Money or Credit, Operationalised: A Comment on Digital Money (The Future of Banking 8)

1. A comment that mostly agrees

It is worth saying at the outset what kind of comment this is. Digital Money and the work I bring to it largely agree. The report’s central move is to treat digital money “not as a narrow payments question but as a matter of institutional organisation,” and that move is exactly right. It is the move too much of the stablecoin debate still refuses to make. The report distinguishes instruments by “the quality of monetary backing, the availability of liquidity support, the credibility of par convertibility, and the location of systemic risk.” It adopts a functional test: “what risks does a liability create, and what institutional supports are necessary for it to operate credibly as money?” It likens stablecoins “more closely to money-market funds than to bank deposits.” It judges that tokenised deposits “enjoy a clear structural advantage over stablecoins issued outside the banking perimeter.” And in its three-country survey it reads the European regime as one that “creates spillovers between stablecoins and traditional banks by design” and therefore “will exacerbate systemic risk.” I agree with all of this.

My aim is not to contest the report but to extend it, from two angles where I can add something the authors, working globally and at the level of principle, had less room to develop. The first is the operational detail of MiCA. I engaged that regulation at first hand in responding to the Commission’s 2026 review consultation, and it turns out to be a working laboratory for the questions the report poses. MiCA is the one major jurisdiction that has already written a detailed answer to a hard question: how should a par-promising private token be backed and supervised? The specifics of that answer are instructive in ways a regime-level summary cannot capture. The second angle is economic history. The report rightly invokes the offshore eurodollar market as the closest precedent for privately created, par-promising money growing up beyond the issuing authority’s reach. That history has a little more to teach than a single analogy can carry.

Five refinements follow, each tied to a claim the report makes. None overturns its conclusions. Two are genuinely external findings: the bank/non-bank issuer split inside MiCA’s e-money-token category (§2), and a deposit-guarantee gap that reaches even bank-issued tokens (§5). The other three (§§3, 4 and 6) reformulate and operationalise the report’s own reasoning, building external scaffolding on the report’s own premises rather than importing new ones, and I flag which is which as I go. Together they aim to make the report’s diagnosis more precise and more actionable. That matters, because the European review now under way is the live test of whether a major jurisdiction will act on the report’s principle or merely restate it.

2. The issuer is the fork: “no backstop” is true of only half the regime

The report states, flatly and more than once, that “MiCA provides no central-bank backstop,” and treats European stablecoins as sitting “outside the banking perimeter.” Its sharpest European observation concerns MiCA’s reserve rule, the requirement that issuers hold a large share of the assets backing the token as commercial-bank deposits. That rule, the report says, “creates a structural channel through which stress in either sector tends to transmit to the other,” so that “a stablecoin run forces rapid liquidation of bank deposits, while banking stress can impair the value of stablecoin reserves.” The channel is real, and identifying it is one of the report’s most valuable European points. I have argued the same about the same rule.

The refinement here is deliberately narrow. The report’s framework already locates an instrument’s safety in the institution behind it, and it predicts, correctly, that bank-issued tokens and tokenised deposits will prevail because they sit inside the perimeter. What a regime-level treatment leaves implicit is a distinction internal to MiCA’s own drafting. MiCA permits a euro stablecoin, an “e-money token” (EMT) in the regulation’s vocabulary, to be issued by either of two very different institutions. (An EMT is a token that promises a fixed one-for-one claim on a single official currency.) One issuer is a credit institution, that is, a bank. The other is a non-bank “electronic-money institution” (EMI), a payments-style firm that is not a bank and stands outside the bank safety net. The two-issuer structure is elementary EU law, not a discovery; the point worth drawing out is its consequence. A backstop attaches to an institution, not to a token. When a bank issues an EMT, the token is the liability of an institution already inside the public safety net, with deposit insurance for its deposits, a resolution regime, and access to the central bank as lender of last resort. When a non-bank EMI issues the very same instrument, none of that applies.

