The following is a guest post and opinion from Patrick Heusser, Head of Lending & TradFi at Sentora.
Capital is undergoing a structural reallocation. What once sat securely in fractional-reserve bank accounts is now increasingly flowing into fully funded, blockchain-based financial systems. From stablecoins like USDC and USDT to tokenized T-bills, institutional and retail capital is chasing programmability, global interoperability, and perceived safety. This is not a simple migration of money; it is a replatforming of financial infrastructure. In this deep dive, we examine the risks, mechanics, and strategic responses to this shift—and ask whether a hybrid system can emerge before systemic cracks appear.
Two Worlds, One Capital Base
The Fractional-Reserve Fiat Model
In traditional banking, commercial banks operate on fractional reserves. Deposits are only partially backed, and banks create money through lending. This model offers high capital efficiency and elasticity; banks can support economic growth by expanding credit, but at the cost of fragility, maturity mismatches, and systemic dependency on central banks.
Payment rails (ACH, SEPA, card networks) rely on netting, credit lines, and settlement-finality delays. Liquidity is managed across a network of intermediaries and backstops.
The Fully Funded Blockchain Model
In contrast, stablecoins operate on a one-to-one reserve basis. Transactions settle instantly, transparently, and are irreversible. However, they require pre-funding and, by design, eliminate endogenous credit creation. Liquidity must be fully available before transactions occur. This rigidity offers trust minimization and atomicity, but also introduces capital intensity and an operational burden when interfacing with TradFi.
The concept of “singleness of money” is challenged by this divide: stablecoins cannot seamlessly substitute for fractional bank deposits unless deep interoperability and synchronized settlement are established.
The Capital Shift: From Bank Deposits to Stablecoins
A growing share of global liquidity is migrating into stablecoins. This movement represents more than technological preference—it is a shift in monetary architecture. As Marvin Barth articulates, this could effectively implement a modern version of the Chicago Plan, disintermediating banks and replacing deposit money with full-reserve alternatives.
Capital moving from bank accounts to stablecoins reduces the banking sector’s access to cheap funding, raises competition for deposits, and may necessitate credit contraction. In aggregate, this migration locks capital into instruments that, while liquid, are not economically leveraged.
The implications ripple beyond banking: as stablecoin issuers invest in T-bills and repos, they crowd out other credit users, distort short-term funding markets, and elevate systemic liquidity needs.
Risks and Tensions in a Non-Fractional Environment
Stablecoins promise real-time settlement and global reach, yet their fully reserved design introduces frictions that the credit-based banking system never had to confront. Because a stablecoin cannot lend on its own balance sheet, any yield must come from taking explicit risk elsewhere—risk that large institutions will only bear when compensation, clarity, and infrastructure are sufficient.
Where the frictions arise
- The real cost of on-chain yield. To earn anything above zero, reserves must be deployed into DeFi lending markets, active-validation services, or structured-yield products such as tranching protocols, all of which add new layers of credit and smart-contract exposure.
- Pre-funding both legs of a trade. As our fiat-versus-stablecoin settlement study shows, a participant often has to hold full collateral in two places at once, tying up balance-sheet capacity that could otherwise generate return.
- Liquidity strains from mismatched finality. Markets must keep capital parked simultaneously in “instant” on-chain rails and in slower, batched banking rails simply to reconcile the two worlds.
The Incumbent Response: JPMorgan’s Deposit Token
Sensing these pressures, JPMorgan has launched tokenized deposits—programmable, on-chain claims on the bank’s own liabilities that still sit inside a fractional-reserve, regulated framework. With this move, the bank aims to
- Keep control of customer balances and associated credit relationships,
- Deliver the user experience of stablecoins without surrendering monetary control, and
- Pre-empt large-scale migration of deposits to third-party issuers such as Circle or PayPal.
It is, in essence, a defensive play: bring deposit money on-chain before stablecoins siphon it away. The architecture is technically elegant but not without trade-offs. Users may assume atomic, irrevocable settlement, yet the underlying asset remains embedded in a credit system subject to maturity transformation and regulatory intervention—an opacity that contrasts sharply with the transparent-reserves ethos of non-fractional stablecoins.
A Hybrid Future?
Concepts such as the one from JPMorgan mentioned above raise an interesting question. Can we avoid the binary choice between rigid, fully funded systems and elastic, credit-generating banks? Emerging solutions suggest that we can:
- Ubyx: structured tranching to create real yield from risk allocation
- Insurance: regulated insurance overlays using idle crypto collateral
- Tokenized T-bill wrappers: yield with minimal credit risk
- CDOR Futures (in development): based on the live CDOR index, these synthetic interest-rate products would enable capital-efficient rate exposure without full notional lock-up—though they have not yet been launched.
These hybrid models aim to balance capital efficiency with transparency and programmability. They are not frictionless, but they are functional.
Why the Battle for Base Money Matters
Money itself is splintering into multiple on-chain and off-chain forms, yet the pool of deployable capital is finite. The contest between fractional-reserve banking and non-fractional stablecoins is therefore a fight over who gets to issue, settle, and earn the spread on digital dollars. Left unchecked, the shift could erode credit creation and the liquidity buffers that support traditional finance. Guided well, it promises a safer, faster, more programmable financial stack.
The landscape is consolidating around players that can straddle both worlds of money:
- Specialized intermediaries—Sentora, Stripe, Visa, and other fintechs engineered for crypto rails—who absorb the pain of conversion, custody, and risk management.
- Capital-efficient protocols that generate yield from real economic activity rather than temporary token incentives.
- Banks that adapt to tokenize deposits while preserving the strength of their own balance sheets.
The real winners will be those who can intermediate between the two monetary systems and reduce the capital intensity of bridging them.
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