Nellie Liang on Stablecoins After GENIUS, Private Money, and the Global Dollar

Nellie Liang is a former Treasury and Federal Reserve official and a senior fellow at the Brookings Institution. In Nellie's first appearance on the show, she discusses the future of stablecoins following the GENIUS Act, what stablecoins mean for private money and illicit finance, Fed master accounts, the global role of the dollar, and much more.

Subscribe to David's Substack: Macroeconomic Policy Nexus

Read the full episode transcript:

This episode was recorded on August 18th, 2026

Note: While transcripts are lightly edited, they are not rigorously proofed for accuracy. If you notice an error, please reach out to [email protected]. 

David Beckworth: Welcome to Macro Musings, where each week we pull back the curtain and take a closer look at the most important macroeconomic issues of the past, present, and future. I am your host, David Beckworth, a senior research fellow with the Mercatus Center at George Mason University, and I’m glad you decided to join us.

Our guest today is Nellie Liang. Nellie is a former Treasury and Federal Reserve official, and she joins us today to discuss the future of stablecoins after GENIUS, what it means for private money, for public debt, and the future of the global dollar. Nellie, welcome to the podcast.

Nellie Liang: Thank you, David, for having me.

Beckworth: It’s great to have you on. This is long overdue. I’ve been following your work for some time. I’ve had some of your colleagues from Brookings. I’ve had some of your former Treasury colleagues as well on the show. It’s great to get you on here. You’ve done a lot of interesting work on Treasury markets in the past, as well as what we’re going to talk about today, which is stablecoins. You have a new paper titled “Stablecoins After GENIUS: Private Money, Public Debt, and the Global Dollar.” It is out on the Aspen website, and we’ll provide a link to it in the transcript. Welcome to the show, and thank you for joining us to discuss this. As we get into this, maybe tell us a little bit about yourself and your career.

Nellie’s Career

Liang: Again, thank you for having me. It’s fun to be here, and I’m looking forward to the conversation. I started my career, as you mentioned, at the Federal Reserve Board. I was there for a little over 30 years. My last few years I spent as the director of a new division called the Division of Financial Stability, which was created after the Global Financial Crisis. The chairman, then Bernanke, very much wanted a restructuring of the Federal Reserve to focus not just on how the Fed responds to crises using its liquidity management tools, but to also be thinking about how should the possibility of crises factor into monetary policy or financial regulatory policy.

That was a challenge and just a very exciting time to be at the Federal Reserve. I was very fortunate to have so many great colleagues at the Fed. I left there, though, after 30 years, went to Brookings. Then several years later, I joined the Treasury. Janet Yellen was asked to be secretary of the Treasury. I had worked with her at the board for quite a while. She had asked if I could take on being the undersecretary for domestic finance, which had many of the same financial stability issues, but a much broader remit and a much broader set of tools and policy objectives. That was a fascinating time. I’ve just, again, been very fortunate to have been able to work with so many extraordinary people, including so many dedicated public servants. It’s been exciting.

Beckworth: You’ve run an amazing circle. Bernanke’s your boss. Janet Yellen’s your boss.

Liang: I’ve had great bosses and also just great colleagues.

Beckworth: You’ve seen it from both the Fed side, 30 years—wow, that’s an amazing career. Then on the side of the US Department of Treasury. You’ve seen a little more politics on that side. Then the Fed, more of a technocratic perspective. It’s still such a rich experience. Now you’re at Brookings. You also participate in your role on the Financial Stability Advisory Council. You’re a visiting scholar at the Federal Reserve Bank of Chicago. You’re staying busy, it sounds like.

Liang: Yes, I’m staying very busy.

Beckworth: In fact, this paper we’re going to discuss today is part of your staying busy, right? You presented it at the Aspen Institute.

Liang: Yes. This paper was a paper written for the most recent Aspen Economic Strategy Group Conference. There was a discussion of the dollar, the deficit, private debt, digital assets, and its role. This was a paper to provide some background on potential role of stablecoins as a payment instrument, as private money, how it could affect Treasury financing, and the role of the dollar.

Beckworth: Yes. Thank you for doing it because we get a chance to discuss it. It gives me an excuse to read another great paper on stablecoins as I learn more. Now you have a co-author, Brent Neiman; is that right?

