Rashad Ahmed on the Global Impact of US Stablecoin Regulation and Crypto Adoption

Rashad Ahmed is a former Treasury and Office of the Comptroller of the Currency financial economist and is currently an economist at the upstart Andresen Institute for Finance and Economics. In Rashad’s first appearance on the show, he discusses the real-world impacts of the GENIUS Act, what US stablecoin regulation means for the rest of the world, the state of crypto adoption, and much more.  

Subscribe to David's new Substack: Macroeconomic Policy Nexus

Read the full episode transcript:

This episode was recorded on June 27th, 2025

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 Rashad Ahmed. Rashad is a former Treasury and Office of Comptroller of the Currency financial economist, and currently is an economist at the Andersen Institute for Finance and Economics. Rashad has written widely on stablecoins, the adoption of crypto, and its macroeconomic implications. He joins us today to talk about these issues. Rashad, welcome to the program.

Rashad Ahmed: Thanks for having me, David.

Beckworth: It’s great to have you on. We have interacted for a number of years online. You have a co-author who I’ve tried to get on the podcast for a number of years, and he can never seem to make it. That’s Iñaki Aldasoro. Iñaki, this is looking at you, sir. You need to get on here as well. Join your co-author, Rashad. This is your day, Rashad, so let’s talk about you and your work.

Rashad’s Career

Now, looking at your vitae, your research, you’ve done a lot of fascinating work on cross-border flows of policy, what happens when there’s a monetary policy shock in one region or changing yields in another region, the cross-border flows. You’ve extended that into what happens when there’s this push for crypto adoption, stablecoins, and what’s the global linkages. You’re doing some really fascinating research, and we’re going to look at several of your articles today. Tell us about your career journey. Tell us how you got to Treasury, the OCC, and what you did there.

Ahmed: Sure. First off, I just want to give the usual disclaimer. These views are my own, and they don’t necessarily reflect those of the Andersen Institute or affiliated organizations. Now, as far as my career goes, I think we probably would need to start in undergrad. I was a freshman in college in 2008, just as the Global Financial Crisis was unfolding. I got to see that in real time, and I saw it impact people that are pretty close to me, family and friends. I think that’s really what sparked my curiosity around financial markets and how financial markets interact with the macroeconomy and public policy.

I decided to study finance in undergrad. Then I graduated, and I took a job at a local investment bank for a year. Then after that, I went on to do my master’s degree in Chicago. I moved to Chicago. As I was studying, and for a couple of years after, I worked at a few financial institutions before going off to LA to get my PhD in economics. I was there for five years, and I graduated with my PhD in 2021, right in the middle of the pandemic. I knew that I liked research, and I really liked financial markets and macro, but I wanted to work more on the public policy side.

That’s what brought me to the OCC and the Department of the Treasury. I joined as a financial economist there within the market RAD division—risk analysis division. It’s a great group of people, really nice colleagues, smart colleagues. Got to work on a lot of interesting issues related to bank regulation and financial stability. I was there until just this month when I left the OCC, and I joined the Andersen Institute for Finance and Economics.

Beckworth: I should mention to listeners that while you were there, you did a lot of interesting work on different Treasury securities, including this security that I watch closely called the savings I bond, which is really interesting because it pays retail investors, so people like you and me who buy these bonds, an inflation-adjusted interest rate. It’s like getting a real return. It’s like buying a TIPS, except it’s a savings bond. Not quite one to one, but it’s very similar. I was tracking this, and I was trying to get the data on it, and I bugged you incessantly, “Where do I get this data?” You were very patient with me. You showed me where to download it off the Treasury’s website. Rashad was very kind to me, and I still track this information closely. 

For what it’s worth, listeners, there has not yet been a turnaround. The amount of these savings I bonds have been coming down, that people accumulated when the inflation surge happened, they’re coming down. I have been looking at it to see if it’s turned up again because they’re worried about higher inflation from the tariffs or some other thing going on. Rashad was very kind to me while he was at OCC and was very supportive of my endeavors, looking at different Treasury securities and instruments.

Ahmed: It was a lot of fun. It was a lot of fun.

Beckworth: Yes. It was a lot of fun. That was a very fascinating series, I did not know about until the pandemic. I saw you comment on it several times, and that’s why I reached out to you. Now you are at a new place you just mentioned. You’re at the Andersen Institute for Finance and Economics. It looks like it’s brand new. I know a few of the people there. In particular, I know Craig Torres. He’s been on the podcast. He’s someone who was at Bloomberg for many years, did great reporting on the Federal Reserve. Your CEO is Fabio Natalucci. You have Jim Klaus, who’s also a prominent, I believe, former deputy director at the Monetary Affairs Division. You’ve got a really solid team there. Tell us what you guys are doing.

Ahmed: Yes. As you said, it’s a brand-new institute. The way I think about it is we’re a global independent think tank or research institute. I think our objectives or our goals are to really put out very high-quality research pieces, very research-centric environment. These research pieces can be anything from short notes like blogs or longer-form papers and even more formal white papers. We want to touch a broad range of macroeconomic issues that our stakeholders care about. We have both private sector stakeholders and public sector stakeholders.

