Stablecoins are a macroeconomic monetary problem

[alani123]

You have some dollars earned through your labour.
You deposit to the bank.
The bank buys treasury bonds and earns 4% ARR on your dollar.
The bank keeps the bonds in its reserve, but they're not as liquid as dollars.

Enter the stablecoin era.
Stablecoin issuers can turn these reserves into a very liquid 1:1 dollar clone.
The dollars earning yields through bonds enter the market again in full liquidity as stablecoins.
The US even tolerates salaries to be paid in stablecoin now. They're for all intents and purposes equal to the dollar.


Do you see the issue here?
Government bonds and their yields, a long used monetary tool to control inflation, can be rendered useless if stablecoins issuance is exploited at scale.

Through these intricate mechanisms, stablecoins can be utilized so banks and anyone holding large cash reserves can literally sidestep central bank attempts to limit inflation. Do you think governments and especially the US will continue tolerating stablecoins under these pretenses?

[d5000]

I may not fully understand what you mean here. But aren't banks exactly those entities who can create dollars out of thin air?

Government bonds increase the LCR (Liquidity Coverage Ratio) of banks, so if they invest in them, they can increase also their emissions to borrowers.

So I don't see the difference. Banks invest in highly liquid assets like government bonds and that enables them to issue USD to their borrowers as long as their balance sheet allows them to do so. In the Euro Area for example banks can issue roughly 5 times the money than they have in liquid assets. Yes, they also need to fulfill a fractional reserve requirement in some countries and buy some Central Bank money, but not in the US for example, and the fractional reserve requirement is often 5% of lower.

Stablecoin issuers buy bonds and have to limit their issuance to 1:1 the money they have deposited according to most stablecoin laws.

PS: Thinking about it there is a little difference: Stablecoins are closed loops, so you can't "transfer an USDT to an USDC wallet", while banks often have to transfer money to other banks, and that comes with obligation to transfer central bank money. This means that stablecoin issuers indeed have an advantage at a first glance, their customers often stay in their "walled garden" and thus they never have to transfer fiat money around -- the only exception being customers redeeming their stablecoin but that should happen seldomly as most of the time they will sell them on the market. However, in most cases in the banking system there is some sort of equilibrium, that a single bank rarely has to transfer much more money to another one than the other banks transfer to them. And stablecoin issuers also have to massively redeem their coins if the demand decreases.

[Italian Panic]

From my point of view, we are currently experiencing a period of profound transformation in the crypto sector, and there are phases when one thing tends to outperform another. We have had the ICO era, the futures era, the altcoin era, the memecoin era, the ETF era, and now we are heading into the era of the token economy, which will prove immensely rewarding and will be driven by stablecoin and where bitcoin can take it's part.

From the altcoin era, I’m holding on to Ethereum, Solana and Monero; the rest have turned into shitcoins or are verging on being memecoins. With the exception of a few tokens from more serious service providers such as Stacks, Rune and a few others, though these are confined solely to their development environments.
In this new era with very high probability the new king in the tokeneconomy will be Tether, but this is will not a problem because the central banks will need stablecoin systems to keep up with the times.

[Realwhot]

My theory is that stablecoins are currently accepted by the U.S. Because it adds significantly to the demand for U.S. Treasuries, increasing dollar dominance worldwide. Once stablecoins stop reinforcing monetary dominance, regulation will surely come hard and fast. As a rule, governments embrace innovation, until it interferes with central state prerogatives like monetary policy.

[Mhizlove]

My theory is that stablecoins are currently accepted by the U.S. Because it adds significantly to the demand for U.S. Treasuries, increasing dollar dominance worldwide. Once stablecoins stop reinforcing monetary dominance, regulation will surely come hard and fast. As a rule, governments embrace innovation, until it interferes with central state prerogatives like monetary policy.

