Biagio Bossone writes on the LSE Blog that as we mock instability of stablecoins, we should realise that without government intervention deposits would be as unstable:
Critics of stablecoins rarely miss an opportunity to pronounce their demise. Every time a token slips below its one-dollar peg, however briefly, a chorus of commentators declares: “this proves they can never be trusted.” The verdict is delivered with confidence, as though each deviation confirms the inherent fragility of privately issued digital money.
Yet this criticism reflects an often-ignored irony: if central banks did not actively guarantee the singleness of money, commercial bank deposits – the very backbone of modern payment systems – would wobble far more than stablecoins ever do. Deposit parity is not a natural, spontaneous feature of banking systems. It is an institutional artefact, painstakingly constructed over a century of legal commitments, public guarantees and lender-of-last-resort interventions.
As a recent article on this blog notes, stablecoins sit at a historical crossroads between innovation and regulation, reviving long-standing questions about how societies safeguard monetary stability.
Today we take for granted that a dollar in deposits is identical to a dollar in cash. But if regulators removed deposit insurance and emergency liquidity provision, and treated commercial banks as ordinary private creditors, deposits would trade at discounts or premiums depending on each bank’s perceived safety. Deposits trade at par because the state makes them safe by underwriting them.
Then he goes on to discuss fractional reserve banking:
Why, then, are bank deposits treated so differently from stablecoins? The traditional justification is that banks operate under a fractional-reserve system. They create money through lending, expand credit and support economic growth. In return for this public function, they are heavily regulated and receive a package of state privileges: access to the central bank balance sheet, lender-of-last-resort protection, deposit insurance and participation in key pieces of financial infrastructure.
Stablecoins, by contrast, are treated as narrow banks: fully backed, operating with limited credit creation and existing primarily as digital wrappers for fiat currency. Since they do not contribute to credit intermediation, the argument goes, they should not benefit from the same public guarantees extended to deposit-taking banks.
But this logic is circular: it blames stablecoins for lacking protections they’re not allowed to have. If the primary goal of monetary authorities is the stability of the means of payment, there is no conceptual reason why similar guarantees could not be extended to other forms of privately issued money that serve comparable functions in payment systems.
Indeed, the latest regulatory proposal from the Bank of England moves in this direction by contemplating limited or supervised access to central bank infrastructure for well-regulated stablecoin issuers. By contrast, neither the European Union’s MiCA framework, administered by the European Banking Authority, nor America’s GENIUS Act contemplate any form of central-bank access or institutional support for private stablecoin issuers. The question is not technological feasibility. It is political willingness.
Hmmm..interesting times…
Mostly Economics 
