BPInsights: May 30, 2026

WSJ: Stablecoins Are Private Money - That's Why They're a Risk to the Economy

Stablecoins are "private money" and carry risks similar to historical private-money experiments, the Wall Street Journal's Greg Ip wrote this week.

• The Contradiction. "To proponents, stablecoins are crypto's killer app. They will make payments faster and more efficient, especially across borders, than the legacy banking system makes possible," Ip wrote. "With that promise, though, comes the risk that this could lead to a financial crisis, much like some past experiments with private money."
• Legislative Context. The GENIUS Act and CLARITY Act both aim to mitigate risks surrounding stablecoins, but "no legislation can fully remove risk that is intrinsic to the design of stablecoins," Ip wrote.
• What Are the Risks? Stablecoins lack "singleness," a necessary property of money in which a dollar always equals a dollar no matter where, when or with whom it is used. Stablecoin issuers also seek to make profits, including by expanding usage through paying interest, the subject of a much-debated provision of the CLARITY Act. Historical lessons from 1800s "free banking" and 2008 money market turmoil tell a cautionary tale: in the free-banking era, fraud was widespread, and the system was fragmented, while in the money market crisis, panic ensued after funds failed to honor redemption value. "Those cases showed how a loss of confidence can cause the volume of private money to contract, amplifying economic stress," the article says.
• Learn More. As BPI's new module, "What is Money?" further explains, money takes multiple forms: central bank money, commercial bank money and nonbank money. Payment stablecoins are a form of nonbank money, because they are issued by nonbanks and do not have deposit insurance. In our recent comment on the OCC's GENIUS Act proposal, BPI emphasized the importance of establishing a durable prudential framework that is appropriate for the risks associated with payment stablecoins.

Five Key Things

1. The Bank of England's Updated Assessment of Optimal Bank Capital

The optimal amount of bank capital balances the tradeoffs between reducing the likelihood of bank failures and raising the cost of loans and other credit. Such an estimate has important implications for borrowing costs and economic growth.

A new BPI analysis discusses how and why the Bank of England recently revised its estimate of this critical optimal-capital level. This revision represents a rare example of a major regulator re-examining an earlier estimate of optimal capital by applying the same broad framework to updated data and improved risk measurement, informed by years of post-crisis experience. It reflects a prudential regulatory framework that has changed drastically since the Global Financial Crisis and thereby bolstered bank capital in the system.

• At the end of 2025, the Bank of England updated its assessment of the optimal level of tier 1 capital in the banking system, lowering it from about 14 percent of risk-weighted assets to about 13 percent.
• This note describes the Bank's analytical framework for assessing optimal capital, how its original 2015 estimate was formed and what changed in the 2025 update and why.
• As the U.S. and European Union revisit their own capital frameworks, the Bank of England's analysis provides a reference point.

2. Regulatory Reforms Enable U.S., UK Bank Balance Sheet Expansion

U.S. and UK regulatory reforms will allow large banks in those countries to expand their balance sheets by $2.9 trillion, boosting capacity to lend to businesses and households, according to research by consultancy Alvarez & Marsal, covered by the Financial Times. Regulatory changes have enabled such banks to grow their balance sheets by $1.3 trillion in the last two quarters, according to the research, which highlights a widening gap between U.S. and UK banks and their EU and Swiss counterparts.

3. Fed IG Considers Changes to Regional Fed President Reappointments

The Federal Reserve's Inspector General office announced this week that it is examining the reappointment process for regional Fed presidents and their deputies. The IG is assessing whether the process "aligns with relevant Federal Reserve Administrative Manual requirements and leading practices." The internal watchdog is also evaluating "the quality and completeness of executive performance evaluations and other potentially relevant information necessary to assess the merits of a reappointment." Regional Fed presidents are appointed to five-year terms.