Good point, because government usually supports innovation more when it still gets in alignance with their economic interest, stablecoins tied to dollar currently helps to expand dollar usage globally, so it's not a suprise that regulators areor open to it for now. But you see government policy can change once control, financial stability and monetary policy begins to feel more threatened. So that's why alot people have the belief that regulations will always increase as crypto grows bigger and more powerful. So the relationship between the government and stablecoins isn't really a pure Freedom instead is more like a controlled or managed acceptance while the system still benefits from it.

[alani123]

@d5000

In monetary terms, cash money is M0, money in the bank that is ready for withdrawal anytime is M1.

Government bonds are even further on the ladder, considered broad money at M3.
You can't exit and enter bonds with zero risk on capital. There's no guarantee there will always be a market for them seeking to buy them at face value. In fact, on the slightest hint of a government's inability to pay back it's very common for bonds to start trading below their face value.

In our current financial system, bank deposits are mostly guaranteed at least up to a certain amount. Bankruptcy of the country holding the deposits can be another story. Cyprus was about to put haircuts on deposits even below the deposit guarantee scheme level but made a last minute decision to implement haircuts only above the guarantee level. So bankruptcy of the country remains a grey area.

Greece is an example of where many bond holders got the short end of the stick and experienced loses on their initial investment. This happened in spite of the fact that Greece was bailed out.

What I'm trying to say here is that Stablecoins kind of invalidate the principles of what a bond is. A mere bank deposit has risk although so far not above the depositor guarantee level, a bond has even more risk. But by governments recognizing bonds as valid backing for a stablecoin that is also tolerated as a means of payment and salary compensation, there's a problem created.

Based on this, stablecoin issuers, who base their reserves to maybe 80% government bonds, create M0 from a M3 medium.
Yes, banks are worse with their fractional reserve. But now banks are going to be encouraged to enter the stablecoin game too. In Europe, 25 banks created a consortium to create a euro stablecoin. And several US banks are considering this too.

So once big banks enter the game, there'll be dilution using stablecoins on top of the already very diluting fractional reserve that they have.

For us in crypto, the most concerning thing is how tied the whole space is becoming to stablecoins. But that might be a topic for another time.

[d5000]

Based on this, stablecoin issuers, who base their reserves to maybe 80% government bonds, create M0 from a M3 medium.

I get what you mean but I think stablecoins would be more a form of M1 than M0, as they're not central bank money. If it was Bitcoin it could be argued that it is some kind of M0, but stablecoin issuers base their token on fiat, and thus for me are simply banks with another kind of technology for the transfer of their assets. (According to Wikipedia, stablecoins are even M2, only CBDCs would be M0. I'm not sure if I agree with M2, but it's certainly not M0.)

Stablecoin issuers for me are comparable to PayPal, only that they are working on blockchains.

So once big banks enter the game, there'll be dilution using stablecoins on top of the already very diluting fractional reserve that they have.

Banks also have to abide stablecoin laws, so they have to cover their issuance 1:1 by highly liquid assets (like bonds or fiat resources). So in my interpretation the "bank stablecoins" (like Société Generale's EURCV) actually "stabilize" banks a bit, because there are higher requirements to issue them than to create fiat in the form of loans.

[alani123]

Based on this, stablecoin issuers, who base their reserves to maybe 80% government bonds, create M0 from a M3 medium.

(According to Wikipedia, stablecoins are even M2, only CBDCs would be M0. I'm not sure if I agree with M2, but it's certainly not M0.)

That's super interesting to consider but I think we're treading on a topic that's too nuanced. I looked into the source this wikipedia article has for calling stablecoins M2 and I don't think that this is exactly what the article linked as a source is trying to say. Quote from the article in question:

Hong Kong’s Race to Regulate: Why Now?

Stephanie: Let’s start with the big news: Hong Kong recently passed the Stablecoins Ordinance, becoming the first jurisdiction to fully regulate fiat-backed stablecoins. Why is this a big deal, and why did Hong Kong move so quickly?

Jack: Great question. Think of it as a battle for financial dominance in the digital age. The global stablecoin market hit US$250 billion in 2025, approximately the amount of M2 money supply in the U.S., and countries realize whoever masters regulation will shape the future of payments and finance. Hong Kong’s move is strategic—they want to solidify their role as an international financial center.

