1. The inversion
2. What the bank lobby is saying
3. Why it's not simple
4. The regulation angle
5. The timeline question
6. The uncomfortable question

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When you put money into a local bank, they primarily lend that money out into mortgages. Local mortgages. They turn deposits into local businesses. If you can imagine that as a transformation function: you put your deposits in the bank, and the bank lends to a restaurant owner and a soccer team. This is what a bank does. They change different duration risks so that a community can make agreements to start new things with credit. That's my mental model of a bank — but they have to do it while safely custodying the deposits.

Stablecoins change this entirely.

The inversion

When you give money to USDC, they don't do any lending with it. They just go out and buy federal Treasuries. So that's basically a loan to the federal government — in a very different way than a mortgage is, because a mortgage is really a loan to a person nearby buying a house.

This is a weird inversion. Money that used to flow into local communities — funding the restaurant on your block, the family buying a house down the street — now flows directly into federal debt. Every dollar that moves from a bank account into a stablecoin is a dollar that stops funding local credit and starts funding federal spending.

I'm not sure this is going to be the biggest issue. But it is a weird inversion that money is now backed by federal debt instead of by local lending.

What the bank lobby is saying

This is primarily what the bank lobby is arguing against stablecoins. And I'm not really a bank lobby apologist. I think they squandered what should have been a great lead. There's no reason banks couldn't have been building stablecoins. I'm very frustrated with them.

But as it is, stablecoins are better, faster, cheaper. They're global, they're programmable. And the banks are upset because they're worried about a lack of local credit creation. I am open to this as a legitimate concern.

The bank lobby's argument boils down to: local credit creation is how communities fund growth, and if you pull the deposits out of banks and stuff them into Treasuries, communities lose the mechanism through which they fund themselves. That's not nothing.

And this isn't just abstract lobbying. Matt from Emprise Bank — a 100-year-old, family-owned community bank in Wichita — told me he sees stablecoins as everything from "product enhancement" to "existential risk to the banking system." That's a big spectrum. He sees an ecosystem growing rapidly, with customer adoption that could pull addressable market out of the banking system entirely. His question is simple: is there a place for community banks to grow in that ecosystem, or does it replace them? When a banker with 60 years of family history in the business says "existential risk," the credit creation concern has a real face.

Why it's not simple

The standard counter is that stablecoins are just better money, and the market will sort it out. That's partially true but doesn't engage with the structural question. Consider the difference:

Bank deposits: A dollar goes in. The bank keeps a fraction in reserve (sometimes as low as 0% for certain deposit types in the US today) and lends the rest. Your dollar simultaneously exists as your balance and as someone else's mortgage. This is fractional reserve banking. It's also how communities create credit.

Stablecoin deposits: A dollar goes in. The issuer buys a Treasury bill. Your dollar exists as your stablecoin and as a loan to the federal government. Full stop. No local mortgage. No small business loan. No soccer team.

The money hasn't disappeared — it's been redirected. Instead of funding local economic activity, it's funding federal spending.

The regulation angle

Stablecoins are going to start with high quality liquid assets — the best possible assets. You should be able to unwind any stablecoin issuer in three days because you can sell $160 billion of Treasuries into the market — the market can actually absorb that. This is exactly why regulators started here: the diligence is very simple.

Does BNY Mellon, or State Street, or Customers Bank have an account with your name on it that equals the total number of stablecoins over there? It's a much simpler check than a bank needs, where regulators have to review every mortgage, assess credit ratings, and evaluate duration risk. The regulatory posture for stablecoins was purposefully simplified so that diligence doesn't require a huge slush fund like the FDIC.

But the simplicity of HQLA-backed stablecoins is precisely what creates the local credit problem. The collateral is safe because it's not being used for local lending. Safety and local credit creation are, for now, in tension.

The timeline question

I think the HQLA requirement will hold for at least another five to seven years. During that time, every dollar that moves from a bank account to a stablecoin is a dollar that stops funding local credit.

But this may be a temporary regulatory artifact. As regulators get more comfortable with stablecoins — just as they got more comfortable with banks over the last century — the aperture of allowable collateral will widen. We may eventually see stablecoins backed by a broader set of assets, including the kinds of loans that banks currently make.

Deposit-backed stablecoins are another path — and perhaps the most promising one. If a bank issues a stablecoin backed by its own deposit base, the credit creation function is preserved. The dollar still supports the loan book of the issuing institution while the stablecoin moves at the speed of a blockchain. Local deposits stay local. Mortgages still get funded. The community bank in Wichita keeps doing what it does — lending to the restaurant owner and the soccer team — but its customers get the speed and programmability of blockchain-native money. This is how you solve the local credit problem without giving up what makes stablecoins better.