4. Capital Buffers, Cyber Risk, Supervision: Highlights of the EUI-BPI Conference

The European University Institute, in collaboration with the Bank Policy Institute, held a research conference on May 18 that brought together academics, policymakers and market participants to examine the evolving landscape of bank supervision and regulation. The program featured six research papers, each discussed by both an academic researcher and market participant, as well as a panel discussion about the opportunities and challenges associated with advancing a European Savings and Investment Union. Patrick Montagner, a member of the European Central Bank's Supervisory Board, delivered the keynote address. Read more about the papers here.

5. The Crypto Ledger

Here's what's new in crypto.

• Hamas Victims Urge Court to Preserve Binance Terrorism Claim. Victims of the Oct. 7, 2023 Hamas attack on Israel argued that Binance should not be allowed to exit the sole remaining claim that the firm aided and abetted the terrorist attack. The plaintiffs in Raanan et al. v. Binance Holdings Ltd. et al. urged a U.S. district judge to continue to allow their claim under the Justice Against Sponsors of Terrorism Act to proceed because the latest version of their suit showed Binance "consciously and culpably participated" with foreign terrorist groups. They also argued that the exchange's conduct - allegedly processing millions of dollars in transactions for Hamas and affiliates ahead of the attack - has a "cognizable nexus" to the attacks. The Wall Street Journal recently reported that Binance processed billions of dollars in transactions linked to the Iranian regime.
• Coinbase Relaunches Direct Deposit Service. Coinbase this week announced the reintroduction of direct deposit services for U.S. customers, who will now be able to deposit their paychecks directly into Coinbase accounts. They can also allocate a portion of the paycheck across cash and crypto. The announcement marks a significant encroachment into traditional banking activities (deposit taking, lending, payments) and comes shortly after the markup of the CLARITY Act, which raised concerns about deposit flight driven by yield-bearing stablecoins. Coinbase had previously offered direct deposit services from 2021-2024 but had discontinued them.
• Bank Partner of Crypto.com, Wise Flagged for AML Program Flaws. American Banker reported that Community Federal Savings Bank, a small bank that serves as a partner for Crypto.com and fintech platform Wise, faces an OCC consent order flagging issues with its anti-money laundering program, including customer due diligence, suspicious activity monitoring and Bank Secrecy Act compliance staffing.
• UK Targets Russian Crypto Networks. Britain on Tuesday issued sanctions against Russia-linked cryptocurrency platforms, banks and financial networks ‌that it said were used to bypass sanctions. The UK government froze the firms' assets and barred UK firms from processing payments and holding correspondent banking ties with them. The measures take aim at "shadow financial systems" underpinning Russia's war economy, including the Kremlin-backed A7 network.

In Case You Missed It

Liquidity Regulations, Discount Window Collateral and the Central Bank Balance Sheet

BPI Chief Economist Bill Nelson discussed the intersection of liquidity regulations, the Fed's discount window and central bank balance sheets in recent remarks at the European Central Bank, Sveriges Riksbank and the Bank for International Settlements. In his remarks, Nelson details the interlinkage between two recent pronouncements by Treasury Secretary Scott Bessent and Fed Chair Kevin Warsh, respectively: that the liquidity coverage ratio should recognize banks' capacity to borrow at the Fed's discount window against prepositioned collateral, and that the Fed should shrink its balance sheet. "These objectives are interrelated: recognizing discount window borrowing capacity will facilitate balance sheet reduction, and a smaller balance sheet will make the discount window more effective," he said. "Neither view is radical; both are natural steps in a debate about central bank operations that I have witnessed from both inside and outside the Fed for over 20 years." Nelson's remarks review the debate, correct common misconceptions, explain why the proposals are a constructive step and outline open issues and the potential path forward. Read the remarks here.

Traversing the Pond

Here's the latest in international banking policy.

