In this commentary, the speaker explains how recent U.S. legislation—referred to as the Genius Act—creates a regulatory asymmetry between traditional banks and crypto‑stablecoin issuers. Sections 4 and 11 of the Act require public payment stablecoin issuers (e.g., Circle’s USDC, Tether) to maintain a 1‑to‑1 reserve and prohibit them from paying any yield. However, Section 2, paragraph 22 defines a "payment stablecoin" to exclude any digital asset that qualifies as a deposit under the Federal Deposit Insurance Act, even if that deposit is recorded on a distributed ledger. By classifying tokenized deposits as traditional bank deposits, banks can apply standard fractional‑reserve banking rules to them. JP Morgan, together with the private Canton Network—backed by DTCC, Goldman Sachs, Euroclear, and others—plans to issue such tokenized deposits on a private, permissioned blockchain. This allows banks to lend out the majority of the underlying assets, earn yield, and keep the reserve ratios opaque to the public, while crypto issuers must publish monthly audits proving full backing. The speaker argues this creates an uneven playing field: the same blockchain technology is subject to full transparency for crypto firms but hidden by design for banks, effectively giving banks a legal advantage to fractionalize digital dollars.
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Banks have found a legal way to fractionalize stablecoins the same way they fractionalize your bank deposits, and they made it illegal for all crypto companies to do the same thing. If you read headlines, though, it'll tell you a different story. They'll probably say something along the lines of Genius Act Section 4 saying that all payment stablecoin issuers shall maintain identifiable reserves backing the outstanding payment stablecoins of the permitted payment stablecoin issuer. on at least 1-to-1 basis. You're supposed to back up stablecoins with a 1-to-1 backing. We all know that. That's headlines. That's what everybody's talking about, right? Section 4, paragraph 11 says, no permitted payment stablecoin issuer shall pay the holder of any payment stablecoin of any form interest yield, whether cash, tokens, or any other consideration. So if you're Circle, Tether, or if you're anybody else in crypto issuing a stablecoin, you have to back it 1-to-1, and you cannot pay yield, and the government can order you to freeze it, burn it, On command, obviously the banks found a loophole, right? So if you read Section Two, paragraph twenty-two, it defines what a payment stablecoin is, and then it says, "Quote does not include a digital asset that is a deposit as defined in the Federal Deposit Insurance Act, including deposit recording using distributed ledger technology." I want you to listen to that one more time. If it's classified as a deposit, yes, the stablecoin can be classified as a deposit. That means all the rules of a regular deposit at a regular bank, including fractional reserve banking, is allowed on that stablecoin. So JP Morgan takes your deposit, it's allowed to put it on the blockchain as a token legally as a deposit, not a stablecoin, even though it is a stablecoin with the same technology. And none of the restrictions of a payment stablecoin that you see with USDC or Tether apply. Now where it gets really out of control is when you put into the picture Canton Network, which is backed by DTCC, Goldman Sachs. and Euroclear. It's basically a blockchain specifically built for institutions where they control who sees all of the data, the transactions, the balances, and the data, all private, like a private blockchain. JP Morgan is bringing their deposit to Canton this year. The DTCC is already tokenizing treasuries on it. So think about what that means for a second. They can take your bank deposit, lend it out, keep 10% in the bank on some private blockchain with institutional repo markets, treasury operations happening 24/7 on a private network, earn yield off all of it, And nobody outside that network can see how much money is actually backing your token. Keep in mind, Circle has to publish monthly audits proving every dollar is there. The banks are doing fractional reserve lending on a private blockchain where the public has zero visibility to the reserves. The same token, the same blockchain technology. One is fully transparent by law and the other is hidden by design. The Genius Act didn't regulate crypto. It gave the banks the legal right to fractionalize digital dollars on a private network while forcing everyone else to back theirs one-to-one. That's not a level playing field. That's a playing field they wrote for themselves, and it's actually right there in the legal documentation if you actually read it.
