Fiat-Backed Stablecoins and Narrow Banking
March 31, 2026
Summary
Devastated by the misery of millions of people during the Great Depression caused by the collapse of the entire US financial system, a group of economists at the University of Chicago sought to reform the banking sector. The "Chicago plan" suggested a replacement of "fractional-reserve banks" with "full-reserve banks" (also called "narrow banks" and "limited-purpose banks"). Most economists dismiss this idea. However, the rising popularity of stablecoins and the 2025 GENIUS Act in the US introduce this form of banking to the general public. The goal of this note is to analyze the similarities and differences between the narrow banking proposal and the fast-growing fiat-backed stablecoins.
View PaperPolicy Hub 2026-2
Key findings:
- Fiat-backed stablecoins and narrow banks share very similar characteristics with respect to: (i) their reserve requirements and (ii) the services that they provide and do not provide.
- However, stablecoins rely on additional "moving parts" that narrow banks do not have, which make them more risky.
Center Affiliation: Center for Financial Innovation and Stability
JEL classification: G21, G23, G28
Key words: fiat-backed stablecoins, narrow banking, full-reserve banks, limited-purpose banks, GENIUS Act
Digital Object Identifier (DOI): https://doi.org/10.29338/ph2026-02