The uncomfortable question

If stablecoins grow tenfold — from $260 billion to $2.6 trillion — and all of that collateral sits in short-dated Treasuries, issuers would own a staggering share of the T-bill market. That money would all be lending to the federal government instead of to local businesses and homebuyers.

Is that a problem? It depends on what you think the purpose of money is. If money is just a unit of account and a medium of exchange, then the backing doesn't matter much. But if money is also a mechanism for communities to create credit and fund local growth, then redirecting trillions into Treasuries is a structural shift worth paying attention to.

The banks are worried about it. The regulators haven't fully engaged with it. And most people in crypto aren't thinking about it at all. But the credit creation question is real, and someone should be working on the answer.

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Quotes

Source: Sam Broner / Common Prefix — Jan 20, 2026

The bank as a transformation function

In the US especially, stablecoins really shift credit creation from local — you've got a local bank that issues mortgages locally, they turn deposits into local businesses. If you can imagine that as a transformation function, you put your deposits in the bank, the bank lends to a restaurant owner and a soccer team. And this is what a bank does. They change different duration risks so that a community can make agreements to start new things with credit. That's sort of my mental model of a bank, but they have to do it while safely custodying the deposits.

USDC buys Treasuries, not mortgages

When you give money to USDC, they don't do any lending with it. They just go out and buy federal Treasuries. So that's basically a loan to the federal government in a different way than a mortgage is, because a mortgage is really a loan to a person nearby buying a house.

The weird inversion

It is a weird inversion now that money is backed by federal debt instead of by local lending. This is primarily what the bank lobby is saying. And I'm not really a bank lobby apologist. I think they squandered what should have been a great lead. Like they should have been building stablecoins. There's no reason they couldn't have done this. I'm very frustrated with them. But as it is, stablecoins are better, faster, cheaper. They're global, they're programmable. And the banks are upset because they're worried about a lack of local credit creation, which I am open to as a concept, but stablecoins are enough faster that we might be able to overcome any capital efficiency issues.

Regulation and the federal control question

Q: Isn't the credit already on the federal level? The commercial bank is essentially under the state Treasury, and that is under the Fed.

Yes. The regulation is under the federal control. But when you put money into a local bank, they primarily lend that money out into mortgages. Local mortgages. This is overseen by the federal government. And potentially the mortgages are being sold to the federal government. So, of course it's a convoluted system. Because in the US we have this thing called Fannie Mae and Freddie Mac. And very commonly, what's called conforming mortgages are sold to these federal buyers. But the key thing I'm getting at is when you give money to USDC, they don't do any lending with it. They just go out and buy federal Treasuries. So that's basically a loan to the federal government in a different way than a mortgage is, because a mortgage is really a loan to a person nearby buying a house.

HQLA makes diligence simple

Stablecoins are going to start with high quality liquid assets — the best possible assets that you could have. In theory, you should be able to unwind any stablecoin issuer in three days because you can sell $160 billion of Treasuries into the market. The market can actually take that. And so it requires much less regulation because you don't need to do full risk assessments.

Does BNY Mellon, a very large custodian, or State Street or Customers Bank or one of basically just like seven institutions, have an account with your name on it that equals the total number of stablecoins over there? And so this is just a much simpler check than a bank needs to have, where it's like, let me check all of your mortgages. What's the credit rating for all of them? What's the duration risk on these things? So it was purposefully simplified so that the original collateral for stablecoins is one that can be diligenced without needing a huge slush fund to carry over, like the FDIC or something.

Risk of deposit outflows from banks

Major risk would be lack of local credit creation. That's a serious risk. Another is — one risk is that the bank sector is accustomed to growth. And much of the regulation is pricing in deposit growth. I'm not talking about how great the banks are at risk management, we could disagree or agree, but at the very least — it's not like the banks crash every day. They crash, you know, at most every 25 years, sort of the frequency. Well, what happens if instead of deposits going like this, deposits go like this? Maybe the stablecoins cause a problem accidentally because it creates an unexpected situation inside the banks.

What stablecoin collateral looks like today

We are currently doing — stablecoins regulation is Treasuries, repos — a type of repurchase agreement for Treasuries — bank deposits, but the bank deposits have a different reserve requirement. So it's not zero. I think it's like 15%, considered very high in banking circles to have 15% reserve requirements for a certain category of business. And tokenized Treasuries. And Genius Act-compliant stablecoins. So you can also hold stablecoins to issue stablecoins. But ultimately, this can't be circular — it needs to be backed at some point, basically by Treasuries. Or deposits, I guess, but 15% reserve requirement.