World with CBDC, Stablecoin, and Narrow Banks. 

Gorton, G., & Zhang, J. (2023). Taming wildcat stablecoins. University of Chicago Law Review, 90(3), 931–1000. 

Group of Thirty. (2024). The future of money. Washington, DC. 

Lewis, A. (2018). The basics of bitcoins and blockchains: an introduction to cryptocurrencies and the technology that powers them. Mango Media Inc. 

Williamson, S. (2024). Deposit insurance, bank regulation, and narrow banking. Journal of Economic Theory, 219, 105859. 

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For further information, we encourage you to read the State of SupTech Report 2025, access session recordings and engage in discussions on GovSpace.io.