When Money Moves to a Ledger, What Does M1 Measure?
Tokenized deposits, tokenized money-market funds, and payment stablecoins are the subject of this series. The immediate question is whether moving a claim onto a blockchain changes where it belongs in the U.S. monetary aggregates—especially M1 and M2. The larger question is what happens when a money-like claim can also move across borders, outside ordinary banking hours, and sometimes beyond the visibility of the statistics designed to measure it. A useful answer begins with function, not technology: identify what the asset lets its holder do, how quickly it can become dollars, and how reliably its amount and circulation can be measured.
The apparent problem is not the blockchain
The Federal Reserve does not define money as whatever has the word “money” in its name, nor as whatever can be transferred electronically. It defines money as a group of safe assets with stable values that households and businesses can use to make payments or hold as short-term investments. Its monetary aggregates are therefore an attempt to sort economic claims by their usefulness, liquidity, and role.
The monetary base is the public-sector layer: currency in circulation and reserve balances that depository institutions hold at Reserve Banks. M1 is narrower and more immediately spendable. It includes currency and demand deposits—balances payable on demand, convertible into cash without selling an investment, and transferable to another person or business. M2 contains M1, then adds less-liquid savings vehicles: small time deposits and retail money-market funds. Those assets are still highly liquid, but they commonly have to be redeemed or moved into a demand deposit before they can be used for purchases. For a retail money-market fund, that process typically takes one to two business days.
This distinction matters because “can be transferred quickly” and “is immediately usable as cash” are not the same statement. A tokenized fund share may change hands on a blockchain in seconds while remaining a fund share that must be redeemed before its holder receives dollars. Conversely, a demand deposit may be represented by a new digital rail without ceasing to be a bank deposit. The ledger records the claim; it does not, by itself, determine the claim’s economic function.
A first-pass way to evaluate any new money-like asset is therefore:
The diagram is deliberately less glamorous than the technology. It says that classification is a chain of judgments. A token must first be understood as a claim with a function. Then the statistician must know how much exists, receive the information through a consistent reporting system, avoid counting the same backing twice, and decide what geographic activity the number is meant to represent. Each step can be clear or uncertain independently of the others.
Three claims wearing three different wrappers
Tokenized deposits are the closest case to familiar money. They are digital representations of traditional depository-institution deposits recorded and transferred on a blockchain. According to the Federal Reserve note, they remain on the bank’s balance sheet, are legally still bank deposits, are subject to banking regulation, and are eligible for deposit insurance. Demand-style versions can support instant, bank-mediated dollar payments around the clock and are immediately convertible into cash without a fund redemption or asset sale. Institutional users are employing them for continuous interbank settlement, corporate treasury operations, cross-border payments, and collateral management.
Those characteristics point toward M1 for a checking-style tokenized deposit. The important fact is not that it uses a blockchain; it is that the holder still has an immediately available claim on a bank. A tokenized time deposit is different. Its savings function places it in the non-M1 portion of M2 when it fits the existing small-time-deposit category. The technology can change how the claim is recorded and transferred without changing the reason the claim belongs in one aggregate rather than another.
This is why tokenized deposits are primarily a visibility and monitoring issue for the current aggregates. Depository institutions already report them together with traditional deposits, so the Federal Reserve does not need to invent a new category merely to count the balance. The existing reporting also means that the bank assets backing the deposits do not create a new double-counting problem. What the routine data cannot show separately is how much adoption is occurring on blockchain-based rails. And because those rails can support activity outside the United States, the question of circulation remains relevant even when the underlying liability is familiar.
Tokenized money-market funds present a sharper contrast. They are blockchain representations of shares in money-market mutual funds. They retain the conventional funds’ low-risk backing and one-to-one net asset value target and remain subject to the SEC’s Rule 2a-7. Their shares can transfer instantly on a blockchain, but turning a share into dollars still requires redemption, typically taking one to two business days. Tokenization changes the transfer interface; it does not remove the underlying liquidity constraint.
