Stablecoins are not a significant threat to the financial system and will lower interest rates, said Federal Reserve Gov. Stephen Miran. .Speaking Nov. 7 during a conference in New York City, Miran cited research last year that found stablecoins in widespread use and fully backed by U.S. securities could reduce interest rates 40 basis points by lowering the “neutral interest rate,” the measure of supply-demand balance for loanable funds. “Even relatively conservative estimates of stablecoin growth imply an increase in the net supply of loanable funds in the economy that pushes down neutral interest rates,” he said. “If neutral interest rates are lower, policy rates should also be lower than they would otherwise be to support a healthy economy. A failure of the central bank to cut rates in response to a reduction in the neutral interest rate is contractionary.” Miran said payment stablecoins covered under the GENIUS Act cannot pay yield and are not backed by federal deposit insurance, making him doubt that they will cause deposits to flow out of the existing banking system. Former Consumer Financial Protection Bureau economist Andrew Nigrinis predicted last month that a provision allowing stablecoin intermediaries — a third party that facilitates transactions with a stablecoin — to pay yield could lead to trillions of dollars in deposit outflows from traditional banks. Passed in July, the GENIUS Act created a regulatory framework for stablecoins. The law requires U.S.-domiciled issuers to keep reserves backed by the dollar — government money market funds, bank deposits, short-term Treasuries, overnight repurchase agreements, or reverse repurchase agreements backed by U.S. Treasuries — on a one-to-one basis. Stablecoins purchased domestically that are financed with bank deposits — or foreign purchases financed with existing dollar-denominated holdings — don’t impact the amount of loanable funds in the financial system, Miran said. He sees opportunities for stablecoins to fulfill unused foreign demand for dollar assets in places where access to the currency is limited. “This innovation has been unfairly treated as a pariah by some, but stablecoins are now an established and fast-growing part of the financial landscape,” he said. The U.S. dollar-denominated stablecoin market reached $225 billion or 7 percent of the $3 trillion crypto ecosystem as of late last month, according to J.P. Morgan Global Research. The company estimated the market “could grow two to three times from where we are right now in the next couple years,” to $500 to $750 billion. Private sector estimates are for the stablecoin market to reach between $1 trillion and $3 trillion by the end of the decade. “If these forecasts prove accurate, the magnitude of additional demand from stablecoins will be too large to ignore,” Miran predicted.