In terms of macro questions that we want to think about, something that I might be working on could consist of looking at how geoeconomic fragmentation and geopolitical risk is affecting macro policy and financial markets. We’re also interested in the micro aspect of some of these big macro trends, for example, the effect of AI on small and medium-sized businesses. We want to cover a range of interesting economic issues. I think that makes it pretty exciting. Like you said, it’s brand new, so the culture is very much like a startup.

At the same time, we brought in some really great people. I think we have some great leadership to put us in the right direction. Fabio is coming from the IMF. He was a leader in the Capital Markets Division. Then, before that, he was at the Fed Board, and he also spent some time at the US Treasury. It’s been a lot of fun to work with him so far. I’m really excited to see where things go from here.

Global State of Crypto

Beckworth: Yes. We’ll provide a link to the Institute in the transcript. Now, Rashad, you have a lot of interesting research. We could spend multiple episodes going over all of it. Today, I want to focus on your work that relates to stablecoins and crypto because you’ve done some really neat work there. As I sit back and observe the world, it seems like we’re going into an era of crypto. It’s been here, but it really seems to be taking hold. We have a president who likes to call himself the crypto president. He signed an executive order in January, really pushing this through.

Probably what’s really at the very forefront of all this right now is the stablecoin legislation. We had the GENIUS Act that went through the Senate. Several, I think 18 or so, Democrats voted for this above and beyond just the Republicans, so it had bipartisan support. It’s gone to the House. The House has the STABLE Act, which is similar, a little bit different. They’re creating guardrails, trying to bring stablecoins into the regulatory perimeter so that there’s AML issues addressed. There’s guardrails on what you can and can’t do. My understanding is, for example, they can’t pay interest on the stablecoins.

It’s just purely like a money market fund, almost very money-like, and a number of other issues that are addressed in that. They’re working through. There was a push by some Republicans to tie it to a second bill on market microstructure tied to crypto. My understanding is Trump wants to get this through, the Republicans want to get it through. It’s a big deal. Now, in addition to this legislative push, stablecoins have been growing rapidly, as you know. There’s been several studies out that the Treasury Borrowing Advisory Committee, TBAC, put a study out that suggests it could get up to $2 trillion market cap size by 2030.

Citibank and several others have come out with similar numbers. Treasury Secretary Bessent said $3.7 trillion. Anywhere from $2 to $4 trillion, which is large. A lot of this would be tied to Treasury securities, because that’s the whole idea. It’s like a money market fund. We’ll talk about that later. There is a lot happening here. Now, I will also mention, Rashad, that I am just back from a conference. This conference is the Bitcoin Policy Institute’s Annual Summit. Now, no, I am not a Bitcoin bro now, but I am a little more interested than I was before.

I was very skeptical before, but now I look at the market capitalization of Bitcoin, it’s really grown a lot. There’s many people on Wall Street. Larry Fink, he used to downplay it, used to say this is a scam. He’s now all in. There’s ETFs for this stuff. Senators are excited about it. It looks like we’re going to have a strategic reserve tied to some Bitcoin. This is something you have to take seriously. I understand there are parts of the world that really do benefit from Bitcoin, places where they have hyperinflation, failed states, legitimate uses.

Rashad, I also had on the podcast just previously, Luis Garicano. He’s at the London School of Economics, I believe. He gave a fantastic presentation at the Hoover Monetary Policy Conference this year on stablecoins in Europe. I’ll encourage listeners to go back and check out that episode. We talked about this. The big takeaway I got from it is that the Europeans are terrified of dollar-based stablecoins. They’ve been pushing for a CBDC. Americans they’re like, “Let’s do it. We’re the Wild West of crypto. Let’s experiment. Let the private sector explore.” They’re genuinely worried that stablecoins are going to get a foothold in Europe and, to some extent, affect how effective monetary policy is and things happen over there.

As you step back, before we get into your research, what is your sense of these developments as you see them? Is this something we really should be paying attention to and thinking about? Even if we’re mainstream macroeconomists, financial economists, and typically we’re like, Bitcoin’s a speculative asset, do you think we should be paying close attention to this?

Ahmed: I do. I do. I think as economists, we tend to err on the skeptical side. If we look at the last 15 years and what’s happened to the asset class, it’s only grown, and it’s only become more mainstream. Now you have financialization of Bitcoin via ETFs. As you mentioned, Larry Fink switched sides. You see Jamie Dimon switching sides. You see the growth of the stablecoin market. A lot of folks are calling stablecoins the potential real-world use case for crypto.

As you mentioned, like Bessent and these other estimates from TBAC, who actually got that $2 trillion number from Standard Charter, and Citibank’s estimate up to $3.7 trillion, in terms of market size for stablecoins, taking all that together, I think it’s worth paying attention to. If the size of the market continues to grow and these predictions become realized, then it’ll get big enough that economists and other skeptics probably can’t ignore it anymore. I thought Luis’s piece was very interesting, and especially to get that European perspective. I thought his proposal, the suggestion he was making that Europe may be at risk of getting dollarized via dollar stablecoins, was very compelling. I thought it was a neat thought experiment. 

I would say that I do generally agree with the risks that he proposed that would come with that, for example, potential loss of monetary policy effectiveness of the ECB, and potentially greater reliance on dollar payment rails, if most people start using or holding US dollar stablecoins. Time will tell if we really get to a world where we see aggressive dollarization via stablecoins. Needless to say, the space is growing. It seems like folks are thinking about several different use cases for cryptocurrencies and stablecoins beyond just facilitating crypto activity.

