Do stablecoins present any significant problems for monetary policy? Consider this discussion in a recent Conversations With Tyler:
DIXON: I think you’re going to have every bank probably issuing, I hope, a stablecoin the way you have them issuing credit cards. These all have users and customers. The banks will have a button that says, “Send a stablecoin.” What I’m hoping is that there’re enough legitimate actors around this who create a network effect that, to your point, yes, there will be that stuff, but it will be marginalized.
COWEN: In that world, should we infer that the Federal Reserve loses control of the money supply? Create a stablecoin. It’s backed by a T-bill. In a funny way, it’s like a private open-market operation. I’m fine with that. I’m not sure the Fed controls the money supply today. Does that become a macro issue?
DIXON: I feel like I’m talking to a famous economist. [laughs] I’m on your territory now. It’s dangerous because I’m not an economist.
COWEN: Well, I haven’t figured this out myself either, to be clear. I’m genuinely asking various people. I asked Austan Goolsbee the same question because I don’t know.
In a recent post, Tyler said the following:
The AI is your smartest reader. It’s your most sympathetic reader.
So why is he asking “various people”? Why not ask an AI? I suspect the answer is that “smartest” can be defined in many ways, and while the top AIs are the smartest in many respects, they are not the smartest in the most challenging areas. I asked ChatGPT about this issue, and its answer is far inferior to the one I’m about to provide. (I’m being a bit mischievous here. Tyler’s right that AIs are smarter than me on the vast majority of questions—but not in areas where I have expertise.)
So here’s my answer: Stablecoins do not present any problem for monetary policy. The Fed will still control the monetary base, and they have almost unlimited ability to adjust both the supply and the demand for base money. This means they will be able to react to the creation of money substitutes as required to prevent any impact on macroeconomic objectives such as employment and the price level.
The Fed can directly control the supply of base money through open market operations, that is, the purchase and sale of Treasury securities. That’s all the power they need to completely offset the impact of stable coins on the demand for base money. But they have an additional powerful tool that also impacts the demand for base money: interest on bank reserves. With these two policy tools, the Fed has the technical ability to move the price level to any position they like. Of course, political considerations would preclude the Fed from engineering any extreme move up or down in the CPI, but that’s not an issue when the Fed is trying to stabilize the price level in the face of growing use of stablecoins.
BTW, some of my views on monetary policy are controversial and not accepted by the experts. I don’t believe that my view on this particular issue is at all controversial, unless base money demand fell to zero. This seems quite unlikely, especially as the stablecoins will probably need to be backed by some form of government money, and at least some cash will continue to circulate.
PS. Contrary to popular opinion, demand for currency has not declined even as we’ve moved to a “cashless economy”. Currency demand, even as a share of GDP, is higher today than it was 100 years ago, when people routinely used cash to make purchases. That’s because increased government regulation (i.e., the war on drugs, etc.) and higher taxes have caused the demand for currency as an anonymous store of value to rise much more rapidly than the transactions demand for currency has declined.
Conceivably, the recent slowdown in currency demand growth might be partly due to stablecoins, but more likely it reflects the fact that much higher nominal interest rates since 2022 have increased the opportunity cost of holding zero-interest currency as a store of value.
READER COMMENTS
Kevin Erdmann
May 16 2025 at 6:10pm
How much certainty is there about the estimates of how much currency is used in illicit or foreign transactions and stores of value versus currency that has been lost or destroyed?
Scott Sumner
May 16 2025 at 7:30pm
I actually did my dissertation on that issue. We are pretty confident that very little currency has been lost, as on previous occasions when all currency is called in, almost all of it comes back. Most currency is recently issued $100 bills. Those aren’t lost very often.
I view most currency demand as mostly being as a store of value, not a medium of exchange. Yes, some is used in drug deals, but it’s mainly a way of doing tax avoidance, or hiding ill-gotten wealth from the government. Large denomination bills are far less likely to circulate than smaller bills, as evidenced by the fact that they wear out and need replacement far less often.
Thomas L Hutcheson
May 16 2025 at 6:30pm
Stablecoin will require the Fed to estimate the effect it has on the link between policy instruments and targeted outcomes. Anything new will make that estimate more difficult. [COVID and the Trump-Biden defcits made the Fed’s job more difficult] But monetary policy _is_ difficult. It’s the Fed’s job to manage inflation (or NGDP) so as to maximize real income regardless of how difficult it is.
Kenneth Duda
May 16 2025 at 6:56pm
I knew as soon as I saw the first sentence — “Do stablecoins present any significant problems for monetary policy?” — what the answer was going to be, and why.
I agree 100%, naturally. Scott, your views on this are so clear, illuminating, and logical, I just don’t understand why others make it more complicated than it is. Take Tyler Cowen, a brilliant economist. He is quoted as saying, “it’s like a private open-market operation… I’m not sure the Fed controls the money supply today.” What?? The Fed is the monopoly creator and destroyer of the dollar. How can anything else possibly control the money supply? Creating a stablecoin doesn’t create new base money, and insofar a large injection of stablecoins reduces demand for base money, the Fed can simply reduce the supply to offset it. If the Fed fails to do so, well, that’s a choice, and blaming stablecoins for the Fed’s wrong choice is like blaming the curves in the road for a bus crash, rather than blaming the bus driver for not turning the steering wheel.
It’s the Fed’s nominal universe. We are mere children playing in the backyard.
-Ken
Scott Sumner
May 16 2025 at 7:31pm
Agree. But everyone looks at macro differently, and things that seem obvious to one person seem implausible to others. There are too many frameworks, and this makes a meeting of minds quite difficult.
Arqiduka
May 17 2025 at 6:29am
I might be misinterpreting th claim, but I read that as a scenario where every bank runs a stablecoin on somewhat less than 100% reserves, implying that there is one more multiplier between the Fed and the ultimate quantity of money.
Their control over the base is not in doubt.
Scott Sumner
May 17 2025 at 1:00pm
Yes, clearly if you define money broadly enough to include stablecoins then the money supply might rise. I would expect the Fed to offset any rise that threatened excessive inflation.
Arqiduka
May 18 2025 at 4:01am
It might take them a while to learn the new transmission function though, and might be more likely to overshoot or undershoot in the meantime.
Assuming the function would be stable at all.
Doesn’t sound like a huge issue, but still…
David S
May 17 2025 at 9:29pm
If I were an international criminal with a large revenue stream from my ill-dealings I could see using crypto for point of theft transactions—particularly if these could be spread around geographically. But when it comes to laundering and storing my ill-gotten gains I wouldn’t trust computer hard drives as much as traditional standbys like real estate, gold, and big bags of American cash.