That combination supports the current placement of tokenized money-market funds in the retail money-market-fund component of non-M1 M2. Their short-term-savings role, market-linked yield, and redemption lag matter more than their transfer speed. If their use for settlement, collateral, cross-border payments, or on-chain lending became dominant, the Federal Reserve note says an M1 classification could be considered. That is a possible response to a functional shift, not a present conclusion. Routine data also have a blind spot: fund reporting distinguishes retail and institutional funds but does not identify whether a fund has been issued in tokenized form. Bank deposits in fund portfolios create a small potential overlap with M1, although funds have an incentive to hold little of a low-yielding asset.
Payment stablecoins are the boundary case. The Federal Reserve note focuses on coins issued by permitted issuers under the U.S. GENIUS Act. In that scope, they are designed to maintain a one-to-one value with the dollar and backed by reserve assets such as Treasury bills and bank deposits. They can support peer-to-peer dollar payments on public blockchains at any time, but their holders cannot be paid interest directly. Their redemption promise is real but its timing is not fully settled: the Act does not prescribe a conversion speed. A proposed Office of the Comptroller of the Currency rule describes timely redemption as two business days, with an extension to seven calendar days in a specified episode of unusually heavy demand; a proposed rule is not the same as a final operating standard.
Their classification depends on what people mainly do with them. Current analogies, such as the use of USDC to move in and out of crypto markets or to hold a short-term dollar-like position, can look more like a store of value and therefore non-M1 M2. If payment stablecoins become widely used for ordinary household and business payments, their immediate transferability could support an M1 classification. The Federal Reserve note leaves both possibilities open. It also identifies a measurement problem that tokenized bank deposits largely avoid: stablecoin reserves can include deposits and money-fund assets already represented in M1 or M2, so simply adding the token balance could count parts of the same economic base twice.
A measurement problem with international consequences
The aggregate question cannot be settled by classification alone. Four practical tests follow. First, are reliable and timely data available on the amount outstanding? Second, is there a uniform reporting infrastructure rather than a collection of incompatible issuer disclosures? Third, can reserve overlap be assessed and adjusted? Fourth, what geography does the number cover?
The last question is especially important for a public blockchain. Currency in circulation can be held and spent around the world, while deposit components of the U.S. aggregates are defined around holdings at banks in the United States; dollar deposits at banks outside the country are excluded. A payment stablecoin issued under U.S. rules may likewise circulate globally. Its reserve report could tell an observer something about the amount issued, but not automatically whether a particular token is being used by a U.S. household, an overseas business, or a trader moving between crypto assets. The Federal Reserve note says the GENIUS Act supplies a regulatory foundation for monthly reserve reporting, but additional standardized reporting and a reporting chain would still be needed.
This is not an obscure accounting detail. Monetary aggregates are used to analyze economic developments. If a money-like asset grows outside the categories that researchers monitor, the measured relationship between liquidity, spending, saving, and financial conditions can become harder to interpret. If the same asset is counted twice through its token and its reserve, the opposite problem appears: the statistic can suggest more monetary capacity than the underlying claims actually provide. The risk is not that one number suddenly becomes useless, but that its meaning becomes less stable as financial practices change.
The international dimension raises a second, related issue. The BIS reports that stablecoin market capitalization exceeded $300 billion in 2026 and that roughly 98 percent of stablecoin value was dollar-denominated. Those figures indicate a potentially powerful extension of private dollar claims, but they do not show that stablecoins have already become household payment money at comparable scale. The paper notes that much activity remains tied to crypto trading and automated or intra-exchange transfers. After adjustments for such distortions, estimated transaction values are about 1 percent of unadjusted values, and only about 0.4–0.9 percent of adjusted activity is retail-sized under its definition. Cross-border use is growing in corridors where conventional correspondent banking is slow or costly, but fees, foreign-exchange conversion, and fragmentation across issuers and blockchains remain real frictions.
The central tension is now visible. A token can be easy to transfer but hard to classify; easy to issue but difficult to measure geographically; designed to be one-to-one backed yet exposed to redemption and market-liquidity stress. And a dollar-denominated token can be a domestic statistical question for the Federal Reserve while also becoming an international store of value or payment instrument elsewhere. The M1/M2 rules have not been rendered meaningless. They have been forced to reveal their boundary conditions.
The next step is to examine those conditions systematically: how liquidity and use determine the first classification, how reporting and reserve composition determine whether the balance can be counted, and why an asset that looks like money in one setting may still function as savings in another.