So the report’s “no backstop” is precise only for the non-bank branch. The deposit-reserve contagion channel the report identifies, and the structural instability that worries it, are properties of the non-bank EMI corner specifically, not of “MiCA stablecoins” as a class. This is not a quibble, because it changes the European verdict in a way that strengthens the report’s own forecast. The report predicts, rightly, that tokenised deposits and bank-issued tokens will tend to prevail over free-standing stablecoins. On the reading offered here, that prediction is the market resolving the issuer fork: par-promising euro money is migrating to the corner that already has a backstop. The right European conclusion is therefore not that MiCA is “restrictive” or “ambiguous,” but something more actionable. MiCA’s non-bank corner is a stark hybrid, while its bank corner is the more coherent of the two. Even the bank corner is imperfect, since, as §5 shows, a bank-issued token still leaves the holder outside deposit guarantee; it is the less hybrid of the two, not a flawless one. The review should either close the non-bank form or convert it into a coherent one.

One implication sharpens this, and it is worth making explicit, because it cuts against reading the fork as a firewall. On-chain the token is fungible, but the protection behind it is not. In a shared, multi-issuer scheme, which MiCA permits, a bank and a non-bank can co-issue the same token, so the instrument is only as safe as its weakest issuer. And even across separate euro tokens, a panic rarely distinguishes by issuer: a run on a large non-bank token can spill onto a sound bank-issued one by confidence alone, much as the March 2023 break in one dollar token propagated to others that merely held it. The dual-issuer design does not only leave one corner unbacked. Through fungibility it lets the unbacked corner contaminate the backed one, a contagion channel inside the regulated perimeter, and the natural complement to the report’s worry about contagion across it. The instrument’s home, not its MiCA label, decides whether a runnable par promise sits behind a safety net.

3. A trilemma to organise the three-country comparison

The report’s regulatory chapter compares the European, American and British approaches and reaches a clear ranking. The United Kingdom’s proposal, “which in effect requires stablecoin issuers to be narrow banks,” is “most likely to lead to stablecoins that function as money”; the European regime is harder to judge but spillover-prone; the American framework, still being written, looks likely to leave today’s coins much as they are. The ranking is sound. What the comparison lacks is the principle that generates it, the reason the three regimes line up in that order rather than some other.

That principle is a trade-off among three things a euro token’s designer might want. The first is par stability: the promise to redeem one token for one euro, on demand, always. The second is private credit creation: holding the backing in assets that earn a spread but can lose value, such as commercial-bank deposits or bonds, rather than in risk-free central-bank money. The third is the absence of a public backstop: no taxpayer or central-bank commitment standing behind the promise. The claim is not an impossibility theorem but a constraint. Any two of the three sit together, and reaching for the third makes one of the others give way. Par with no backstop is achievable only by giving up private credit, because the reserve must then be risk-free, which is narrow money. Private credit with no backstop is achievable only by giving up reliable par, because the value then floats, which is the nineteenth-century free-banking note. Par with private credit is the arrangement we already have for bank deposits, and it is bought with an explicit backstop.

Two cautions keep the device honest. First, the interior is occupied, not empty. A near-par promise held without risk-free reserves and without an explicit backstop can persist for years, as constant-value money-market funds did. But they persisted only by being rescued, in 2008 and again in 2020, with emergency public facilities. That makes the point sharper, not softer: the interior is survivable, but historically only on improvised public support, a debt §6 collects. The trilemma maps gradients of fragility, not a forbidden centre. Second, the three goods are not fully independent. “No backstop” is partly an outcome of holding credit-bearing reserves against a par promise, rather than a free third axis. The device earns its place as a way to see why the regimes line up as they do, not as a theorem.

Read through this lens, the report’s ranking explains itself. The United Kingdom’s narrow bank with a central-bank backstop sits on a coherent edge: it buys par by removing credit risk from the reserve and adding a backstop, which is why it “functions as money.” Tokenised deposits sit on the bank-money edge, behind the existing safety net. The European non-bank EMT sits in the unstable interior, reaching for all three at once: a hard par promise, a reserve full of commercial-bank credit, and no acknowledged backstop. The trilemma does more than relabel the report’s verdict. It states a general constraint that travels to any regime the report did not survey, and it yields a falsifiable expectation. If a failure comes, it should take the form of a liquidity-driven break in the peg of a large non-bank token under stress, absent official intervention. A sustained stretch in which such tokens reach scale and weather stress as high-quality payment rails would count against the reading. The claim is meant to be refutable, which is the point of stating it.

A sceptic might object that this is mere taxonomy, that naming corners adds nothing to a comparison the report already got right. The reply is that a country-by-country verdict is hostage to the next country, and a constraint is not. The trilemma predicts where any new regime will land, and it tells a designer what must be given up to reach a coherent edge. That is more than the three data points can do on their own.

