Stablecoins cut long-run output, boost short-term growth

A quantitative macroeconomic model reveals that stablecoins influence the economy through two primary, opposing channels.

The bank lending channel operates as household demand for stablecoins raises deposit rates, increasing bank funding costs and reducing loan supply, which ultimately lowers investment and output.

Conversely, the fiscal space channel arises from stablecoin issuers' demand for Treasury bills, lowering sovereign borrowing costs and expanding fiscal space for tax reductions or increased government spending, thereby boosting output.

Calibrated to the U.S., the model predicts that widespread stablecoin adoption modestly reduces long-run output, as the bank lending channel's contractionary effects outweigh the fiscal space channel.

However, the fiscal space channel activates more quickly, resulting in significantly positive short-term output effects during the transition phase.

Additionally, the model suggests a strengthening of monetary policy transmission via the bank lending channel.

Despite a modest long-run output depression, stablecoin adoption generates overall welfare gains by expanding the set of liquid assets available to households.

The study explores how alternative regulatory regimes for stablecoin reserve asset allocation impact macroeconomic outcomes.

Requiring stablecoin issuers to hold reserves in bank deposits could lead to a greater long-run output decline (0.07 percent vs. 0.03 percent baseline), as this regulation leaves the bank lending channel largely intact while muting the offsetting fiscal benefit.

Conversely, if stablecoins were required to hold unremunerated deposits at the central bank, output could rise by around 0.02 percent.

This highlights the critical importance of how seigniorage revenues from stablecoin issuance are allocated.