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How the fiat-backed stablecoins are manipulating US money supply

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  • Nizam, Ahmed Mehedi

Abstract

Fiat-backed stablecoins have been around for quite some time and yet not much have been said about its impact on US money supply. Although a few studies have qualitatively discussed that the issuance of fiat-backed dollar-pegged stablecoins might have an impact on US money supply, they are unable to quantify it. Here we have developed a detailed framework to quantify the impact of the issuance of fiat-backed US dollar-pegged stablecoins on US money supply. According to the proposed framework, the issuance of US dollar denominated stablecoins is supposed to have a contractionary effect on US money supply. The said contraction stems from the fact that the issuers of stablecoins tend to invest heavily in US treasury bills and bonds, which takes funds out of the process of fractional reserve banking and thereby stops the money multiplication process. Fitting empirical data into our proposed framework, we have shown that the top 3 issuers of stablecoins together have brought about a monetary contraction in US in the range of 1.1-1.2% of total US money supply during different months of 2022.

Suggested Citation

  • Nizam, Ahmed Mehedi, 2023. "How the fiat-backed stablecoins are manipulating US money supply," MPRA Paper 117948, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:117948
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    References listed on IDEAS

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    1. L. Randall Wray, 1998. "Understanding Modern Money," Books, Edward Elgar Publishing, number 1668.
    2. Robleh Ali & John Barrdear & Roger Clews & James Southgate, 2014. "The economics of digital currencies," Bank of England Quarterly Bulletin, Bank of England, vol. 54(3), pages 276-286.
    3. Fernando E. Alvarez & David Argente & Diana Van Patten, 2022. "Are Cryptocurrencies Currencies? Bitcoin as Legal Tender in El Salvador," NBER Working Papers 29968, National Bureau of Economic Research, Inc.
    4. Lyons, Richard K. & Viswanath-Natraj, Ganesh, 2023. "What keeps stablecoins stable?," Journal of International Money and Finance, Elsevier, vol. 131(C).
    Full references (including those not matched with items on IDEAS)

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    Keywords

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    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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