4. Functional equivalence is necessary, but the category still does the work

The report’s stated regulatory principle is functional equivalence: “instruments that create similar monetary risks should be subject to similar constraints, regardless of the technologies they use.” I endorse the principle. The European case shows why it is necessary without being sufficient, and the gap is worth naming, because it is where well-intentioned regimes go wrong.

A rulebook does not only set constraints. It also sorts instruments into legal categories, such as “deposit,” “electronic money,” and “financial instrument,” and the category an instrument lands in quietly governs which risks supervisors are told to look for. I have elsewhere called this the distribution of supervisory attention: the rulebook decides, in advance and largely invisibly, which dangers are in view and which are out of frame. The intent to regulate by function does not by itself fix the category. Where the inherited category was built for a different instrument, it can misdirect attention even as the regulator believes it is regulating by function.

MiCA is the demonstration. By any fair reading the European legislator intended functional rigour: it loaded the EMT issuer with much of a bank’s prudential machinery, including own funds, stress tests for significant tokens, recovery and redemption plans, and audited reserves. That fact also bounds the claim. MiCA plainly did not fail to regulate the EMT prudentially, so this is not a case of the category hiding risk wholesale. The point is narrower. Because the instrument was filed under the inherited “electronic-money” category, two consequences slipped past that a thorough application of functional equivalence should itself have caught, and that the category instead made look ordinary. The first is the deposit-reserve contagion channel the report identifies: banking-sector credit risk written into the reserve of an instrument the category insists is not banking. The second is a consumer-protection gap, discussed next, that follows directly from the e-money classification.

The lesson is not that functional equivalence is wrong, but that it needs a second clause: apply it, and then audit where the inherited legal category is still misdirecting supervisory attention. The mechanism, that an inherited legal category steers which risks supervisors watch, is not original to me; adjacent points are made by Awrey (2022) and by Gorton and Zhang (2023). What I add is the MiCA illustration and a procedural corollary. The report supplies the principle, and the European experience shows it needs a second step, lest a regulator apply functional equivalence in name while the inherited category quietly under-applies it in fact. There is a sharper way to put it. Classifying a runnable par liability as “electronic money” rather than as a deposit is not a neutral taxonomic act. It is a deliberate subordination of the holder’s claim, a policy choice to create a second tier of par money carved out of the public safety net, and that is precisely the kind of choice a functional test is meant to expose rather than inherit.

5. The holder-protection gap the report’s own conclusion implies

The report’s case for tokenised deposits rests on institutional location. A tokenised deposit “remains a claim on a supervised bank,” sits inside prudential frameworks, “may benefit from deposit insurance,” and connects to central-bank settlement and liquidity support. This is persuasive, and it is mostly a systemic-risk argument about where stress is absorbed. There is a second argument, at the level of the individual holder, that the report does not make but that strengthens its conclusion.

Consider three instruments that do almost the same job for an ordinary user: a tokenised deposit, a bank-issued EMT, and a non-bank EMT. Under European law these carry three different levels of protection, set by their legal wrapper rather than by economic function. A tokenised deposit is a deposit, and is covered by the deposit-guarantee scheme up to the limit. A non-bank EMT is electronic money, and electronic money is excluded from deposit-guarantee cover. The decisive and under-appreciated case is the one in the middle. A bank-issued EMT is also electronic money, so it too falls outside deposit-guarantee cover, even though a bank issues it. The holder of a bank-issued EMT does not have the protected claim that a depositor of the same bank would have. None of this is an accident or a drafting slip. E-money is deliberately defined as a payment instrument rather than a deposit, and is excluded from the guarantee scheme by design. That is what makes the example sharp: the protection a holder enjoys is fixed by a deliberate categorical choice, not by what the instrument does. Three closely substitutable promises carry three different protections, determined by the category the instrument was filed under.

