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Why is the Federal Reserve more anxious as stablecoins become more popular?
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Stablecoins actually compete with the size of deposits in the U.S. banking system. Therefore, it weakens the mechanism of money creation through the fractional reserve system and also affects the effectiveness of the Federal Reserve's monetary policy, whether it is through open market operations or other means to control the money supply, because it reduces the total amount of deposits in the banking system.
Even though stablecoins may increase demand for Treasury bonds and reduce the refinancing costs of the US government, their impact on money creation remains. Money creation can only be maintained if the US dollar flows back into the banking system as collateral in the form of bank deposits. But the reality is that this approach is not cost-effective for stablecoin issuers because they will miss out on risk-free Treasury bond returns.
The self-custody feature of stablecoins is incompatible with the custody mechanism of bank deposits. In addition to on-chain assets, almost all digital assets require custody. Therefore, the expansion of the scale of stablecoins in the United States directly threatens the normal operation of the money creation mechanism.
Stablecoins reveal a core contradiction, the tension between an efficient, programmable full reserve system and a leveraged credit mechanism that can drive economic growth. How to find the best balance between transaction efficiency and monetary creativity will be a key issue in the evolution of the future monetary and financial system.
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