Liang: Yes, that’s right. He’s at the University of Chicago Booth School. He served as the assistant secretary in International Affairs at Treasury when we were there. We met then. I also served on the Financial Stability Board function. I chaired the SCAV Committee, which is the [Standing] Committee on Assessment of Vulnerabilities. We jointly worked on payment issues, which were a broad issue for the International Financial Stability Board. I met him then. When they asked about writing this paper, we decided it would be a good joint effort.

Beckworth: I like your paper because it was a balanced paper. It wasn’t overly hyped, but also it wasn’t overly critical. You recognize the potential, but you also recognize the hurdles that still need to be cleared for stablecoins to effectively function as private money, to be safe, and their effect on debt. Let’s begin our conversation on your paper and talk about the GENIUS Act because that kicks the paper off. In your view, how has the GENIUS Act really changed the monetary landscape by creating a new regulatory framework for stablecoins?

The GENIUS Act

Liang: I think GENIUS is very significant, maybe more significant than I had appreciated, although I was very much advocating for legislation in this space for many years. Just to go back, when I was at Treasury, in November 2021, we put out our first report on stablecoins. Stablecoins then were about $25 or $30 billion, and now they’re $275 billion, $300 billion. The view was they were being backed by reserve assets of uneven quality or unknown quality. They were purporting to be money, and so that raised all kinds of questions about financial stability.

We raised some issues about the quality of the reserve assets, the operational risks, and the ability to function as money redemption risks. Also, one risk, which was the possibility of nonfinancial companies creating money, and the potential for network externalities such as big tech companies creating money and creating walled gardens. Those were three financial stability issues that we highlighted. That was November 2021. We spent several years working on potential legislation, especially with the House Financial Services Committee.

We weren’t successful in getting legislation out, but when this current new administration came in, it became a high priority in the first six or seven months. Although I had left, I continued to spend time on this. GENIUS, as I said, we thought it was important because even though the potential and what the future and the size and all that were not clear, it was being used. They were being used, and they had the potential to scale. We thought to protect consumers, to protect financial stability, you should have some rules in place.

What GENIUS ended up doing was provide some clarity—using a different word, no pun intended, exactly—provide some clarity for not just the stablecoin issuers, but for the banks. I think the amount of innovation that this act has ignited has been among stablecoin issuers, among other fintechs, and among banks, it’s been remarkable. I think the outcome is unknown still. It clearly made it easier for stablecoin issuers to figure out how to operate, but it also made it easier for banks to start to think about how to incorporate digital assets and distributed ledger technology or blockchains into their systems. I think it’s been, again, more important than I actually appreciated what we were pushing for.

Beckworth: Kudos to you for being an early advocate, or at least fighting the good fight and getting some regulatory framework set up, which eventually manifested itself in the GENIUS Act. Your fingerprints are all over that to some extent. I like this idea that the GENIUS Act is not just this law. It’s actually kick-started a whole new industry, or at least it’s given momentum. The industry was there, but really gives it the tailwind that’s going to push it forward.

When it was passed, we had two major stablecoins, Circle and Tether, but recently, this big OpenUSD, which, again, it’s on paper, it’s a proposal. If it were to manifest itself, it’d be the mother of all stablecoins, right? A global stablecoin. In my mind, it kind of echoes Libra back in 2019. It’d be a global, huge, a bunch of companies coming together. The point is competition, new ideas. Tether and Circle may not be the final thing in terms of stablecoins. We have no idea what innovation, competition will do to this space.

Liang: Absolutely agree. OpenUSD, as you said, is on paper still. What distinguishes it from Libra is it is like a consortium of, say, 140 companies, not one company offering a stablecoin. I think it’s a little different. It’d be more of an underlying infrastructure. We’ll see if it works. I mean, they haven’t set what blockchain, and governance among 140 companies might be challenging.

Beckworth: It’s exciting to see, though.

Liang: It’s very exciting, like a SWIFT sort of evolved. I think there could be a need for something like this, but this is what this all gets to develop now.

Beckworth: Like you said, it’s more of a neutral infrastructure that all these firms can participate in, which I think is a big deal because one of the questions is, how do you have interoperability between Tether and Circle, between a bank and the stablecoin? This could serve as kind of like a clearinghouse of sorts that connects everyone. Now, if you are leery of dollar-based stablecoins, you may not appreciate this development. Again, if we like innovation, competition, to me, this is a very promising sign. I love that emphasis. Let’s have some competition. Let’s have some guardrails at the same time. GENIUS has unleashed a lot of potential.