Beckworth: Yes. We’re going to go to a paper of yours in just a minute where you look at the relationship between stablecoin adoption and Treasury yields, and safe asset prices. Just parking here for a minute on the big picture implications, what you just mentioned, if indeed stablecoin dollarization does grow—let’s pick that upper bound—I’ll round up to $4 trillion by 2030, maybe even more after that. Who knows where this will go? That really does suggest more dollar dominance, despite what we’ve been through. For me, my focus initially was on April 2 and woe is us. Look at the spreads between Treasury yields and dollar index. They’re going apart. The dollar’s days are numbered.

As I mentioned on a previous podcast, that’s one thing you could look at. That could be one thing that is Trump’s lasting legacy on dollar dominance. The other could be this push for stablecoins. If dollar stablecoins do take hold and grow around the world, that legacy might be more important than his trade war. I suspect, and I’m speculating here, but to me, the long arc of history is more global trade, more globalization. I think, what we’re experiencing now at some point will mellow out, and the world may be somewhat different, but there’ll still be trade. I think his biggest legacy will be the stablecoin push.

You’ve done work related to this on, as I mentioned earlier, the spillover effects of monetary policy. I know even before this all happened, in the 1990s, 2000s, there’s always this talk about when the Fed does something, it affects interest rates across the world, affects monetary policy conditions around the world. You have several papers on this. Would this not also imply, like Luis was arguing, that the Fed sets conditions here, and let’s say, far-fetched scenario, but there’s a big portion of Europe that’s dollarized via stablecoins, the ECB would have to follow in some sense. The footprint or the reach of the Fed would be even more pronounced. Is that fair?

Ahmed: I think that’s a really good question, David. There’s a few ways that I think about this. If we think about monetary policy spillovers to other countries from the United States, there’s a lot of different channels through which monetary transmission can get amplified. I think one of the biggest channels that’s related to dollarization would be if other countries are pegging their exchange rates to the USD. Under a fixed exchange rate regime, you do have very strong transmission of US monetary policy, assuming free capital flows, because when the Fed raises rates, in order to maintain that peg, the foreign country is going to also have to raise rates.

You get a contractionary monetary policy shock in the other country. You have near-complete monetary policy transmission. Now, what’s interesting about stablecoins or a hypothetical world where you have stable US dollars stablecoin adoption is you don’t really have interest rates that are paid on stablecoins, at least according to the GENIUS Act and the existing fiat-backed stablecoins we have today. They don’t pay any interest. In some ways, the implications we can draw from history will be a little bit different.

For example, this interest rate channel of monetary policy spillovers may not be very strong in a world that is dollarized via stablecoins versus being dollarized by a fixed exchange rate peg or literal dollarization. There would be other transmission channels that open up. For instance, and I think Luis mentioned this too, if households adopt significant amount of dollar stablecoins, they have long dollar exposure on their balance sheet now, and they’re going to be exposed to currency mismatch on their balance sheet, and that’s going to be impacted by US monetary policy. If the Fed raises rates, you have dollar appreciation. That’s going to affect the value or the net worth of the household.

In fact, it’s going to increase the net worth of the household because now their dollar assets are going to be worth more in local currency. Now, if we think about the emerging market story, what we’ve seen through history is that emerging markets in developing countries may borrow quite a bit of debt denominated in dollars, so it’s a different form of dollarization. This goes back to the original sin hypothesis. When that happens, then that economy is going to be short dollars because they have dollar exposure on the liability side of their balance sheet.

When the Fed did raise rates, you would get monetary policy transmission, and that would be amplified in an adverse way on that emerging economy because the real debt burden would increase, because they would have to pay back debt in dollar terms. What would the public sector in those countries or central banks in those countries do to try and moderate these spillover effects? The central bank would go out and they would purchase dollar assets.

One of many reasons is the central bank may go out and accumulate reserves, but it would increase the long dollar position on the economy’s balance sheet because now you have the central bank sector holding dollar assets on the asset side and the net increase in the balance sheet value of the central bank could help offset the adverse impact coming from the liability side of, say, the corporate sector or the public sector that borrows foreign-denominated debt. It almost acts like a hedge against foreign monetary policy spillovers from the United States.

Now, if we removed the central bank for a second and we replaced it with a household sector that holds a lot of US dollar stablecoins, then we’ll get a really similar result, at least in theory. You have a monetary tightening in the United States. The Fed is going to raise rates. That’s going to appreciate the dollar. Now, normally this would leave an amplified contractionary effect on the emerging market because they tend to hold a lot of dollar-denominated liabilities, but now they have quite a bit of dollar-denominated assets in the household sector.

The value of that household balance sheet is going to go up, and that will hedge a little bit of the short dollar position of the public sector and the private sector. In some ways, dollarization via USD stablecoins could actually moderate the transmission of monetary policy coming from the United States to other countries in a way that’s sort of counterintuitive to traditional forms of dollarization.

Beckworth: That is so fascinating. There is an entirely different story one could tell here. Right now, you’re right, the STABLE Act, GENIUS Act, they don’t allow for interest-bearing stablecoins, so it would have to be dollar appreciation, depreciation would be the only channel. What you’re saying is basically households would be better hedged against any changes in their dollar liabilities by holding these stablecoins. It might be a wonderful world overseas. Some of the conversations that we’ve had were about how do we prevent the Fed inadvertently causing problems overseas.

