Fed’s Miran: Stablecoins Could Impact Monetary Policy as They Grow

The Governor of the Federal Reserve Board says stablecoins could become a “multitrillion dollar elephant in the room for central bankers” and push the exchange rate of the US currency higher as demand for US Treasury bills accelerates due to the popularity of these digital tokens.

Governor Stephen Miran said in a speech that stablecoins are already increasing demand for US government debt and making the cost of borrowing for the American administration lower, which is a trend he expects to see continuing and growing as stablecoins expand their reach.

The total market cap of stablecoins is roughly $300 billion today, which the Fed estimates could reach as much as $3 trillion by the end of this decade. In total, there is about $7 trillion of Treasury bills outstanding as of now.

“For reference, the Fed grew its holdings of US Treasury securities by just over $3 trillion during the latest round of quantitative easing in response to the COVID-19 pandemic,”  Miran said. “If these forecasts prove accurate, the magnitude of additional demand from stablecoins will be too large to ignore.”

The speech, titled A Global Stablecoin Glut: Implications for Monetary Policy, went on to stress that while this could be positive for the government and the dollar’s prospects against other currencies, for central bankers this could pose a problem. “There are several open questions with respect to the impact of stablecoins on US monetary policy: How many assets will be managed by stablecoin issuers? Will the funds come from domestic or foreign sources, and where might substitution pull funds out of the banking system? What are the systemic risks related to runs on stablecoins?” he asked.

Miran urged policymakers to explore these questions now, to ensure that monetary policy remains forward looking. He also stressed that stablecoins could put pressure on the neutral rate and said this could imply that current interest rates are too high.

Miran said the growth of stablecoins is likely to come from other countries, primarily, which links to his prediction that the dollar’s exchange rate could come under upward pressure, however, Daragh Maher, head of digital asset research and senior FX strategist at HSBC says in a note to clients that it’s possible that demand from US institutional investors and institutions could prove to be more significant than it’s currently expected.

“It is also possible that much of the growth for USD- based stablecoins may come from within the US,” Maher writes. He attributes this source of demand to the expected growth in tokenisation, which will drive up demand for stablecoins as these tokens facilitate transactions. As the GENIUS Act, the US regulatory framework for stablecoins, prohibits payment of yield to holders, neither Maher nor Miran anticipates a huge outflow from banking deposits into stablecoins, but Maher says that given the size of US institutional investors globally, they could play a significant role in the growth of the digital asset universe.

“Tokenised deposits could help meet this demand for tokenized money from institutional investors, but stablecoins are likely to play a significant part also, especially given the likely lack of a USD Central Bank Digital Currency (CBDC),” Maher writes.

“As Governor Miran notes, it is hard to know how the relative shares of stablecoin demand will evolve (i.e., foreign vs domestic) but we suspect US-based institutional demand will be significant,” he adds.