MNI INTERVIEW: Stablecoin Boom Adds Uncertainty To Fed Policy

The rapid expansion of stablecoins to trillion-dollar levels by 2030 could prove to be a significant new source of Treasury funding while complicating the jobs of central banks, former Office of the Comptroller of the Currency economist Rashad Ahmed told MNI. 

Already there's some evidence that flows in and out of the USD250 billion dollar-pegged cryptocurrency token market are having modest effects on short-term Treasury yields, Ahmed, now an economist at the Andersen Institute for Finance and Economics, said in an interview. 

A back-of-the-envelope calculation supposing the sector grows tenfold in the next few years finds that those effects could be large enough to influence the transmission of monetary policy, he said, citing a Bank for International Settlements working paper he co-authored with Inaki Aldasoro of the BIS. 

"If the Fed is trying to raise rates at the same time that you have stablecoins receiving many inflows and turning around to purchase reserve assets and Treasury bills, it would put downward pressure on Treasury bill yields at a time when the Fed is trying to get overnight rates higher," he said. "Assuming the stablecoin market grows that big, we find pretty meaningful price impacts." 

There are also tail scenarios where emerging market countries see mass adoption of U.S. dollar stablecoins and households hold lots of dollars on their balance sheets instead of deposits in local currency at the local bank, potentially undermining domestic capital controls and monetary policy. Nigeria was ranked top globally in the adoption of stablecoins with a 11.9% penetration rate, according to a recent report by African crypto exchange Yellow Card.

"That opens up FX risk exposure on household balance sheets and affects the transmission of local monetary policy. It opens up channels by which U.S. monetary policy can affect the local economy to a greater extent," Ahmed said.  

OUTFLOWS EVEN WORSE

Ahmed and Aldasoro found large inflows into stablecoins over the past five years suppresses three-month Treasury bill yields by 2 basis points to 2.5 bps within 10 days. That price impact grows to 6 bps to 8 bps as the sector reaches USD2 trillion by 2028, the estimate out of the Treasury Borrowing Advisory Committee. 

Outflows would have had an opposite and much bigger effect, causing an increase in yields two to three times as large over the past five years, with implications for financial stability, Ahmed said. 

"Faced with outflows, stablecoin issuers are obligated to meet redemptions on demand. They can draw down bank deposits, but in cases where they deplete those deposits, they'll need to liquidate Treasury positions at potentially undesirable prices, putting disproportionate upward pressure on yields," he said. 

The GENIUS Act, which would create a federal framework for stablecoins, does not create a public backstop for stablecoins, which are neither FDIC insured or have access to the Fed's lender-of-last-resort facilities. 

"We're getting to the stage where stablecoins are on a path to have an impact on the financial system. If it grows that big, it's inevitable that the Fed will need to backstop losses," Ahmed said. "As current legislation is written, there's nothing on that."