I’ve talked on the show several times about Mark Carney’s proposal in 2019 for a synthetic hegemonic currency, how do we get away from the dollar? It was a really far-out-there proposal when he was governor of the Bank of England. One of the concerns he raised was when the Fed moves, it affects these emerging markets, usually in an adverse way. This might actually be something that would help them. Man, Rashad, you’re making a win-win case here for stablecoins, dollar pay. I know that’s not your point, but Secretary Bessent would love to hear this angle, this pitch, and run with it. Say, “Hey, rest of the world, hey, US, this is win-win for all of us.”

Ahmed: It’s definitely an interesting angle, I would agree. I think you mentioned something earlier how stablecoins could promote dollar hegemony. I think that can be true at the same time. You can have a world where if foreigners adopt US dollar stablecoins, the transmission, the cross-border spillovers of US monetary policy, become more moderated. At the same time, the rest of the world becomes increasingly reliant on dollar payment rails, local central bank policies become less effective, and US dollar stablecoin holders will become more effectively captured by presumably US-domiciled stablecoin issuers. You could possibly have both cases at the same time.

Beckworth: You have, on one hand, the challenges created by the Fed, less pronounced. On the other hand, you still have dollar dominance, which is good for the fiscal health of the US, because that, in turn, creates real demand for dollar-denominated assets, some seigniorage flows, demand for other dollar-denominated assets: corporate bonds, repo, checking accounts, Treasuries. That’s been one of the pitches by the Treasury Department, by people in this administration, is we’re going to have all this added demand on Treasury bills that may make up for some of the abandoning by foreign central banks and other entities away from Treasury securities.

Although I always have this question, and I don’t know if you have the answer to this, Rashad, but when people talk about China has slowly been unwinding its positions in Treasuries, I also see evidence that maybe it’s still indirectly holding a lot of dollar-denominated assets through intermediaries. We don’t know for sure that it’s completely wiped its hands clean. It’s just maybe a little more, less clear. In any event, that’s really fascinating. The challenge with Fed setting global monetary policy may become less pronounced, but dollar dominance may be more pronounced at the same time.

Stablecoins and Safe Asset Prices

Let’s talk about your research, then, because it ties into this. You have several papers, Rashad, and this is a nice way to set the table as we lead into your papers, this conversation we’ve had. You have a BIS paper with Iñaki. You two have a paper called “Stablecoins and Safe Asset Prices.” Why don’t you give us the executive summary, then we’ll jump into the details a little bit closer?

Ahmed: Sure. Sure. This was a paper that was a lot of fun to work on. The goal was very simple. We wanted to see if there were any measurable price impacts coming from stablecoin flows on Treasury bill yields. Yes, stablecoins are still relatively small, maybe $200, $250 billion market today. Even over the past year, we’ve noticed that their footprint in Treasury markets have gotten much bigger. Between USD Coin, Circle, and Tether, there were maybe $40 billion worth of Treasury bills purchased in 2024. That puts them ahead of several sovereign nations in Treasury bill purchases. It even puts them ahead of some of the largest US government money market funds. 

It certainly seems the case that they are growing. They may not be giant yet, but they’re sizable. We wanted to see if there’s any early evidence of stablecoin flows affecting the pricing in Treasury bill markets, their preferred habitat. The thing is, this is a pretty challenging empirical problem for multiple reasons. The first is the data. Stablecoins are a pretty new technology. Usable data on stablecoins maybe goes back five years. The other issue is that stablecoin issuers are extremely concentrated. The two largest stablecoin issuers make up about 90% or more of the circulating supply. There’s not a lot of cross-sectional variation you can exploit in an empirical analysis. You’re relying mostly on time series variation. That was a big constraint for us. 

Another issue, and probably the most important challenge to overcome, is the sources of endogeneity that are coming from a lot of different things happening at the same time that stablecoins are purchasing Treasuries. For example, we may be interested in the causal effect of stablecoin flows on Treasury yields, but we’re also aware that Treasury yields are going to affect stablecoin flows.

That’s simply because stablecoins, as we mentioned earlier, pay zero interest, so the opportunity cost of holding stablecoins gets bigger as interest rates go up. As interest rates rise, I’m more likely to migrate out of my stablecoin and into a high-beta deposit-like product like a money market fund or a high-yield savings account. You have this two-way causality problem that if you totally ignore it and you run a simple regression of stablecoin flows on yields, you’re going to get a biased estimate, and you’re not going to get something that consistently tells you the price impact of stablecoin flows on yields. You have other endogeneity problems like that, too.

We do a few things to try and tackle these data challenges and endogeneity challenges. As far as data goes, we rely on daily data. We have about five years of data, and we use daily frequency, relatively high frequency, to try and increase our sample size. Then, as far as endogeneity goes, what we do is we take an instrumental variable strategy where we instrument our stablecoin flows with a series of idiosyncratic, plausibly exogenous crypto price shocks. We construct this series, and the idea is that stablecoins continue to be a primary facilitator of cryptocurrency market activity and DeFi trading.