But it’s not just about status. Stablecoins like USDT have faced scrutiny over opaque reserves—remember, only 83% of Tether’s reserves meet the U.S. GENIUS Act’s standards.

Hong Kong saw a gap: by mandating strict reserve separation, regular audits, and 1:1 redemption guarantees, they’re creating a trust framework that could attract global issuers tired of regulatory ambiguity.

via: https://www.21jingji.com/article/20250613/herald/9a0af5670b4e32780e3982e83bdcac80.html

Well for one the supply of M2 in the US is much greater than a few hundred billions. Secondly, the person being interviewed probably didn't mean to say that stable-coins are M2. Maybe that stablecoins are growing along with M2 though?

Anyway, I haven't looked at what academics say on the topic. But if I were to approach what constitutes M2 and M1 aside of the more traditional examples I'd look at usage instead of mere classification. Legally speaking it might be a little shaky to claim that stablecoins are legal tender. But there are improving regulatory frameworks that recognize their usage for payments. And functionally speaking stablecoins can substitute cash too. Maybe central banks are accelerating CBDC rollout precisely because they're afraid of this prospect.

Banks also have to abide stablecoin laws, so they have to cover their issuance 1:1 by highly liquid assets (like bonds or fiat resources). So in my interpretation the "bank stablecoins" (like Société Generale's EURCV) actually "stabilize" banks a bit, because there are higher requirements to issue them than to create fiat in the form of loans.

Banks will have a cost of opportunity in using their liquid cash reserves on a 1:1 basis for stablecoin issuance. I'm just thinking they'll probably utilize stablecoins for further commodification of their bond holdings. 

[fillippone]

Banks also have to abide stablecoin laws, so they have to cover their issuance 1:1 by highly liquid assets (like bonds or fiat resources). So in my interpretation the "bank stablecoins" (like Société Generale's EURCV) actually "stabilize" banks a bit, because there are higher requirements to issue them than to create fiat in the form of loans.

It also “destabilise” banks as well, as issuing stablecoins doesn’t allow the bank to issue more credit, perpetrating the loop.
If all bank’s deposit get converted into Stablecoins, it significantly reduce the ability for the issuing bank to generate money from fractional reserve.
Just remember that banks usually profit by lending money.

[el kaka22]

It won't... Consider it as much of a fiat currency as the cash in your hand, or the money in your bank account, so there is literally nothing changing with this. Stablecoins (in this case CBDC is more realistic) is just printing more money by the FED just like they do now, but instead of actual cash, it would be digital, and you do exactly what you do with it as you di with normal fiat that you do, so nothing is changing in that regards.

You may assume that it won't be the same but that is your own opinion and not the reality. If you just use it the same way then why would that be changing anything. And with higher regulations we are going to see it even not be as relaxed as fiat so it will even hurt less than fiat.

[d5000]

I looked into the source this wikipedia article has for calling stablecoins M2 and I don't think that this is exactly what the article linked as a source is trying to say.

I found a better article: https://medium.com/@rendarax/to-classify-stablecoins-based-on-the-monetary-aggregates-m0-mn-described-previously-we-need-to-ba8796491115

The author basically says that stablecoins could either be M1 (because they are used for payments like checking accounts) or M2 (because of their backing and their usage as store of value like savings accounts).

Interesting quotes from that article:

Conclusion: Stablecoins are not officially part of M1 in most jurisdictions because they are not regulated as bank deposits. However, in practice, they function similarly to M1 for users who treat them as transaction-ready money (e.g., in crypto trading or payments).[...]
Stablecoins are not officially part of M2 but have characteristics that align closely with M2 components like savings deposits or money market funds.

There seems to be one regulatory development that puts some stablecoins already close to inclusion into M1: E-Money tokens according to the EU MiCa Regulation. These coins (USDC for example) are classified as e-money, the same like PayPal USD for example. And thus one can deduct that these coins could be (once MiCa begins to fully be applied) be classified "officially" as part of M1. But stablecoins not regulated by MiCa (like Tether) would not be included.

