Stablecoins and Monetary Policy Transmission

This paper studies the effects of stablecoin adoption — crypto-assets designed to maintain a stable value relative to a reference asset — on bank intermediation and the transmission of monetary policy. Using evidence from the rapid expansion of stablecoins combined with confidential granular data on euro area banks and their individual borrowers, we document three main findings. First, stablecoin adoption induces a deposit-substitution mechanism, whereby funds shift from retail bank deposits to digital assets. This reallocation increases banks’ reliance on wholesale funding and can ultimately constrain their intermediation capacity. Second, we show that stablecoins affect the pass-through of policy rates to bank funding costs and lending conditions, potentially strengthening bank-based monetary policy transmission while making it less predictable. These effects are nonlinear and depend critically on the scale of stablecoin adoption, their design features, use cases, and regulatory treatment. Third, we document a potential risk associated with the growing prevalence of foreign-currency-denominated stablecoins. Their diffusion is likely to increase banks’ reliance on foreign-currency wholesale funding. We show that banks with greater exposure to this source of funding exhibit a weaker loan-supply response to domestic monetary policy shocks, indicating a weakening of monetary policy transmission and a potential erosion of monetary sovereignty.