When you observe the stablecoin market, it tends to increase, and demand for holding stablecoins tends to go up during crypto market booms, and it tends to fall during crypto price crashes. We have an instrument that is correlated with stablecoin flows. At the same time, we make the argument that idiosyncratic crypto price fluctuations shouldn’t have a strong effect on Treasury market conditions for a few reasons. One is that crypto markets are growing, but they’re still relatively small and disconnected from traditional financial markets.

There is one channel through which there can be interaction, and that’s through the stablecoin channel because stablecoins act like a bridge between cryptocurrency trading and facilitating cryptocurrency activity and activity in traditional financial markets like Treasuries. The idea is that cryptocurrency price shocks can induce stablecoin flows because it can alter the demand for holding stablecoins, and then stablecoins will have to turn around and purchase or sell Treasuries and other assets that they hold as reserves. That was our IV strategy.

Using this strategy, we try to estimate the effects of stablecoin flows on Treasury bill yields. What we find is that for a two-standard-deviation flow, Treasury bill yields, specifically the three-month bill yield, tends to compress by about two to two-and-a-half basis points relative to proximate bills. Another way to think about it is we’re viewing the three-month T-bill as the preferred habitat for the stablecoin sector. The 90-day maturity of three-month T-bills is basically the maximum maturity that stablecoin issuers can buy under the GENIUS Act. I think that’s basically the maximum maturity that issuers like Circle and USD Coin buys today.

We see that those yields are affected by stablecoin flows, but we don’t see that same impact on proximate maturities like the one-month or the 12-month bill yield. So that’s how we’re able to identify that effect. Then we find something else that’s pretty interesting. We find that the effects of flows are asymmetric. For example, inflows into stablecoins, that induce stablecoins to purchase Treasuries, compress yields, but outflows from stablecoins, which induce stablecoins to sell Treasury securities and other reserve assets, raises yields by more about two to three times more than inflows compress yields.

Iñaki and I thought about this for a little while. Our leading hypothesis for this empirical result is that when stablecoins receive dollars, they can turn around, put them in the bank deposit they hold with a bank. They have the luxury of taking some time to tactically and strategically trade into the reserve assets into reserve repo positions and Treasury bill positions in an optimal way, maybe a way that minimizes price impact.

When stablecoin issuers face redemptions, they don’t have that luxury anymore because they need to meet liquidity demands from the stablecoin holders that want their dollars back. It’s more likely that stablecoin issuers will have to turn around and sell and liquidate these Treasury bill positions. Investors that are going to step in to buy, they may step in and demand more attractive prices, which would leave stablecoin issuers absorbing a bigger adverse price impact if they were selling Treasuries than buying them.

Beckworth: That is so fascinating. For people who don’t know what IV is, I’ll just briefly summarize instrumental variables. In essence, it’s a way to find an exogenous change in stablecoin flows that will allow Rashad and Iñaki to identify the effect. Very interesting, very clever way to identify. I hadn’t thought about that approach. It’s great research there. Going to your results, that’s even more interesting to me. That’s a pretty sizable effect, number one. It’s asymmetric due to transaction costs. A question I had was this. Thinking through these projections from TBAC, from Standard Charter, again, I’m going to take the real extreme one, round up to $4 trillion by 2030.

I was wondering if stablecoins do create this new net demand for T-bills, and it lowers the yield on T-bills, and then we invoke an expectations theory of long-term interest rates, I was wondering, would there be any effect that stablecoins could have on longer-term Treasury views, some expectation? They’re weighing down the short end of the Treasury yield curve. What you’re suggesting is the answer, at least so far, is no. Is that a fair interpretation?

Ahmed: I think, David, that it is possible what you’re suggesting. My prior would be that, if anything, it would affect the term premium and the short end of the term structure versus the expectations. Like you said, I think it’s a really important thought experiment that not just us folks that are macro nerds and stablecoin nerds should have, but maybe even policymakers should think about. If the stablecoin market does grow as large as some of these projections suggest, what does it mean for the price impact if stablecoins are going to have a bigger and bigger footprint?

We try to do some back-of-the-envelope calculations of that in the paper, but we make some pretty big assumptions when we do that. We do find that the impact can get larger. If the stablecoin sector grows maybe 10 times from here, we’re seeing like an equivalent two standard deviation flow, which at that point will be a larger dollar amount. It could lead to an impact of closer to maybe 10 basis points, which is not insignificant. This assumption is not assuming any increased issuance at the short end. I think, as we see over the last couple of years, there’s been quite a bit of issuance in the short end.

If the Treasury Department recognizes increased demand for T-bills and increased demand for short-term Treasury debt, they may actually respond by increasing issuance or changing the profile of debt maturity, and continuing to issue debt on the short end. If they do that, you’ll have this increased demand from stablecoin issuers, but it may be met with a little bit more supply, which could potentially moderate any price impact.

Beckworth: That was my second question. You’ve touched on this. My first one is, what are the linkages between short end of the Treasury yield curve to long term, given stablecoins’ effect on it? My second question is a very much policy-driven question. Do stablecoins allow US policymakers to kick the can down the road? By that I mean, if there is this new demand, and if it does lower Treasury yields, and it does allow Congress to avoid making tough tradeoffs because, oh, interest rate on the debt has come back down, no worries, what would happen then?

