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Money is a confidence trick. When you tap a card, swipe a phone, or send a wire, you move a claim on a commercial bank. You expect others to accept that claim at par — you send a dollar, euro, pound, or yuan, and they receive one. The claim settles and life goes on.

This apparent simplicity conceals an elaborate architecture. Commercial bank deposits circulate at par with central bank money (reserve liabilities) because a complex legal and institutional framework makes the parity credible. Prudential regulation constrains bank risk-taking. Supervision enforces the constraints. Deposit insurance reduces the incentive to run (or to panic). The lender of last resort keeps solvent banks liquid when private funding evaporates. Settlement in central bank money anchors the payment system. Each element reinforces the others. Start stripping them away and private liabilities like bank deposits will stop functioning as money.

Stablecoin advocates ignore these essential foundations. They point to asset backing — in some cases, with quality determined by legislation like the GENIUS Act — and a programmable ledger, and stop there. That is not enough. General acceptance of private money — digital or otherwise — depends on functions that only a central bank can provide. Tokenized deposits inherit this institutional support; stablecoins do not. That is why tokenized deposits will likely dominate stablecoins outside the crypto ecosystem (see here).

The history of payments is an arms race that pits law enforcement against criminals, with criminals typically maintaining an edge. The newest technology is crypto and stablecoins. Milton Friedman saw them coming. Nearly a decade before Bitcoin launched, he described the technology that stablecoins have become: e-cash that is a digital peer-to-peer bearer instrument. He knew gangsters would make it their own, and they have.

Friedman's observation has a counterpart in an older principle about money. Gresham's Law — an observation associated with the Elizabethan financier Sir Thomas Gresham and later formalized by economists — holds that “bad money” drives out “good money.” In the era of metallic coinage, the rule was simple: spend the lighter coin, keep the heavier.

In this post, we argue that a modified version of Gresham’s Law applies to stablecoins. Stablecoins are private digital tokens that promise to maintain a fixed value — typically one U.S. dollar each — backed by reserve assets whose composition varies by issuer. Users who value anonymity gravitate toward what Gresham might have called the bad money: the coin with weaker oversight that makes identification easier to avoid.

Put differently: in stablecoins, as in metallic coinage, bad money drives out good — where “bad” means less transparent and less certain in value.