Stablecoins, Inflation and the Settlement Hierarchy

Summary

Would widely used stablecoins raise prices? This paper studies coins backed by government debt in a general equilibrium model of money and inflation. Such backing turns government bonds into spendable payment capacity, so the price level rises as adoption spreads. Monetary policy can offset the rise, but only at a real cost. And if private tokens were ever accepted in final settlement, the price level would lose its anchor. Regulation, not technology, decides these outcomes.

Highlights

A channel of inflationary finance
Stablecoins backed by Treasury bills turn government debt into a payment instrument: the existing bond stock held as reserves becomes spendable, and newly issued debt arrives partly spendable. Both effects raise the price level, and they grow with the breadth of adoption.

Bounded, and a policy choice
Monetary policy can offset the pricelevel effect, but only by suppressing trade financed by bank credit. The channel‘s size is set by regulation: reserve rules steering issuers into government bills switch it on; backing in central bank money switches it off.

Final settlement must stay public
Current regulatory design leaves open an escalation path on which stablecoins become a competing money and nominal determinacy is at risk. The safeguard is constitutional, not prudential: taxes and bank obligations must remain settled in public money.