This both reinforces the report’s verdict and extends it. Tokenised deposits win not only on the institutional location the report stresses but on holder protection too, because they keep the user inside the guarantee scheme, which the EMT does not, whether bank-issued or not. And it points to a concrete fix the report does not reach. If the policy aim is bank-issued par money that a holder can trust, the clean route is to channel it through tokenised deposits, which are deposits and carry the guarantee. Bringing bank-issued e-money inside the scheme is the alternative, but it is a larger structural step that would redraw a deliberate legal boundary, and I do not pretend it is a simple amendment. What is not defensible is to leave holders believing an e-money wrapper carries a protection it legally cannot. This is the report’s own function-over-wrapper logic, followed one step further than the report follows it, to where it touches the consumer rather than the system.

6. “No backstop” is an illusion at systemic scale, which sharpens one of the report’s strongest points

The report says of stablecoins that they “typically do not have a lender of last resort,” and that this is, in its words, “their fundamental weakness.” It is right. Two refinements make the point decisive rather than merely diagnostic.

A break in a par promise is a coordination problem, not a solvency problem, which is what the bank-run literature has modelled since Diamond and Dybvig (1983). A holder redeems not because she has worked out that the issuer is insolvent, but because she expects others to redeem first and does not wish to be last. This is why the instruments the report and I both favour as cures work, and the others do not. Capital, disclosure, stress tests and recovery plans address solvency, so they attenuate run risk without removing it. Only two things remove it: reserves that carry no credit or liquidity risk, so that there is nothing to run on, or a credible backstop that pays out when everyone runs at once. The report’s preference for the money-market-fund analogy is exactly apt here, because constant-value money-market funds promised par without a backstop and were rescued anyway, by emergency public facilities, in 2008 and again in 2020.

The second refinement carries the policy bite. At systemic scale, “no backstop” is not credibly absent. This holds for systemically large instruments, the ones whose disorderly failure forces the authorities’ hand. A small token can and does break its peg with no rescue, and its holders simply bear the loss, so the claim is about scale, not about every issuer. When a large par-promising instrument is about to break, the authorities improvise a rescue. The United States did exactly that in March 2023, when it guaranteed the uninsured depositors of Silicon Valley Bank and thereby restored the peg of a dollar token that had fallen below par because part of its reserve was trapped at that bank. The transmission runs both ways, and the report’s primary worry is the other direction: a run on a large token forces a fire-sale of its reserve, of government paper and bank deposits, carrying stress from the issuer into the core financial system. The backstop question and the spillover question are the same question seen from two sides. An uncommitted, unpriced, implicit backstop is not the absence of a backstop. It is the worst kind: public support extended in the moment, without supervision in advance or a fee for the risk. This reframes a position the report relays without challenge, that European policymakers hold “stablecoins should not benefit from public-sector support.” Read literally, that is not a stable policy. It is a decision to have no acknowledged support, which in practice means improvised support on the worst possible terms. The honest choices are two, and they are the coherent edges of §3: make the backstop explicit and supervised, which is bank money, or remove the need for it by making the reserve risk-free, which is narrow money. What cannot hold is the middle that the European non-bank corner now occupies.

The report’s authors might resist this last step, and the objection deserves a hearing. A threshold regime, they could argue, can credibly commit to letting a small token fail while reserving support for systemic ones, so “no acknowledged backstop” need not be the whole story. The objection is fair. My reply is only that the threshold is itself the soft spot, since an instrument is seldom declared systemic until it is already failing. The disagreement is about how credible such commitments prove in practice, a matter of degree rather than of kind.

This also recasts a smaller puzzle the report notes, that both the European and American regimes prohibit paying interest to stablecoin holders. The report attributes the ban, plausibly, to banks defending “franchise value and monetary rents.” That is part of the story. But the prohibition is also a category boundary, a device to stop an EMT becoming, in substance, a remunerated deposit issued without a banking licence or a backstop. On the trilemma reading the two explanations are one explanation seen from different sides, and both dissolve once the issuer fork is resolved. If the token becomes narrow money, there is nothing to run on and interest is harmless. If the issuer becomes a bank, paying interest is simply what a deposit does.

A closing word on the history, since the report invokes it well. The report observes that the offshore eurodollar market “became much more resilient once the Federal Reserve’s liquidity backstop was understood to extend, indirectly, to the wider dollar system.” That is the right lesson, and it is the same fork again. Privately created, par-promising money that grows up beyond the issuing authority’s reach is not doomed, but it stabilises only when it is brought within reach of a backstop, whether explicitly or, as with the eurodollar, implicitly. The history is a caution as much as a reassurance. The eurodollar market was itself a recurrent source of instability that drew central banks into swap lines and tacit support, so “within reach of a backstop” names a costly accommodation, not a happy equilibrium. Dollar stablecoins are the eurodollar’s on-chain successor, and the open question is whether they will be drawn inside an acknowledged backstop by design or, as before, by improvisation in a crisis. The report frames this at the level of the international system; what I can add is that the same choice presents itself, in miniature and on a nearer horizon, inside the European regime.