Liang: I agree. Absolutely.

Stablecoins as Private Money

Beckworth: All right. Quickly on stablecoins as money, so as private money. We have this history in the US of innovating, and then sometimes things happen, and then we bring them into the regulatory perimeter, kind of an American tradition. Do you see stablecoins ultimately being a form of private money?

Liang: As you know, stablecoins started as sort of a more stable value cryptocurrency designed to get outside the traditional financial system. Their original impetus was to sort of bypass the traditional [system]. Then the prices of some of those cryptocurrencies, just way too volatile to actually serve as a payment instrument. That’s how stablecoins operated. If you’re one of the ardent supporters of crypto, stablecoins becoming part of the system probably was not in your plan. 

It’s moved from trading assets and now becoming more used for cross-border, business-to-business, for remittances. We’re starting to see data that show the ability of stablecoins to provide those kinds of services. In that sense, it’s already functioning as private money. It’s money backed by reserve assets, not provided by a bank. They don’t take deposits. You do not make loans. It is not backed by the Federal Reserve in any way. It is currently functioning as private money. It’s on a small scale. Let’s say stablecoins may be $300 billion. M1 is like $19 trillion. It’s a small scale. If it scales and gets big, I think it’ll be interesting to see what the Federal Reserve and Congress want to do about that.

I do think the history of private money suggests it’s not stable over the long run. You can’t have a big system of private money outside central bank-based money. If it scales and gets really big, I think there will be big questions for the Fed and Congress as to how to deal with it. We’re not there. We’re not there.

Beckworth: That’s creative of you to rein in my enthusiasm. In the grand scheme of things, it’s still really small. Stablecoins are small even compared to Bitcoin. Compared to M1 or M2, it’s very small. Now, let’s talk about that size and projections. In your paper, you mentioned some of them, $3 trillion, $4 trillion over a decade. Even that number is small compared to the M1 number you just gave. Is it possible to get bigger than that? Could it take off? Could OpenUSD or some other new innovations push it larger? Do you think $3 trillion, $2 trillion is a reasonable number?

Liang: Maybe if we just step back, what stablecoins, what their benefits are for payments over existing systems. Being blockchain-based, they’re faster. They are now cheaper than most payment instruments. They offer 24/7 access, which is one of the more valuable pieces. Then over time, they’ll be programmable. Some are programmable now, but that is a potential that it could change the nature of money. It has lots of potential benefits. Not everybody needs all those benefits. They want some of them and not all of them.

I see stablecoins as meeting the needs of certain consumers or businesses. Again, where it’s really making traction is cross-border business-to-business payments and remittances. You can think about a small business in the US transmitting funds to a business. It’s paying a supplier. It could be in a country where the bank of the purchaser and the bank of the supplier aren’t the same banks. Instead of going through a banking system and corresponding banks, they can just transmit to each other.

That reduces costs. It reduces the chain. It’s settled quicker. It can be done on different hours than the US banking hours of 9:00 to 5:00. This is a global system. I think stablecoins have the potential to really meet some different payment needs. As you know, remittances are reputed to have terribly high costs. For those sending $200 to somewhere in a less developed country, the fees can be pretty substantial. The World Bank documents between 10% and 15% sometimes in some of the less-traveled corridors.

To the extent that stablecoins can reduce those costs and make it faster and convenient, that’s great. All that to say, I think stablecoins meet certain important needs that the current system isn’t serving well, and whether all the benefits that stablecoins can bring are needed by everybody for all transactions is an open question. Then there are some potential risks to stablecoins that I really want to emphasize. This is one of the key tensions in the paper we wanted to emphasize.

All those benefits that are there for payments also make it very attractive for illicit finance transactions. Stablecoins are like cash. They’re a bearer instrument. You can have these transactions subsequent to the initial issuance that the owner or the issuer has no insight into, has no record of, just like cash. For illicit finance, cash is used, and stablecoins are starting to be used as well. I think the challenge for regulators now, despite GENIUS, there’s a lot of rules to write.