You’re saying there is some possibility that they could issue more debt to meet the demand. In my mind, that’s saying equivalently, they’re taking advantage of the fact that the demand’s high, so yields could be lower, they’re taking advantage of that, and it makes it easier. Maybe avoid making some tough choices. I know I’m reading more into your results than you have in the paper, but that is a question in my mind. When do we make these tough choices? When do we address real, meaningful structural reform in fiscal policy? Stablecoins might help us avoid, at least for some time, making those tough choices. Am I reading too much into your work?

Ahmed: I think it’s a really interesting question. Our work, the paper with Iñaki and I, I think it’s very targeted. We’re just trying to estimate any current price impacts. It certainly does encourage broader questions like the one you’re raising. I think where you’re going with this is a broader question like are we starting to engage in policies that look a lot like financial repression? The stablecoin issuance, the rise of stablecoins certainly does seem to have this side benefit of increasing demand for Treasuries at a time when the administration is interested in expansionary fiscal policy, with the BBB.

I think that there’s two things we have to think about. The first is that stablecoins may increase demand for Treasuries so long as the purchases of stablecoin issuers are not fully displacing other investors who would be buying Treasury bills anyways. It’s reasonable assumption that that will happen. You will get some increased demand for Treasury bills, but it’s going to be very much concentrated in the short end.

Where I think the argument that some proponents have been making falls apart, and the argument that I’m referring to, is the one that stablecoins will basically save the US fiscal deficit by filling the gap that is being left by falling demand from foreign investors, is that foreign investors in Treasuries tend to live in a different part of the term structure. It’s not like it’s going to be a perfect one-for-one fill in the gap as foreign central banks reduce their purchases of Treasuries. That may be more on the long end of the curve, but stablecoins will be purchasing Treasury bills.

It will be interesting to see exactly how it plays out. It might be beyond the scope of this talk, but there are other policies that the administration may be eyeing to help stir demand at the long end. You probably know what I’m talking about, just there’s been a lot of discussion about SLR reform. Maybe that is a way to more effectively absorb or compensate for a drop of demand in the long end.

When you take SLR and stablecoins together, I think advocates will push for them on their own individual merits. There are certainly desirable goals of these legislation, like responsible innovation and healthy development of the crypto sector, or as far as SLR goes, improving Treasury market functioning and the ability for dealers to absorb Treasuries, especially and during times of stress. When you look at them together, it brings up curious questions like something you alluded to, whether when you package them, is there also this ulterior intention to help absorb an ever-expanding fiscal deficit?

Beckworth: Even if both of these policy changes do help the problem, do address some of the growing debt, at the end of the day, it’s still a question that has to be addressed fundamentally by Congress. We have reforms that are needed, structural reforms. In my mind, these are just like window dressing. They might take some of the pressure off, but fundamentally, you’ve got to look at things like entitlement reform, you’ve got to look at the trajectory. You mentioned financial repression. I wasn’t going to go there, but let’s do it. Let’s talk about some of the rhetoric coming out of this administration really does have me worried.

The president is going after the Fed chair again. He did this in 2018, 2019, as you know. Back then, he was going after Jerome Powell because they didn’t lower rates fast enough. Eventually, they did. Maybe Trump was vindicated, but they weren’t lowering rates fast enough, and that was purely just an let’s juice the economy up story. Today, it’s been very explicit, lower rates because that will save us, he said, $800 billion on the debt.

I’m not sure how he gets that big number, but in his mind, lowering the interest rates down far enough will lower the cost on the debt payment. That concerns me because that’s fiscal dominance rhetoric. My concern is we’re getting to the precipice. Language like this, the calls for eliminating interest on reserves, that too is being driven by fiscal pressure. This is a bigger context all of this is emerging in. It will be interesting to see how all these pieces of the puzzle come together.

Sovereign Default Risk and Cryptocurrency Adoption

Let’s go on to your next paper here. This is a co-authored paper titled, “Does Sovereign Default Risk Explain Cryptocurrency Adoption?” This is a really cool paper. Walk us through it.

Ahmed: Sure. This was joint work with Steve Karolyi at the OCC and Leili Pour Rostami at UMass Boston. We talked a little bit about the motivators behind this project. This idea that there is a value proposition for holding cryptocurrencies like Bitcoin or US dollar stablecoins in other countries, specifically in countries that are subject to high inflation, a lot of macroeconomic volatility, unstable governments, weak institutional quality, or even financial underdevelopment.

In these countries, at least anecdotally, we’ve seen that there has been some success of stablecoins and Bitcoin as savings vehicles because they effectively act as a hedge against hyperinflation of the local currency. Some countries that come to mind are Venezuela, Argentina, Turkey. There’s been quite a bit of anecdotal evidence of some success of stablecoin and crypto adoption there. Then you have other countries like Nigeria that has seen some success with US dollar stablecoins. That’s often attributed to the fact that Nigeria is relatively underbanked. It’s just much easier to download a digital wallet onto your phone with an internet connection and then you have US dollar stablecoins that you can transact with.

Seeing these headlines and seeing this narrative for quite some time, which I thought was very interesting and it makes a lot of sense to me, got us interested in whether there was any systematic empirical evidence backing up these claims. We couldn’t really find too much. That’s what motivated us to explore this research project together. I agree, it’s a really interesting project, but there’s obviously some challenges involved. For one, how do you measure cryptocurrency adoption across countries?

