Human civilization and the concept of money have historically been intertwined. And, as the financial landscape is faced with the question of stablecoins and tokenized deposits, a February 2026 Federal Reserve Bank of New York staff study argues that this may be less a technological dispute than a modern reprise of the narrow-banking debate that has surfaced repeatedly since the 1930s.
The Fed’s conclusion in the report titled “Stablecoins vs. Tokenized Deposits: The Narrow Banking Debate Revisited” is deceptively simple: the choice between stablecoins and tokenized bank deposits is not about cryptocurrency at all. It is about whether society wants money and lending fused together or pried apart.
In the New York Fed’s model, stablecoins function as “safe money” fully backed by low-risk assets, while bank-issued (including tokenized) deposits can fund loans and investment, tying money creation to credit expansion. The choice unpacked by the report is not one between “crypto” and “traditional finance,” but between two institutional models where one separates payments from lending while the other preserves their longstanding integration.
That creates a policy tradeoff whereby stablecoins may make the payments system safer but may reduce lending, whereas deposit-based tokenized money supports credit but can carry risk and require heavier oversight.
For finance leaders, the New York Fed’s analysis reframes stablecoins and tokenized deposits not as competing payment tools but as instruments with fundamentally different balance-sheet consequences. The choice between them affects liquidity strategy, counterparty exposure and ultimately the cost and availability of credit across the economy.
Read more: CFOs Eye Stablecoins as Capital Tool, Not a Crypto Bet
Expect Regulation to Shape Treasury Infrastructure
The difference between stablecoins and tokenized deposits can be blurred in public discussion. Both are digital claims denominated in fiat currency and designed to function as settlement instruments on distributed ledgers. Their economic roles, however, diverge in ways that matter far beyond payments infrastructure.
One of the report’s clearest conclusions is that the dominance of stablecoins or tokenized deposits will not be decided by technology or consumer preference alone. It will hinge primarily on regulatory design and the incentives those rules create for banks.
Stablecoins provide a payments instrument insulated from bank risk, but they do not contribute to loan formation. Bank-issued tokenized deposits support lending, yet inherit the incentive problems and regulatory complexities of insured banking.
As regulation raises the cost of deposit creation, stablecoins become more attractive as transaction media; when regulation is lighter, banks expand tokenized deposits instead. Between these two poles lies a middle zone in which both forms of money circulate simultaneously, producing what the Fed report’s authors described as an optimal balance between efficient payments and productive lending.
The eventual balance between stablecoins and tokenized deposits may hinge less on policy than on how blockchain adoption unfolds.
Ultimately, banks will choose payment rails based on “the path of least resistance,” meaning the lowest barriers across risk, compliance, fraud prevention and technology migration, Himal Makwana, global head of corporate strategy at FIS, told PYMNTS in August.
If blockchain payments largely substitute for existing transactions, banks can migrate their deposit model into tokenized form without major structural change. If, however, digital networks expand the total volume of trade thereby enabling new categories of decentralized exchange, the demand for transaction balances may grow faster than banks can efficiently supply them, increasing the role of stablecoins.
See also: Why Banks Want to Issue Stablecoins
Two Forms of Digital Cash, Two Different Economies
The rise of blockchain money does not so much invent a new category of finance as it forces a decision about how closely society wants money tied to risk-taking institutions.
The traditional financial services landscape is already testing the waters around tokenized deposits. Federal Reserve Governor Michael Barr in October called tokenized deposits “more robust” than stablecoins; ex-Consumer Financial Protection Bureau Director Rohit Chopra said the same in May; and big banks like BNY, Citi, HSBC, JPMorgan and more are experimenting with them.
Stablecoins are also gaining traction across regulated financial products, with PYMNTS covering last week (Feb. 9) how banks and asset managers are integrating stablecoins into payments, settlement and asset servicing, noting how what is taking shape is not a single “bank stablecoin” model, but a family of instruments that reflect where inefficiencies are most painful, and where incumbents believe blockchain rails can quietly outperform legacy systems.
Financial systems have repeatedly oscillated between integrating payments with lending and separating them to reduce systemic risk. Blockchain technology has not resolved this tension but may have made the boundary easier to redraw. The argument now unfolding among regulators, banks and FinTech firms is therefore less about cryptocurrency than about institutional design.
The PYMNTS Intelligence and Citi report “Chain Reaction: Regulatory Clarity as the Catalyst for Blockchain Adoption” found that blockchain’s next leap will be shaped by regulation; that evolving guidance is beginning to create the foundations for safe, scalable blockchain adoption; while at the same time, implementation challenges continue to complicate progress.