The challenge is, how do you make stablecoins, which had been designed mainly for trading crypto assets, make them fit for purpose in a real mainstream payments world, and control the risks of illicit finance? That can be hard. Cash is pretty anonymous, so are stablecoins. Stablecoins can move a lot more cash and a lot faster. All those rules still are being written. I think what the potential for stablecoins and where they grow will depend a lot on where we get to. That’s why I don’t know, and I don’t think anyone really knows how big stablecoins can get. That’s why we have ranges right now of, say, we’ll grow only to $500 billion, which is like double the current size, to $5 trillion, which is huge. I think it’s just a big range at this point.

Beckworth: Let’s talk about Tether a little bit because it comes into this point you made. It’s outside, at least currently, the regulatory umbrella of GENIUS. It might be one that’s used by criminals. It’s also used by a lot of people in developing countries as well. I’m torn. On one hand, yes, we don’t want to fund terrorists smuggling in weapons of mass destruction. On the other hand, I also understand there’s people in developing countries who want to bypass their government, an oppressive regime. How do you strike that balance?

Going back to the competition point, on one hand, I’m pleased, maybe it’s too strong of a word, but interested to see how Tether navigates it outside GENIUS. We could maybe learn some things, right? Then Circle and others are inside. I know, and you’re aware of this too, from being a Treasury person, Treasury has gone after Tether to shut down certain accounts. It’s not completely outside the purview of the US government. Tether’s so big, they’ve done it. Maybe you speak to that. Tether’s already being tapped by the government, right?

Liang: Yes, and Circle—both. Both have the ability, and I think for stablecoins, they have to have the ability to do some monitoring. Then there’s private firms who do a lot of monitoring and looking for patterns among accounts in terms of how they transact that look like maybe some illicit finance activity. They’ve been asked; law enforcement agencies can ask stablecoin issuers to freeze accounts, block accounts, et cetera. Right now, the issue for the stablecoin issuers is what is their legal authority to block and freeze accounts if asked by a law enforcement agency but without a court order.

There’s some ambiguity about how are they protected if they freeze something from private lawsuits, for example, right? Some of these issues are being raised in clarity, but there is a certain baseline of in GENIUS, they raise the standards for AML/CFT, all these anti-money laundering. Prior to that, they’d been subject to state-level regulations which aren’t standardized, and the federal regulations are a little bit higher. They have to finalize those rules.

That involves having the ability to transact, having the technology to block and freeze accounts, but there’s quite a bit. I think I just want to say Treasury has used authority, and here I’m not the expert on all the OFAC authorities and everything, but authorities to ask these agencies, along with other law enforcement agencies, to ask the issuers to block and freeze accounts. They have cooperated to the fullest extent they can. It does strike me as while stablecoins are anonymous and people are very concerned about illicit finance, that ex post, you can track a lot. I don’t think with cash, you’re able to do that kind of tracking. I think over time, we’ll see where that goes. Even though it’s pseudonymous, you can see patterns in ways, and it’s on a public blockchain.

Beckworth: It’s very transparent.

Liang: It is. Not who, but transactions are. Potentially, you can do that.

Beckworth: This goes back to your point. Maybe at the end of the day, it just serves to be a better payment mechanism, not necessarily an independent government-free money. It’s just that it’s truly 24/7. I want to use that to segue into one of your colleagues I’ve had not too long ago, Aaron Klein. He’s a very passionate individual about 24/7 payments. He’ll come in here—and we told Nellie, don’t beat the table because the mics will pick it up—he’s someone who’ll come in here. He beats the table. “There’s no excuse why people can’t get paid immediately,” because he talks about households that live paycheck to paycheck, have less than $1,000 in their checking account. They can’t wait two or three days for money to clear from their employer. This would be one potential solution to it.

Liang: The other way is fast payment systems, which have been adopted. This would be like the US FedNow. In other countries, and we document this in the paper, more than 100 countries have adopted fast payment systems. They’re pretty pervasive and widely adopted in a few countries like Brazil, Kenya, and India. Research is finding that fast payments, not just blockchain-based, can meet these kinds of needs. It helps to smooth consumption for some households. It reduces the minimum fixed cost of a transaction.

That’s allowing certain transactions that might never have happened to now occur. That’s having benefits for, say, liquidity-constrained households or small businesses and that kind of thing. One could imagine you’ll get that from blockchain-based payments, stablecoins as well. There’s not enough information yet on stablecoins to document benefits.

