I guess stablecoin issuers would still use skinny master accounts even without interest because these accounts eliminate all major risks. Funds held directly at the Fed remove counterparty risk, provide instant 24/7 liquidity, and eliminate maturity- and liquidity-mismatch. This guarantees a perfectly stable peg and greatly simplifies operations and regulation. Issuers can still earn revenue through fees, payment services, and possibly limited investments in T-bills if permitted. However, such a setup fundamentally undermines the original goal of stablecoins—to operate independently from the central bank.
Excellent post, however I am not clear about the mechanism that would cause an increase in the Fed bal-sheet, which is under Fed control.
1. Do you have in mind a process whereby offshore demand for dollars increases and the Fed supplies reserve liabilities to maintain a stable exchange rate (holding offshore reserves as the corresponding asset)?
2. Is your claim that holding money in the form of a stablecoin increases the offshore demand for dollars? If so, what is the motivation for an offshore entity holding money in the form of a stablecoin to have a higher demand for dollars than it would have of currency or bank deposits,? Is it that stablecoins reduce the transaction cost of shifting between offshore currency and dollars?
I might be wrong on both counts. Can you comment to clarify your argument or dispel by confusion?
I don’t want to speak for the author, but I think that :
1. Offshore users first convert their local currency into dollars, then buy the stablecoin. Once those dollars reach the issuer’s skinny account, the Fed simply credits a liability without intervening in FX markets or holding offshore reserves. The exchange-rate risk is borne by the user, not by the Fed.
2. The idea might be that holding value in the form of a stablecoin can increase offshore demand for dollars because stablecoins may offer cheaper access, faster transfers, and 24/7 global usability. For some offshore users, they might lower transaction costs and circumvent certain banking or capital-control frictions compared to holding physical dollars or offshore dollar deposits. The higher demand arises not from a different currency preference, but from the possibility that stablecoins make using dollars more efficient than traditional offshore arrangements.
Why would stable coin issuers put money in these master Fed accounts if they don't pay interest?
Surely they are better off buying treasuries or placing them with commercial banks who have access to the get paid IORB?
I guess stablecoin issuers would still use skinny master accounts even without interest because these accounts eliminate all major risks. Funds held directly at the Fed remove counterparty risk, provide instant 24/7 liquidity, and eliminate maturity- and liquidity-mismatch. This guarantees a perfectly stable peg and greatly simplifies operations and regulation. Issuers can still earn revenue through fees, payment services, and possibly limited investments in T-bills if permitted. However, such a setup fundamentally undermines the original goal of stablecoins—to operate independently from the central bank.
Excellent post, however I am not clear about the mechanism that would cause an increase in the Fed bal-sheet, which is under Fed control.
1. Do you have in mind a process whereby offshore demand for dollars increases and the Fed supplies reserve liabilities to maintain a stable exchange rate (holding offshore reserves as the corresponding asset)?
2. Is your claim that holding money in the form of a stablecoin increases the offshore demand for dollars? If so, what is the motivation for an offshore entity holding money in the form of a stablecoin to have a higher demand for dollars than it would have of currency or bank deposits,? Is it that stablecoins reduce the transaction cost of shifting between offshore currency and dollars?
I might be wrong on both counts. Can you comment to clarify your argument or dispel by confusion?
I don’t want to speak for the author, but I think that :
1. Offshore users first convert their local currency into dollars, then buy the stablecoin. Once those dollars reach the issuer’s skinny account, the Fed simply credits a liability without intervening in FX markets or holding offshore reserves. The exchange-rate risk is borne by the user, not by the Fed.
2. The idea might be that holding value in the form of a stablecoin can increase offshore demand for dollars because stablecoins may offer cheaper access, faster transfers, and 24/7 global usability. For some offshore users, they might lower transaction costs and circumvent certain banking or capital-control frictions compared to holding physical dollars or offshore dollar deposits. The higher demand arises not from a different currency preference, but from the possibility that stablecoins make using dollars more efficient than traditional offshore arrangements.