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Stablecoins: Growth Potential and Impact on Banking

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Abstract

Stablecoins have experienced tremendous growth in the past year, serving as a possible breakthrough innovation in the future of payments. In this paper, we discuss the current use cases and growth opportunities of stablecoins, and we analyze the potential for stablecoins to broadly impact the banking system. The impact of stablecoin adoption on traditional banking and credit provision can vary depending on the sources of inflow and the composition of stablecoin reserves. Among the various scenarios, a two-tiered banking system can both support stablecoin issuance and maintain traditional forms of credit creation. In contrast, a narrow bank approach for digital currencies can lead to disintermediation of traditional banking, but may provide the most stable peg to fiat currencies. Additionally, dollar-pegged stablecoins backed by adequately safe and liquid collateral can potentially serve as a digital safe haven currency during periods of crypto market distress.

Suggested Citation

  • John Caramichael & Gordon Y. Liao, 2022. "Stablecoins: Growth Potential and Impact on Banking," International Finance Discussion Papers 1334, Board of Governors of the Federal Reserve System (U.S.).
    • Handle: RePEc:fip:fedgif:1334
    DOI: 10.17016/IFDP.2022.1334
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    6. David Lowe & Matthew Malloy, 2021. "Global Stablecoins: Monetary Policy Implementation Considerations from the U.S. Perspective," Finance and Economics Discussion Series 2021-020, Board of Governors of the Federal Reserve System (U.S.).
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    9. Jesse Leigh Maniff & Paul Wong, 2020. "Comparing Means of Payment: What Role for a Central Bank Digital Currency?," FEDS Notes 2020-08-13-2, Board of Governors of the Federal Reserve System (U.S.).
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    Cited by:

    1. Oefele, Nico & Baur, Dirk G. & Smales, Lee A., 2024. "Flight-to-quality—Money market mutual funds and stablecoins during the March 2023 banking crisis," Economics Letters, Elsevier, vol. 234(C).
    2. Saengchote, Kanis & Samphantharak, Krislert, 2024. "Digital money creation and algorithmic stablecoin run," Finance Research Letters, Elsevier, vol. 64(C).
    3. Philippe Bergault & Louis Bertucci & David Bouba & Olivier Gu'eant & Julien Guilbert, 2024. "Automated Market Making: the case of Pegged Assets," Papers 2411.08145, arXiv.org.
    4. Jean Barth l my & Paul Gardin & Benoit Nguyen, 2023. "Stablecoins and the Financing of the Real Economy," Working papers 908, Banque de France.
    5. Lyons, Richard K. & Viswanath-Natraj, Ganesh, 2023. "What keeps stablecoins stable?," Journal of International Money and Finance, Elsevier, vol. 131(C).

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    More about this item

    Keywords

    Stablecoins; Digital currencies; Credit intermediation; Banking; Systemic risk; Fintech; Financial innovation; Payment system;
    All these keywords.

    JEL classification:

    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • O30 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - General

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