• ECB Summons Banks on AI Cyber Risks. The ECB planned to meet with banks earlier this week to emphasize the risks posed by Anthropic's Mythos and similar AI models and urge expedited efforts to shore up cyber defenses, according to the Financial Times. Frank Elderson, vice chair of the ECB supervisory board, said it was "unfortunate" that European banks lack access to Mythos, but he hoped the US banks attending Tuesday's meeting would share lessons from testing the model with their Eurozone-based counterparts. "There is a whole range of issues on cyber security that we have been engaging on with the banks for years which are all still valid, but given the progress in AI, they need to be dealt with faster," Elderson told the FT.
• ECB Cautious on EU Stablecoins. The ECB warned EU finance ministers late last week that proposals to issue more euro stablecoins could jeopardize bank lending and control of interest rates, according to Reuters. Authors from the economic think tank Bruegel presented a paper calling for easing liquidity requirements for crypto issuers and considering granting them access to ECB funding, with the aim of promoting a euro-based stablecoin market. But ECB President Christine Lagarde and other officials expressed concern about deposit flight risk.
• Germany Open to Compromise on EU Capital Markets Union. Germany is "ready to compromise" on the European Union capital markets union, including on how and whether to centralize financial supervision at the EU level, according to Reuters. German Finance Minister Lars Klingbeil emphasized the urgency of moving forward on the project, which is a "game-changer" for EU economic sovereignty. Klingbeil made the comments ahead of a scheduled meeting of the E6 group finance ministers in Berlin this week.
• Tokenized Central Bank Reserves Project. The BIS Innovation Hub recently released a new report providing updates on its Project Agora, which aims to tokenize central bank reserves and commercial bank deposits on a shared distributed ledger - preserving the existing correspondent banking structure but modernizing the underlying system. The prototype for Project Agora "demonstrates how tokenisation and programmable technologies can address long-standing inefficiencies in wholesale cross-border payments at scale, while preserving the safety and integrity of settlement in central bank reserves," the BIS said. "Atomic settlement - enabling cross-border wholesale transaction chains to be completed on an 'all-or-nothing' basis - is achievable securely across currencies and jurisdictions."
• ECB on Nonbank Financial Firms. The ECB recently published a report containing policy proposals to strengthen the macroprudential regulation of nonbank financial intermediaries. The proposals include advancing implementation of internationally agreed reforms and conducting an EU system-wide stress test for nonbank firms.

Member News

Women in Banking Feature Prominently in Fortune's 'Most Powerful Women in Business' List, Led by Citi's Jane Fraser

Citigroup CEO Jane Fraser ranked No. 1 on Fortune's Most Powerful Women in Business list for 2026 and was joined by other leaders at BPI member banks, including, Ana Botín (Executive Chair - Banco Santander), Gunjan Kedia (Chairman and CEO - US Bank), Marianne Lake (CEO, Consumer & Community Banking - JPMorganChase), Kim Posnett (Global Co-head, Investment Banking - Goldman Sachs) and Meena Flynn (Chair, Global Private Wealth Management - Goldman Sachs).

TD Bank Launches Agentic AI for Real Estate Secured Lending

TD Bank Group announced this week the launch of its first agentic AI model, a major milestone in the bank's enterprise-wide AI strategy, to automate and streamline the application process for mortgages and Home Equity Lines of Credit.

Upcoming Events

• 5/31/2026: Fed Governor Christopher Waller Remarks on Stablecoins at the 32nd Dubrovnik Economic Conference
• 6/2/2026: Brookings Institution Event with Janet Yellen: "The Powell Years at the Fed: A Retrospective"
• 6/4/2026: House Financial Services Committee Hearing: Oversight of Prudential Regulators
• 6/9/2026: HFSC Subcommittee on Oversight and Investigations Hearing: "Converging Criminal Enterprises: Chinese Money Laundering Networks and Cartel Financing in the U.S. Financial System"
• 6/12/2026: HFSC Task Force on Monetary Policy, Treasury Market Resilience and Economic Prosperity Field Hearing on Examining the Structure of the Federal Reserve System
• 6/24/2026: HFSC Hearing: Future of Payments: Promoting Innovation and Fair Markets