Stablecoins might just be what America needs to give its economy a boost. We know that unlike regular cryptocurrencies, stablecoins keep their value steady.
The steadiness makes them super useful for all kinds of economic purposes mainly because they can act as major buyers of US Treasuries, so they provide a steady demand for government debt. This keeps America’s finances stable and could even help lower borrowing costs.
Stablecoins to the rescue?
Lately, data from the Treasury Department and DeFi Llama shows that stablecoins, particularly those pegged to the dollar, are snapping up U.S. government debt.
To give you an idea, if stablecoin issuers were a country, they’d be just outside the top 10 holders of US Treasuries, bigger than Saudi Arabia but smaller than Hong Kong.
As more people and businesses get into stablecoins, their role in buying US debt could grow even more.
This is great news for the government because it means there are more buyers for its debt, making it easier to manage. More buyers usually mean lower interest rates, which is a win for the government.
Stablecoins could also help keep the US dollar on top globally, especially as de-dollarization is gaining ground.
The dollar’s dominance is a big deal for America’s economy because it lets the governments run large deficits and borrow money at lower rates than other countries.
By driving demand for Treasury notes and the dollar itself, stablecoins could help steady the dollar and America’s global economic influence. The more the world relies on the dollar, the stronger America’s economic position becomes.
But it’s not all smooth sailing. Stablecoins also bring risks. One major concern is the “run on the bank” problem.
If stablecoins aren’t backed by real cash or equivalents, people won’t be able to redeem them at full value. If there is one thing the downfall of TerraUSD and Do Kwon taught us, it is that stablecoins aren’t always as stable as they appear.
Changing the money supply and payments
Stablecoins could change how money moves around the economy. A stablecoin pegged to the dollar and backed by real dollars in bank accounts could expand the money supply without causing inflation.
These stablecoins would mainly be used for transactions, with people holding more of their deposits in stablecoins rather than traditional bank accounts.
This could lower borrowing costs since more funds would be available for lending. Banks could offer loans at lower rates, thanks to the stable long-term deposits backing these stablecoins.
Plus, the speed and efficiency of transactions using stablecoins could make them a preferred option for both domestic and international payments.
But the adoption of stablecoins could lead to a contractionary effect on America’s money supply. This is because funds invested in Treasury securities through stablecoins are effectively taken out of the banking system, reducing the potential for credit creation.
Researchers have found that the top three issuers of stablecoins contributed to a monetary contraction of about 1.1-1.2% of the total U.S. money supply in various months of 2022.
The source of funds flowing into stablecoins matters, too. If these funds come from other investments like stocks, corporate bonds, or real estate, the effect on money supply could vary.
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