How the fiat-backed stablecoins are manipulating US money supply

Nizam, Ahmed Mehedi (2023): How the fiat-backed stablecoins are manipulating US money supply.

Abstract

Fiat-backed stablecoins have been around for quite some time and yet not much have been said about its impact on US money supply. Although a few studies have qualitatively discussed that the issuance of fiat-backed dollar-pegged stablecoins might have an impact on US money supply, they are unable to quantify it. Here we have developed a detailed framework to quantify the impact of the issuance of fiat-backed US dollar-pegged stablecoins on US money supply. According to the proposed framework, the issuance of US dollar denominated stablecoins is supposed to have a contractionary effect on US money supply. The said contraction stems from the fact that the issuers of stablecoins tend to invest heavily in US treasury bills and bonds, which takes funds out of the process of fractional reserve banking and thereby stops the money multiplication process. Fitting empirical data into our proposed framework, we have shown that the top 3 issuers of stablecoins together have brought about a monetary contraction in US in the range of 1.1-1.2% of total US money supply during different months of 2022.

• Item Type: MPRA Paper
• Language: English
• Keywords: Cryptocurrencies, stablecoins, money supply
• Subjects: E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E44 - Financial Markets and the Macroeconomy; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E51 - Money Supply ; Credit ; Money Multipliers; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E52 - Monetary Policy

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