Beckworth: Stablecoins is a potential solution. It is a little puzzling why we in the United States in the year 2026 still seem to be way behind on real-time settlement, real-time payment systems. I know we have FedNow, but my understanding is that’s not being widely used, not a lot of pickup. There’s also the private real-time payment system.

Liang: The large banks.

Beckworth: You’ve got two utilities. It’s not going to work. You need network effects. You need to get the lower portion of the average cost curve. Maybe tokenized deposits could be part of the solution to this. With tokenized deposits, you’ve got to have banks that can talk to each other.

Liang: Exactly.

Beckworth: Like JPMorgan’s tokenized deposit may not want to talk to Bank of America. Maybe that’s where OpenUSD would come in and provide a clearinghouse of some kind. It seems odd to me that we’re still having this conversation in 2026. That’s where Aaron Klein gets worked up. Maybe stablecoins, if nothing else, will give competition to the banks to find a way to get 24/7 clearing.

Liang: This is exactly, as I mentioned, igniting innovation and new products and services. The banks have announced a broader system for tokenizing deposits through this RTP system you’re referring to. Again, it’s an announcement. There’s a lot of details to come. You’re seeing regional banks joining together, announcing either a broader network for tokenized deposits or a stablecoin. The distinction that is probably useful to recall is stablecoin’s open permissionless blockchain, are not limited to a certain set of counterparties, like bank depositors. Tokenized deposits are often limited to the depositors.

There are some big banks testing tokenized deposits onto a public blockchain, but with some privacy protections. They’re merging. Everybody’s testing new things. I would say that, certain banks have become much more forward on these new product offerings and testing products since GENIUS was passed.

Fed Master Accounts

Beckworth: I love that. I love to see industries being pushed out of their comfort zones to innovate. We want to see that. We rely heavily on the private sector in the US economy. We need to give it sometimes a gentle nudge toward being more lean, mean, and efficient. I think stablecoins is doing that. I’ll just briefly mention Chris Waller announcing Skinny Fed Master Account. I know that really worked up the banking industry. Maybe they needed to hear that. What can we offer that’s as good or better? You can fight it with legislation, with regulatory pushback, but you can also fight it with a better product.

Liang: Absolutely.

Beckworth: That’s good.

Liang: I’ve advocated for some version of limited access to master accounts as competition. During our last year, during the administration, with the payments innovation and competition, the current regulatory system for payments is state by state. A firm like PayPal or others operates with 50 or 70 state licenses instead of a federal charter. The question was, should there be more of a consistent set of standards across all the states, like a federal charter, and maybe then they could also have access with some regulation? Not like a bank-regulated entity because they’re not banks, but some kind of regulation which might then give them potential access to a Fed payment account of some form, maybe in a limited form.

Beckworth: Well, that’s crazy to hear your thinking about this back when you were at Treasury.

Liang: We were doing that then.

Beckworth: You were ahead of the curve. I just also want to recognize President Trump has an executive order that’s told the Fed, look at this issue in terms of how do you hand out master accounts? Have some kind of uniform, systematic approach because I know right now each Federal Reserve Bank does it, and they might have slightly different ways they do it. It’ll be interesting to see how all that unfolds. On the question of going back to banking and law enforcement, you raise this really interesting tension in your paper. This takes us into discussions about the impact stablecoins could have on the global dollar and its role as international reserve currency.

Dollar as Global Reserve Currency

You note that one of the benefits of this reserve currency status is that the US government can shut down someone overseas, they don’t have access to the global dollar system through the correspondent banking, or any bank that wants to have access to the dollar system. It’s a powerful lever. It’s a tool, but what if dollar-based stablecoins completely cut out those correspondent banks? On one hand, it could spread the dollar more widely. On the other hand, it could cut out that middleman and undermine the ability of the US government to do something. This is an interesting tension I had not thought about until I read your paper. Tell us more about it.

Liang: The role of the dollar, the global role of the dollar, provides benefits to the US in two ways. One, it reduces the borrowing costs for the US. That’s the economic benefits. Also, in our traditional correspondent banking network system has provided national security benefits, again, through enforcement of sanctions or AML/CFT rules. That’s because there’s some authority that because the dollar is so strong and used so widely that the threat of cutting off access to a US correspondent bank gives you the ability to enforce sanctions.