For this, we had to find a cross-country dataset of cryptocurrency adoption metrics. Fortunately, the BIS released a public cross-country dataset, which is a subset of a private vendor dataset that covers the G20 countries. It reports cryptocurrency app downloads and usage for these countries over a period of 2015 to 2022. These are our metrics for crypto adoption. It’s basically app downloads, for example, if you’re downloading Coinbase onto your phone so you can engage in cryptocurrency trading. This vendor is collecting this data across many, many countries. We were able to get that data for the G20. That’s our metric for cryptocurrency adoption. We have that.

Then we still needed a measure that would summarize these sovereign risks that we’re thinking about when we’re thinking about things like hyperinflation and unstable governments. We really came to the conclusion that it’s sovereign default risk or government instability that really may be one of the driving factors behind this narrative. We collect data on sovereign CDS spreads, which are credit default swap spreads for this sample of countries. We like CDS spreads because they’re real-time indicators, they’re market prices, so they can take in information pretty quickly. That’s going to be important for us down the road if we want to try to say anything causal about the effect of sovereign default risk on crypto adoption.

We also look at other measures of sovereign risk too, like credit ratings, which have a lot of valuable information in them as well. They’re just a little bit slower to adjust. In fact, we see that CDS spreads tend to lead sovereign credit rating upgrades and downgrades. Anyway, we have these two main ingredients for this paper. With those two ingredients, we’re able to start studying the relationship between sovereign credit risk and crypto adoption rates.

We also wanted to see what other macroeconomic drivers there are behind cryptocurrency adoption around the world. We brought in a lot of different macroeconomic drivers that at least narratively are thought of as influencing crypto adoption. For example, inflation rates, whether a country has strict capital controls in place, the degree of financial development, the degree of dependence on remittances. We take a lot of these variables in. Then we run some empirical tests.

We find that there are several macroeconomic factors that predict crypto adoption across countries. What was most interesting for us is that sovereign default risk was a strong and robust predictor of cryptocurrency adoption. Specifically, what we find is that a 10% increase in sovereign CDS spreads were associated with a 3% to 4% increase in crypto adoption rates across countries. We felt like this was really a verification of the narrative that we’d been hearing for months across the headlines we’d been seeing on the internet.

Now, this was really just correlations that we were recovering and reporting. We wanted to test and see if we could say anything more causal about this relationship. What we did next was we looked at every individual country and we flagged what we call credit risk events. These are news, announcements, or events on certain days, which were fundamentally related to sovereign default risk and elicited a meaningful increase in sovereign CDS spreads around that announcement. These events turned out to be things like political elections, news about fiscal sustainability, literal news about sovereign defaults or debt restructuring, and war amongst other things too, like deep recessions or hyperinflation risk.

We felt like these “high-frequency credit risk events” were doing a good job of capturing news and fundamentals that really do drive sovereign credit risk. Then we took this series of data and we set up an event study so we can see how crypto adoption rates across countries change around these events. What we find is that in the month of the event, and following, there’s a significant and persistent increase in crypto adoption rates. We’re able to find evidence of this relationship between sovereign default risk and crypto adoption rates using a pretty strict timing restriction on sovereign CDS spread jumps. We found that pretty exciting. 

What’s more is we then split the sample into advanced economies and emerging markets just to see if the relationships are different. We found that the relationship between sovereign default risk and cryptocurrency adoption is stronger in emerging markets and developing countries. That’s very much consistent with the narrative that we hear. It’s usually argued that this is a value proposition for those countries, not so much in advanced economies. We do also find an effect in advanced economies. It’s just not as quantitatively big but it’s still significant.

I think that’s pretty timely result because maybe in the last year, we’ve seen that narrative sort of migrate from being just an emerging market story to one that folks in advanced economies are contemplating too. For example, we mentioned the Bitcoin Act earlier that Senator Lummis put out proposing a strategic Bitcoin reserve, when we read that the legislation, one of the reasons behind it is to hedge macroeconomic risk and economic policy uncertainty.

That’s usually the value proposition in a developing country or an emerging market. Now we have this strategic Bitcoin reserve that is suggesting that holding Bitcoin will be a hedge against that same risk, but in the United States. I don’t think it’s a coincidence that this discussion is now happening in advanced economies at a time when a lot of countries are facing very high debt levels.

Beckworth: That came up during my visit to the Bitcoin Policy Institute’s annual summit. It was a part of the conversations on stage. The podcast that I did there, one person made this point. They said, look, it’s unlikely the US will lose dollar dominance. It’s unlikely we’re going to have a collapse, but why not have some insurance? He said, I have insurance on my home against fire. Why not have a little insurance? We hold gold, and yes, we probably don’t need it, but why not diversify and have a neutral asset? There are some interesting conversations that went on about that.

Your findings on the advanced economies were really interesting. In my mind, I’m like, are the results capturing the Bitcoin bros? Are they something more serious? I think it is something more serious. You also had some results tied to inflation in your work. At least in the advanced economies, at least in my world, in this anecdotal evidence here, you often hear people say, oh, Bitcoin or crypto is a hedge against runaway inflation, fiscal dominance like we’re talking about earlier. Did you find any good support for that? Are people jumping on to crypto when they have high inflation or is it more complicated?

