Growing market influence of stablecoins evaluated by BIS in terms of their effect on Treasury rates
In a recent study, the Bank for International Settlements (BIS) has shed light on the potential influence of stablecoins on Treasury rates, particularly short-term rates. The research reveals that stablecoin issuers, surpassing countries like China, are significant holders of short-term Treasuries, primarily three-month Treasury bills.
However, it's essential to note that the BIS study cautions against overstating the impact, as numerous factors affect both stablecoin demand and Treasury rates. The growth of stablecoins could potentially impact the Federal Reserve's ability to influence long-term Treasury rates, similar to the "Greenspan Conundrum" caused by significant offshore holdings of Treasuries in the early 2000s.
For central banks, this increasing stablecoin demand for short-term Treasuries represents a novel channel influencing money markets and short-term interest rate dynamics. Central banks must monitor possible substitution effects where stablecoins compete with bank deposits and money market funds, potentially impacting bank funding models and liquidity conditions.
In the short term, this stablecoin demand lowers short-maturity Treasury yields by pushing up prices (lower yields) for three-month bills. Longer-term Treasury yields have less direct impact since stablecoins cannot invest beyond a 93-day maturity maximum under current law. Hence, stablecoins mainly affect short-term rates.
Rapid growth in stablecoins could introduce new risks, given their payment and settlement roles crossing traditional financial and crypto markets. The requirement that stablecoins hold high-quality liquid assets like short-term Treasuries helps maintain stability, but instability in stablecoin markets could transmit shocks to Treasury markets and the wider financial system.
Regulators and central banks closely monitor stablecoin issuance, reserves backing, and their broader systemic implications, considering both potential benefits (efficiency in payments) and risks (market disruptions, liquidity mismatches).
The BIS research does not explicitly address the impact of draft UK rules on long-term Treasury rates. Some view the reduction in central banks' effectiveness as a positive thing, while others worry about financial stability risks, especially when combined with geopolitical instability.
In summary, growing stablecoin investments increase demand for short-term US Treasuries, lowering their yields and potentially steepening the curve's front end. This dynamic influences central bank policy considerations about money market liquidity, monetary transmission, and financial stability, requiring ongoing oversight and adaptive regulatory frameworks. The impact of stablecoins on long-term Treasury rates has not been extensively studied in the BIS research.
- The BIS study provides insights into the analysis of stablecoins' potential impact on government finance, particularly Treasury rates, revealing that stablecoin issuers hold significant amounts of short-term Treasuries.
- Central banks should closely monitor the growth of stablecoins, as they could impact investing in short-term Treasury bonds and influence the stability of money markets and short-term interest rate dynamics.
- The BIS research focuses on the effects of stablecoins on short-term Treasury rates, but it does not offer extensive analysis on how they may impact long-term Treasury rates, which is a growing concern for regulators and central banks alike.