Stablecoins, to the extent they bypass all those correspondent banking relationships, collapse down to this blockchain settlement; to the extent it gets rid of that, reduces the effectiveness of that. There has to be ways that people will develop to be able to enforce. The point we were just making is the economic benefits of continued use of the dollar through lower rates for the United States will continue, but there is some tension of reduced national security. This is similar to the broader tension of all those things that make stablecoins better for payment efficiencies and costs also make it more attractive for illicit finance.

Those are the same tensions that we wanted to highlight. It’s just a way to help think about policy is always about balancing the costs and benefits of new things, and so just be very explicit about what some of these are. That’s what we want to highlight.

Beckworth: We should probably also be charitable to policymakers as we move forward and try to figure out these tradeoffs. We’re going to make mistakes, right?

Liang: Exactly. It’s hard.

Beckworth: You’re a former policymaker of both the Fed and the Treasury, so it’s easy for people like me on the outside to be critical. “Why didn’t you do this? Why didn’t you do that?” “We’re trying, David. Just calm down. Give us a chance to grow.” Now, let me tell you a story I heard. I want to use this as a way to motivate another point, but I was talking to someone who has family in Argentina, which is a very dollarized economy, and they bought a home. I may have shared this story on a podcast before, so I apologize to listeners if you’ve heard this story.

To buy the house, they actually had to use it with US dollars, not with the peso. It was several hundred thousand dollars. They literally had to get several hundred thousand dollars from their bank and take it to the seller’s bank. The way they did that, he told me, is they had to hire a security team to physically haul the physical cash from one bank to another bank in Argentina. He goes, “Man, if they could have just used the stablecoin, it would have been a lot safer, quicker, more efficient.” Lots of points that maybe that illustrates, but the one I want to really focus in on, will the stablecoin create net new demand for the dollar?

Now, we’ll talk about in a minute whether it creates net new demand for Treasury bills. Let’s put that to the side. Is this something that’s going to create new dollar demand usage? In the case of this story, we’re just substituting from currency into a stablecoin, and there’s benefits to doing it. What do you think is going to happen?

Liang: I think these stablecoins are, on net, a positive for the role of the dollar. One is, the status quo, that’s not there. Other countries are developing payment systems, digital assets. We weren’t the first. The US has to innovate to stay as part of the system. You don’t want new payment systems being created without a dollar-based instrument being available, so it can be part of the system.

I think absent this, we would lose to some extent in terms of our share of cross-border transactions, or how much is invoiced in dollars, et cetera, if there were an absence of a digital dollar, even if it’s private. I think to that extent, that supports the role of the dollar. Stablecoins also are going to make it easier to access US dollars by some, because the technology, as opposed to trying to find currency or cash, or your example of transacting large quantities, that you need security people, that kind of thing, stablecoins, the accessibility of the US dollar is going to be greater. I think that will create new demand for dollars. I think those are both useful for supporting the role of the dollar.

Stablecoins and US Debt

Beckworth: All right. It’s good to hear. Let’s go to the point I said let’s put to the side. Let’s go to it. Let’s talk about an important section of your paper, and that is, what does it mean for our debt? What does it mean for the demand for Treasuries? You have an interesting exercise where you go through a number of outcomes based on the type of asset it replaces.

Liang: Yes. Stablecoins can help the debt. One is, again, lowering the cost of borrowing through the use of the dollar, but two, stablecoins are backed by Treasury bills largely. If you look at the two largest stablecoins these days, 79% of the reserve assets are Treasury or Treasury repo. That’s a big chunk. If you assume that practice will continue under GENIUS, which I would expect it would, then every dollar of stablecoins creates $0.80 of demand for T-bills. To really see how much you would really get is you want to think about where that new demand for stablecoins comes from.

What we did was look at does it come from commercial banks, does it come from money market funds, does it come from currency of the Fed, or does it come from new demand from abroad? Those are four broad categories that cover mainly where you would expect stablecoin growth to come from. That’s one element of thinking about what’s the net new demand for T-bills, like where’s the source? 

The other piece of it is how big will stablecoins get? As we’ve talked, it’s really hard to know. We relied on a private-sector forecast of some alternative scenarios. We took three scenarios, sort of a low growth, a medium growth, and a high growth. They were $0.9 trillion, $1.9 trillion, and $4 trillion. Under those scenarios and where the growth would be, we were able to assign how much of that growth would come from those four sectors I mentioned earlier, the three domestic sectors—banks, money market funds, currency, and then, from abroad.

