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International Finance Discussion Papers (IFDP)

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January 2022

Stablecoins: Growth Potential and Impact on Banking

Gordon Y. Liao and John Caramichael

Abstract:

Stablecoins have experienced tremendous growth in the past year,
serving as a possible breakthrough innovation in the future of
payments. In this paper, we discuss the current use cases and growth
opportunities of stablecoins, and we analyze the potential for
stablecoins to broadly impact the banking system. The impact of
stablecoin adoption on traditional banking and credit provision can
vary depending on the sources of inflow and the composition of
stablecoin reserves. Among the various scenarios, a two-tiered
banking system can both support stablecoin issuance and maintain
traditional forms of credit creation. In contrast, a narrow bank
approach for digital currencies can lead to disintermediation of
traditional banking, but may provide the most stable peg to fiat
currencies. Additionally, dollar-pegged stablecoins backed by
adequately safe and liquid collateral can potentially serve as a
digital safe haven currency during periods of crypto market distress.

DOI: https://doi.org/10.17016/IFDP.2022.1334

PDF: Full Paper

Disclaimer: The economic research that is linked from this page
represents the views of the authors and does not indicate concurrence
either by other members of the Board's staff or by the Board of
Governors. The economic research and their conclusions are often
preliminary and are circulated to stimulate discussion and critical
comment. The Board values having a staff that conducts research on a
wide range of economic topics and that explores a diverse array of
perspectives on those topics. The resulting conversations in
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important to sharpening our collective thinking.

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Last Update: January 31, 2022

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