Who Really Creates Money? How Stablecoins Could Rewrite Modern Banking
July 31, 2026
Ask most people who actually creates money and you will almost always get the same confident answer, which is “the central bank,” and it happens to be one of the most widely accepted ideas in all of economics while also being one of the least understood. Central banks certainly shape the supply of money, since they set interest rates, manage liquidity, issue physical currency, and step in as lenders of last resort, and yet the overwhelming majority of modern money is not created by central banks at all but rather conjured into existence every single day by commercial banks through the deceptively simple act of lending, a distinction that sits right at the heart of modern finance and explains precisely why stablecoins deserve far more attention than most investors are currently willing to give them, because this is not really a cryptocurrency story so much as a banking story.
The Quiet Mechanics of Credit Creation
When a commercial bank approves a mortgage or extends a business loan, it does not quietly lift existing money out of some other customer’s account and pass it along to the borrower, but instead creates a brand-new deposit directly on its own balance sheet, so that a fresh asset appears in the shape of the loan while a matching liability appears in the shape of the customer’s deposit, and new money has effectively entered the economy through pure credit creation. This mechanism has underpinned banking for generations along a remarkably elegant cycle in which deposits fund lending, lending creates money, and economic growth follows, and it is exactly this cycle that explains why deposits matter so enormously, because they are never simply idle customer balances sitting inside a vault but represent one of the cheapest and most stable funding sources available anywhere in the financial system, which is precisely why banks compete so aggressively for them, since deposits support lending, profitability, and ultimately the creation of still more money.
What Happens When Deposits Quietly Migrate Away
Now consider what unfolds if a meaningful share of those deposits gradually drifts somewhere else, so that households begin parking part of their savings in regulated dollar-backed stablecoins rather than traditional accounts, businesses start settling invoices through tokenised dollars instead of commercial bank deposits, and international trade increasingly leans on programmable digital dollars that run continuously rather than on conventional banking networks hemmed in by geography and business hours.
On the surface nothing dramatic seems to have happened, because people still hold dollars, payments still clear, and the economy keeps humming along, and yet something genuinely fundamental has quietly shifted, since the deposits that once anchored commercial bank lending have begun slipping outside the traditional banking system altogether, which is exactly why banks pay such close attention to stablecoins even when they present a publicly cautious face, given that their real worry was never that stablecoins might replace the dollar, since most leading stablecoins are denominated in dollars anyway, but rather that these instruments change where dollars actually reside and, by extension, who controls the funding base sustaining credit creation.
Unbundling the Three Functions of Banking
This is one of the reasons the current debate reaches well beyond technology and pushes straight into the architecture of money itself, because commercial banks have long enjoyed a privileged position by bundling three functions under a single roof, storing deposits, creating loans, and facilitating payments, whereas stablecoins begin prying those functions apart, so that payments increasingly migrate toward blockchain-based settlement, savings can migrate toward tokenised assets, and lending, at least for now, remains with the banks.
That kind of separation may sound merely technical, and yet history strongly suggests that whenever specialised institutions start performing functions that used to be tightly bundled together, entire industries eventually reorganise around the new structure, and banking may well prove no exception, though none of this implies that banks simply vanish, because they remain indispensable for evaluating credit risk, allocating capital, financing businesses, and providing services that stablecoins on their own cannot begin to replicate, since a token can certainly move money but it cannot decide whether a small manufacturer deserves a five-million-dollar credit facility or whether a fledgling pharmaceutical company should receive long-term financing, which keeps human judgement, risk assessment, and capital allocation firmly at the centre of what banking actually is.
How the Competitive Landscape Shifts
The competitive landscape, however, changes considerably, because if deposits become less abundant then banks may be forced to compete far harder for funding by offering higher interest rates, building out their own digital payment systems, or leaning more heavily on wholesale funding markets, and all three of those paths chip away at profitability compared with a world where cheap deposits arrive almost automatically, which likely explains why so many of the largest financial institutions have quietly pivoted from dismissing digital assets to actively exploring their own tokenised deposit systems and regulated stablecoin initiatives, since they recognise that payment infrastructure is going to evolve whether they choose to take part or not.
Another consequence receives surprisingly little airtime, namely that stablecoin issuers themselves become important financial intermediaries, because every fully reserved stablecoin demands reserve assets, which today consist largely of Treasury bills and highly liquid cash equivalents, so that some of the deposits that once sat inside commercial banks may eventually end up financing government debt directly through stablecoin reserve portfolios rather than indirectly through the usual banking channels, and notice what has happened in that scenario, because the dollars remain, the Treasury market remains, and the economy remains, while the pathway connecting them has been rerouted, which represents one of the most significant architectural shifts underway in modern finance given that financial systems are defined far less by individual assets than by the pathways along which those assets circulate.
Credit Creation Itself May Evolve
The implications stretch well past mere banking profitability, because credit creation itself may gradually evolve, since if commercial banks are left holding fewer low-cost deposits then the economics of lending inevitably shift, loan pricing shifts, competition shifts, balance-sheet management shifts, regulators adapt, and capital markets expand to fill the emerging gaps, and while none of these developments arrives overnight, history consistently shows that when funding structures change the institutions built on top of them eventually change as well. There is a further layer worth equal attention, because stablecoins also chip away at one of banking’s oldest competitive advantages, namely settlement friction, since for decades moving money across borders required a chain of intermediaries, correspondent banks, clearing systems, and no small amount of time, all of which created value precisely because banks sat at the centre of the settlement process, whereas stablecoins strip out many of those frictions and let value move continuously across digital networks, so that the less friction remains, the less valuable certain traditional intermediaries become.
The Real Competition Is Between Architectures
None of this should be read as an argument against banks but rather as an argument for genuinely understanding structural change, because history repeatedly demonstrates that industries rarely disappear simply because technology eliminates demand, and instead evolve because technology changes where value gets created, so that railroads survived electrification, newspapers survived radio, and banks will almost certainly survive digital assets, even though the institutions that adapt to the new architecture are unlikely to look much like those that ignore it. Investors should therefore resist the temptation to frame all of this as banks versus blockchain, which is almost certainly the wrong comparison, because the real contest is between competing architectures for creating, moving, and allocating money, and in that contest some banks will emerge as leaders, some technology firms will become financial institutions in everything but name, and some payment companies may discover that their old business models no longer justify yesterday’s valuations because settlement itself has grown dramatically cheaper, since whenever infrastructure changes, value migrates, a pattern that has held throughout economic history and is unlikely to turn false now.
Perhaps that is the single most important insight investors ought to carry forward, because the stablecoin revolution is not fundamentally asking whether digital money succeeds but posing a far more consequential question about who controls the next generation of money creation, and the answer to that question will shape the future of banking far more profoundly than the answer to whether Bitcoin ever reaches another all-time high.