Using that, some of those sectors already invest in T-bills, so it’s not net new demand. We do a very simple, first-round calculation of if stablecoins were to get to $4 trillion, at the high end of estimates, how much of that would come from banks, money market funds, currency abroad? Reduce the net new demand by how much those sectors already invest in T-bills. Simple example, money market funds, they have at least 80% of their assets in T-bills as well.

If all of the new stablecoin demand came from money market funds, then stablecoins would invest in T-bills, money market funds would sell those T-bills, and there would be a net wash and no new demand. We did that. It turns out commercial banks don’t actually have a lot of T-bills or Treasury securities in their portfolio. Demand from abroad, those are foreign assets, so that’s all net new. We come up with, roughly, for every dollar of new stablecoins, using our very simple first-round estimates, you’d get about a 0.6 demand on T-bills, which is significant, but it’s not one. It’s not one-for-one. It’s 0.6, but it’s significant.

You can make different assumptions. I’m sure we’re wrong, but I don’t know how to make it right, what exactly all our assumptions are. It’s a simple calculation, but we thought it was worth walking through to highlight where the tensions were. One, it highlights that a lot of the demand for T-bills is going to come from reduced bank deposits. It’s like you can see this tradeoff explicitly, that banks will lose. The way that you get more T-bills if banks lose deposits and from abroad, those are the two main sources of net new T-bill demand.

We acknowledge that banks losing deposits, especially if it’s the smaller community banks that would lose deposits if it were them. They serve small business credit needs. One could imagine some disruptions in that, in being able to provide small business credit. Some of the banking trades have highlighted this issue. I think there could be something to that, that capital markets haven’t quite yet gotten down to the small business. I think it’s something that would transition over time. It’s a disruption, but I don’t think it’s a permanent displacement of credit. It’s just a disruption.

This calculation, we wanted to, one, [figure out] how much new demand for T-bills, and two, just highlight where the displacement and disruptions would be, just for, again, for how to think about policy for stablecoins.

Beckworth: This section was so fascinating. I can’t recommend it enough to our watchers and listeners. It helps you think through some of the issues. Just a couple of comments. One, I repeatedly hear from financial regulators and people in that space, the community banks are an incredibly strong bastion. They know how to fight a fight. They’re the one part of the banking sector that always has one. Maybe they finally have them at their match. A gentle, long-run structural change. That’s just my throwaway comment. 

I also wonder, though, again, going back to our competition point, one of the observations about the US banking industry is the depositor base is very sticky and does not get paid much. We don’t think twice about the fact that we don’t get paid anything on our deposits. I remember reading one paper, maybe in the QJE, but it was a theoretical paper that argued something like a CBDC or a stablecoin could force banks to have to start paying a little bit more, some kind of remuneration. They wouldn’t forever get permanently cheap funding. What are your thoughts on that?

Liang: I’m sympathetic to that argument. As you know, Reg Q didn’t allow banks to pay interest on deposits. Then that led to the growth of the money market funds. I think we call them money market funds and money market demand accounts. Anyway, there was some disruption. When Reg Q was repealed, it said you could pay interest on certain accounts, but there were still the transactions accounts that you didn’t pay interest on that was still part of the law. Then Dodd-Frank repealed that.

We’ve been in this period of really low interest rates for so long. I think people just don’t expect any kind of interest on their transactions accounts. I’m not a lawyer. Where it used to be prohibited from paying interest, it’s now allowed. It’s just not common practice, or it’s very low. I think competition could change this. A higher-rate environment and competition can change this.

Beckworth: That’s always been a question. The Fed tightens policy. Where’s the pass-through to the depositor? Again, we’ve been in a low-rate world for a long time. Expectations, we don’t think differently. Maybe all that needs to be shaken up. Again, I’m not trying to cause a run on the banking system or—

Liang: That’s right.

Beckworth: —disintermediate it.

Liang: That’s right.

Beckworth: Who’s to say whether this equilibrium we’re in is the optimal one? Just because it’s been this way, doesn’t necessarily mean it’s the optimal one.

Liang: That’s right.

