Growing Demand for Stablecoins Could Lower Interest Rates

A growing demand for US dollar-tied crypto stablecoins could lead to a decrease in interest rates, according to US Federal Reserve Governor Stephen Miran. Speaking at the BCVC summit in New York, Miran indicated that dollar-pegged crypto tokens might be exerting downward pressure on the neutral interest rate, also known as r-star, which is the rate that neither stimulates nor hinders the economy.

He emphasized that if the neutral rate declines, the Federal Reserve would likely respond by lowering its interest rates. Currently, the total market cap of all stablecoins stands at approximately $310.7 billion, as reported by CoinGecko.

Miran projected that the stablecoin market could expand to as much as $3 trillion in value over the next five years. He noted that stablecoins are already increasing demand for US Treasury bills and other dollar-denominated liquid assets from international buyers and suggested that this trend will persist.

Miran described stablecoins as potentially becoming a multitrillion-dollar 'elephant in the room' for central bankers. There are concerns from organizations like the International Monetary Fund, which warn that stablecoins could threaten traditional financial assets and services by competing for customers.

Additionally, US banking groups have called on Congress to impose stricter regulations on stablecoins with yield, arguing that they could attract customers who might otherwise utilize banks. During his presentation, Miran expressed support for the GENIUS Act, which aims to provide clear guidelines and consumer protections for stablecoins.

He acknowledged that while he typically views new regulations with skepticism, he is encouraged by the GENIUS Act. This legislation establishes a regulatory framework that creates legitimacy and accountability akin to holding traditional dollar assets.

Most importantly for monetary policy, it mandates that US-based stablecoin issuers maintain reserves backed on at least a one-to-one basis with safe and liquid US dollar-denominated assets. The implications of these developments in the demand for stablecoins are significant, as they may alter the landscape of the banking sector and influence Federal Reserve policy moving forward.