Ahmed: In a nutshell, we find that the relationship is a little bit more complicated than that. I totally agree with you. We’ve actually seen, not just in the media, but also there’s been several academic papers that have been coming out testing the relationship between inflation and propensity to hold crypto. Some of these papers are looking at survey data, for example, others are looking at how Bitcoin prices respond to inflation shocks. It’s definitely a topic of interest.

What we find is that it really depends on what we call the ex-ante sovereign default cost. When the sovereign default cost or the cost of default is high in a country, then people in that country, households, are more likely to adopt crypto when inflation goes up. If the cost of default is not very high, then you don’t see a strong relationship between inflation going up and people adopting crypto. The way we measure this ex-ante cost of default is very simple. We just look at the total public debt outstanding divided by GDP, just to look at the amount of potentially defaultable debt. Then we also look at the amount of bank lending or bank credit to the nonfinancial sector also divided by GDP.

The reason we do that is because the literature has showed us that the way sovereign default affects the macroeconomy is very much through the banking sector because you get severe balance sheet impairment of the banking sector, which happens to be usually one of the largest holders of the sovereign debt. Then you get credit impairment and then that can cause severe recessions. We use that data to create this measure of sovereign default cost. It goes against this idea that unconditionally, crypto is hedging inflation. Rather it seems like it can hedge inflation, but inflation that is really related to fiscal risk and sovereign default risk, not so much inflation that’s driven by supply shocks.

Beckworth: This result made so much sense to me, so intuitive. It fits most of the data we’ve seen. Zimbabwe in 2008, when it had hyperinflation, they substituted it into physical dollars. You could say, yes, they were protecting themselves against a worthless currency, but the real fundamental issue was the collapsed state. If you had applied your credit default swap measures there, it would have been screaming, this state is collapsing, there’s default happening. It’s fundamentally deeper than just, oh, inflation’s up. There’s a deeper structural fiscal problem. That result made a lot of sense.

That’s why, yes, I think sometimes in the US it’s overstated, “oh, watch out. The Fed’s deflated the dollar by 100% since 1913.” You see these memes and stuff on social media. Your point is it depends on where you are, it depends the state you’re in. We’ve all heard these stories. In Venezuela, people are using this to survive. It really is an important form of transaction occurring. The critique here in the US is, “oh, that asset is way too speculative to be a transaction asset, to be a medium of exchange.” Go to a place like Venezuela, it’s relatively stable compared to everything else going on. It’s all relative, which is a fascinating thing.

Now, in the few minutes we have left here, a question I want to ask you. I want you to look into your crystal ball, Rashad, since you follow this closely, and smart guy, well read. Right now, the stablecoins that are out there and the ones being proposed through legislation do not pay interest. I’m wondering though, at some point, somebody’s going to find a workaround. They’re going to have some innovation. That’s just the marketplace. At some point, stablecoins might start offering, in some sneaky, maybe some explicit way, interest as well. They’re going to get closer and closer to a bank account that pays interest or money market account, but you earn a little something on them. Do you see that as a possibility or do you think it’s going to be hard to get there given where we are now?

Ahmed: I do. I do see that as a possibility, David. In my view, stablecoin issuers don’t want to register themselves as securities. I think paying zero interest natively is constructive to that or conducive to that. That doesn’t mean that third parties cannot give rewards or issue rewards on their platforms for the stablecoins you hold on that platform, whether it’s a wallet, whether it’s an exchange. There are ways that interest could implicitly be paid that kind of workaround, the GENIUS Act, at least in my view. I’ll just say upfront, full disclosure, I’m not a legal expert, but I do see something like that being possible.

Let’s suppose in the future we live in a world where stablecoins aren’t only used for facilitating crypto and DeFi activity, but rather folks are using them as a means of payment. These stablecoin issuers right now, because they pay no yield, they have very, very big net interest margins, very, very profitable businesses in a high-rate environment. At the same time, these merchants would love to accept stablecoins because they can reduce or potentially eliminate the interchange fees that they have to pay when they accept credit cards for payments.

The question is, for the businesses, how do you get consumers to adopt USD Coin or Tether, or a stablecoin as a means of payment and give up their credit card which gives them tons of rewards? All of a sudden, you can start seeing how they would do that. You have a ton of profits at the issuer. The merchant is very happy to accept it, but you got to somehow get some reward structure in place to incentivize the consumer.

Maybe the stablecoin issuer can somehow take some of that profit margin, some of the profits they’re making by paying out zero interest, partner with some third parties or even merchants in order to implicitly pay interest through rewards to stablecoin holders to get them on board to adopt stablecoins as a means of payment. I think there are creative ways the economy and the stablecoin industry could work their way around. We’ve seen throughout history time and time again, when there are regulations in place, financial innovation happens. It just shifts to an unregulated area, or they find a legal loophole and they’re able to perform their regulatory arbitrage. I’m with you on that one.

Beckworth: Very interesting. You reminded me of the news story just last week or the week before that Walmart and Amazon are looking at stablecoins. Now, my understanding is under the current legislation, they can’t issue it. They’re big entities. They’re going to find a way somewhere, somehow to get their own stablecoin. Like you said, they may offer rewards. You use the Walmart stablecoin, you get some points back you can spend later in the store or online. This is going to be a brave new world for sure. With that, our time is up. Our guest today has been Rashad Ahmed. Rashad, thank you so much for coming on the program.

Ahmed: Thank you, David.

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.