Beckworth: Just because it’s been this way doesn’t necessarily mean it is the best outcome.

Liang: Right. Well, we do have traditional banking. We do have models from the past about deposit-taking has some complementarities to making loans to firms that are information-intensive, need more information than you could just ship off to the capital markets. I think there’s probably still some validity to those arguments. On that basis is why I’ve been recognizing some potential risk to small business credit until there’s some more developments that can address that. I do think there could be some transition.

Beckworth: Nellie, on this point of competition, I recently gave a presentation to a group of federal regulators at the deputy level. A lot of bankers were in there, bank regulators. I was explaining stablecoins. They had a really hard time with it. One of them even raised his hand and said, “Why would you want to disrupt this model that we’ve spent hundreds of years developing? It’s an optimal model of how we provide credit and payments.” 

I was like, “Really? Are you sure this is the final destination? Are you sure there’s no room for improvement? Why must it be the case that payments are linked to credit intermediation? Why is that necessarily the optimal outcome?” It just blew their minds I’d even suggest that. I said, “Go read Dan Awrey’s book.” Dan’s written about this, breaking apart some of those elements of the current state of banking.

Again, I want to be gentle and careful because community banks, they do fill a niche that’s not met by other entities out there. A lot of things could happen. A lot of change coming forward. Any other thoughts on disrupting the business model of banks or?

Liang: No, I think that we’ve covered that.

Beckworth: There’s much more to your paper, Nellie. Again, I encourage all the watchers and listeners to go check it out. We’ll have a link in the transcript. There’s a lot of issues with stablecoins. There’s a lot of hope for stablecoins. What are your policy recommendations for that space?

Nellie’s Policy Recommendations

Liang: I think, as I mentioned, GENIUS is in law. There are a lot of regulations that need to be written, and the OCC is responsible for a good part of the credential regulations that would apply to stablecoin issuers. One, they need to write the capital, liquidity, and risk management standards for stablecoin issuers. A key part of the stablecoins that we think is a risk is what’s the quality of the reserve assets and is there capital?

In GENIUS currently, reserve assets allow for cash and currency, T-bills, also uninsured deposits of banks. In GENIUS, there is no risk weighting for the different kinds of reserve assets. The view was these are all high-quality liquid assets. In my mind, the risk of an uninsured deposit is higher than the risk of a T-bill. There should be some risk weighting for that.

In Europe, stablecoin issuers under MICA would have, say, a 2% capital requirement. They have more restrictions on their assets. Here, I’m not saying 2%, but I think there should be a distinction between if a stablecoin issuer holds a lot of uninsured deposits versus T-bills, versus give the issuer an incentive to hold the less risk-free assets. I think that’s super important. That’s issue number one. There are some other risk management things, but I think that’s the key thing.

Illicit finance, we’ve talked about getting those rules correct. I think to be adopted on a big scale, maybe not by retail investors as much, but if corporations and their cash Treasury functions want to incorporate stablecoins into their cash management functions, they’re going to want stablecoins that don’t have the risk that they’re going to be somehow used for illicit finance. They need operational certainty that transactions will settle.

There need to be some standards that I think everyone needs to be expected to live to for it to be adopted in a big way. I think it’s in everyone’s interest, the stablecoin issuers and policymakers for the financial system, for these kinds of rules to get put in place. Those are my first-order policy things that need to be taken care of right now. OCC is now writing the rules. Others have raised these issues too, but I just think it’s an important thing to emphasize.

Beckworth: Well, maybe it’s a good thing we went past the deadline for writing the rules. It’s supposed to be one year, in my understanding, and they’re still writing the rules. Maybe they need to. They need to listen to Nellie Liang and make sure they have a complete to-do list and check off all the recommendations in this paper. With that, our time is up. Our guest today has been Nellie Liang. Nellie, thank you so much for coming on the show.

Liang: Of course. Thank you for having me. I enjoyed the conversation.

Beckworth: Macro Musings is produced by the Mercatus Center at George Mason University. Dive deeper into our research at mercatus.org/monetarypolicy. You can subscribe to the show on Apple Podcasts, Spotify, or your favorite podcast app. If you like this podcast, please consider giving us a rating and leaving a review. This helps other thoughtful people like you find the show. Find me on Twitter @DavidBeckworth, and follow the show @Macro_Musings.