Stablecoins are safe but don't inflate the money supply

In the aftermath of the 2008 financial crisis, significant changes were made to U.S. monetary policy, particularly allowing the Federal Reserve to pay interest on reserves. This development altered the traditional mechanisms of monetary policy, empowering the Fed to manage short-term interest rates while enabling commercial banks to hold onto excess reserves. As a result, the focus shifted to managing interest rates based on market conditions rather than direct manipulation of the money supply. Since then, the U.S. has notably avoided demand-induced recessions, showcasing the effectiveness of these policy changes in maintaining economic stability. Currently, under the GENIUS Act, stablecoin issuers are mandated to fully back their liabilities with safe and liquid assets, ensuring that stablecoins cannot expand credit like traditional banks. While stablecoin accounts may not offer interest at present, the guarantees provided by these assets mitigate risks significantly. As long as U.S. Treasury bonds continue to be viewed as trustworthy, stablecoins are well-positioned to grow without contributing to inflationary pressures. Despite concerns regarding the integration of stablecoins into the financial system, the more pressing challenge appears to stem from legislative actions rather than competition with the Federal Reserve. The ongoing discussion should focus on how best to incorporate this emerging technology into the existing monetary framework in a way that prioritizes security and transparency. By doing so, regulators can embrace innovations in finance while also safeguarding financial stability against potential disruptions. The relationship between stablecoins and the broader monetary system highlights the importance of careful regulatory oversight. It is crucial to ensure that as these digital currencies integrate with traditional financial structures, they do not inadvertently pose a threat to the overall integrity of the monetary system. Thus, advancing discussions on stablecoin regulations is pivotal for fostering transparency, promoting innovation, and supporting the safe growth of digital currencies within the economy.