7. Where I defer, and what I take from the report

A comment should be honest about its limits. The report’s third chapter, on dollar dominance, the complementarities that sustain an international currency, and the trajectories it sketches for the system, is stronger than anything I could add, and I take its framework as given. The same goes for the report’s careful, sceptical treatment of the retail central-bank digital currency and the conditions under which substitution of public for private money need not reduce bank credit. On these I am a reader, not a critic.

One bridge to that chapter is worth naming, because it raises the stakes of the domestic argument. The design flaws identified here do not stay domestic. A euro regime is one thing, but the tokens EU residents actually hold are overwhelmingly dollar-denominated, issued offshore, with reserves held abroad. The deposit-guarantee gap (§5) and the fungibility-contagion channel (§2) therefore reappear as a cross-border resolution problem that the report’s international chapter frames but does not close: how does any authority resolve a failing non-bank issuer of a foreign-currency token whose holders are here and whose reserves are not? The domestic category choices analysed above are, in that light, the EU’s contribution to a global financial-stability question, which is the strongest reason to get them right at home first.

The place where the report and the work behind this comment most usefully converge is the public anchor. The report judges that wholesale central-bank money settled on-chain is the tractable near-term step, less contested than a retail digital euro. That matches the conclusion I reached from the regulatory side: the common settlement asset is what gives tokenised deposits their singleness across banks, and gives any safe private token something to tether to. That is the constructive core the report and I share, and it is where a European policy that took the report seriously would start.

8. Conclusion

Digital Money is right that the important questions about digital money are institutional, and right that an instrument’s reliability is decided by where it sits, not by the technology it runs on. The five refinements offered here point in one direction. The first is to identify the issuer, because the backstop attaches to the institution and not to the token. The second is to name the trilemma corner, because it tells a designer what must be given up to reach a coherent edge. The third is to audit the category, because the intent to regulate by function does not by itself stop an inherited classification from misdirecting attention. The fourth is to protect the holder, because the same wrapper that misdirects supervision also strips a guarantee the user assumes is there. The fifth is to stop treating the backstop as absent, because at scale the choice is never “backstop or none” but “acknowledged and supervised, or improvised in a panic.”

The European Union’s MiCA review is where these refinements stop being academic. It is the first occasion on which a major jurisdiction can act on the report’s own principle, or restate the principle while leaving the incoherent corner in place. The cost of the latter is not abstract. It is a contagion channel written into the reserve rule, and a consumer-protection gap written into the category. None of the fixes is free. Closing the non-bank corner, rerouting or extending deposit protection, and standing up explicit backstops each carry institutional and political-economy costs, including disintermediation, burden-sharing across Member States, and an enlarged central-bank footprint. This comment names those costs but does not price them; that accounting is the natural next paper. The report has supplied the diagnosis. The task now is to operationalise it, and the European review is the test.

Disclosure. The author is the founder and CEO of Eurodollar, a regulated euro-stablecoin issuer based in Denmark, that is, of precisely the non-bank e-money-token category this comment argues is structurally mis-shaped. The central recommendation here applies to that firm as to all others, does not rest on privileged central-bank access for non-banks, and is built from the independent and official-sector sources cited. The disclosure owes one point of candour. Of the two coherent edges this comment recommends, the narrow-money edge is one that a regulated non-bank issuer like the author’s own firm could in principle occupy under a full-reserve standard, which would also raise the bar for less-capitalised entrants. The recommendation is therefore not purely self-abnegating, and the reader should weigh that alongside the rest. The comment draws on the author’s response to the European Commission’s 2026 MiCA-review consultation and on two working papers, “Money or Credit? MiCA’s Stablecoin Hybrid and the Direction of the 2026 Review” and “Which Coherent Corner? An Options Appraisal for Europe’s Stablecoin Choice,” with the underlying framework in “What the Rule-Book Cannot See” (SSRN, 2026).

References

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