But if I were to approach what constitutes M2 and M1 aside of the more traditional examples I'd look at usage instead of mere classification. Legally speaking it might be a little shaky to claim that stablecoins are legal tender. But there are improving regulatory frameworks that recognize their usage for payments. And functionally speaking stablecoins can substitute cash too.

Yes they are used for payments just like bank money (debit cards) but cash is another category. I don't see any reason to classify them into M0.

I think the big difference is that there is a slightly different risk profile: M1 funds can still become illiquid if a big bank gets bankrupt (and big accounts falling out of the insurance, i.e. >~100k USD/EUR would then lose some money). This can also happen to stablecoin issuers, but not with cash.

Banks will have a cost of opportunity in using their liquid cash reserves on a 1:1 basis for stablecoin issuance. I'm just thinking they'll probably utilize stablecoins for further commodification of their bond holdings. 

Agree here. Another possible benefit for a bank to issue an own stablecoin is possibly to prevent payment solutions to change to non-bank stablecoins. However I don't really see a problem there. I think banks will probably try to find an equilibrium between the benefits of "commodification" of their bond holdings, and the need to maximize income by loans.

It also “destabilise” banks as well, as issuing stablecoins doesn’t allow the bank to issue more credit, perpetrating the loop.

Yes, that's the opportunity cost problem alani123 mentioned too. I think still this would stabilize them more, because if they can benefit in some way from their stablecoin issuance (e.g. commodifying bond holdings which yield earnings), they don't need that much income via risky loans. As far as I understand it, it's basically a tradeoff between a slower but stable growth or a more risky, steeper growth.

[Alpha Marine]

The goal when the government use bonds to fight inflation is to reduce borrowing, thereby reducing the supply of money. The money that banks were supposed to use to give loans goes into the bonds and then the interest rates. So when the banks can't have as much money to give out loans, the supply is reduced, which makes the money scarce.

Stablecoin companies don't give out loans. If they buy the bonds, they will add them to their reserve and increase the number of tokens they issue. This may look like conflicting with the initial plan of the government, but it doesn't because businesses won't go to a stablecoin company to get loans to expand their business or carry out a project.
Even in the rare case that they do, they would have to lock their collateral like BTC/ETH, which has to be more than the amount they want to borrow. So it's like they are still using money to buy that money.
Even though salaries are paid in stablecoins, it won't affect anything. Reducing the money supply doesn't aim to reduce salaries. Workers would still get their salaries if they are paid in USD.

But now banks are going to be encouraged to enter the stablecoin game too. In Europe, 25 banks created a consortium to create a euro stablecoin. And several US banks are considering this too.

If this happens, where banks create stablecoins and use them to give loans when the government is trying to reduce inflation, then regulations would be put in place.

[viljy]

As I understand it, the question is that treasuries are "monetized" in the form of stablecoins and enter the economy in this form, contributing to an increase in inflation instead of simply generating income?

What can a bank do? After receiving the money from your deposit, the bank issues a loan (for example, in the amount of = your deposit (this is 3%) + 97%, depending on the jurisdiction) to its subsidiary investment division (also as an example). This loan buys income-generating treasuries. Now the bank can issue another loan, and the loan is already secured (secured by these treasuries), etc.

What can a stablecoin issuer do? The issuer buys treasuries and creates stablecoins secured by these treasuries. The issuer can buy treasuries again either with these stablecoins, or take out a loan secured by treasuries, buy more treasuries and issue even more stablecoins again. But even so, it's nothing compared to how much money a bank can make out of thin air and throw into the economy.

There are absorbers of inflation - the American financial markets. They absorb inflation, but at the same time bubbles are inflated. The largest such bubble now is the AI bubble, particularly Nvidia shares. When the bubble bursts, the inflation created by the banks will hit consumer levels. Stablecoins actually have little effect on inflation. In addition, stablecoins mostly circulate in their own closed systems.