Stablecoins reshape bank funding and monetary policy transmission

The paper documents that stablecoin adoption induces a deposit-substitution mechanism, shifting funds from retail bank deposits to digital assets.

This reallocation increases banks' reliance on more expensive and less stable wholesale funding, ultimately constraining their intermediation capacity and reducing credit supply to firms.

Furthermore, stablecoins alter the pass-through of policy rates to bank funding costs and lending conditions, potentially weakening the predictability of monetary policy actions.

These effects are non-linear, depending critically on the scale of stablecoin adoption, their design features, and regulatory treatment.

The study uses granular data on euro area banks and their borrowers, combined with an internal instrument based on shifts in public attention toward stablecoins, to quantify these dynamics.

A key risk arises from the growing prevalence of foreign-currency-denominated stablecoins.

Their diffusion is likely to increase banks' reliance on foreign-currency wholesale funding, leading to a weaker loan-supply response to domestic monetary policy shocks.

This indicates a weakening of monetary policy transmission and a potential erosion of monetary sovereignty, as foreign monetary conditions could be 'imported' into the euro area.

The findings highlight the importance of thoughtful regulation, including stronger transparency for stablecoin reserves, robust redemption guarantees, adequate capital buffers, and effective oversight.

Central bank digital currencies (CBDCs) like the digital euro, with features such as holding limits, may offer a public alternative that preserves monetary sovereignty and reinforces financial stability.