The Long Shadow: Monetary Policy and Stablecoin Dollarisation

This chapter examines two ways stablecoins can change monetary influence without paying interest themselves. Within an issuing economy, they can alter how a policy-rate change reaches bank deposits, loans and output. Across borders, a foreign-currency stablecoin can become a store of value, a channel for capital flows and eventually a competing means of settlement. Separating these domestic and international mechanisms lets the reader judge monetary-policy transmission and monetary sovereignty without treating every stablecoin balance as the same kind of money.

The indirect interest-rate channel

A monetary-policy shock begins with the central bank’s policy rate, but it reaches households and firms through financial markets and intermediary balance sheets. In the working paper’s experiment, the shock is a 25-basis-point increase in the nominal policy rate. The model compares an economy with stablecoins with an otherwise comparable economy without them. The difference is not that stablecoin holders suddenly receive a new interest payment. Stablecoins remain unremunerated. The difference is that banks face a different pool of liquid savings.

Without stablecoins, a household that wants liquidity mainly chooses among deposits, cash and other available assets. Deposits pay less than the risk-free rate because they provide convenience and payment services. The lower return is acceptable while those services are valuable. When the policy rate rises, the household’s opportunity cost of holding a deposit changes, and the deposit rate adjusts according to the household’s demand for liquidity and the bank’s funding needs.

With stablecoins, the household has a larger stock of alternative liquid assets. This changes the marginal value of the deposits that remain in the portfolio. The working paper’s model predicts that deposit rates respond more strongly to an increase in the policy rate when stablecoins are available. The deposit beta—the sensitivity of the deposit rate to the risk-free rate—rises. Banks’ funding costs therefore move more closely with the policy rate, and the deposit-financing advantage in loan pricing changes more sharply.

The effect may seem counterintuitive. A higher policy rate makes an interest-bearing bank deposit more attractive relative to an unremunerated stablecoin. That portfolio-composition force tends to pull funds back toward deposits and would reduce the rate adjustment needed to rebalance the household’s holdings. But the model contains a second force: total liquid assets are more abundant, so the marginal liquidity value of deposits changes differently when economic activity and savings respond to the shock. Quantitatively, the first force dominates. Banks raise deposit rates by more, pass higher funding costs into loans, and firms cut borrowing and investment by more than in the economy without stablecoins.

This is an indirect channel. The stablecoin does not need to mirror the policy rate for the banking system to become more sensitive to it. Competition for deposits changes the price of bank funding; bank funding changes the loan-pricing schedule; and the loan price changes the real response of firms. The working paper finds that stablecoin adoption amplifies the real effect of a contractionary monetary-policy shock through this bank-lending route.

The effect on the Treasury market is related but distinct.