How the fiat-backed stablecoins are manipulating US money supply

TLDR

Stablecoin issuers tend to invest more heavily in US treasuries than traditional banks. This has a contractionary effect on US monetary supply (quantified at 1-1.5% decrease at any given moment).

Stablecoin issuers invest a much higher percentage of their reserves in US treasuries etc. than big banks. Average treasuries reserve investment percentage of the three largest stablecoin issuers was ~87% compared to ~34% by the 3 largest US banks.
Stablecoin issuance has a direct impact on US money supply - the top 3 issuers of stablecoins caused US monetary contraction in US in the range of 1.1-1.2% during different months of 2022.

Concrete relies heavily on accurate assessment of collateral risk, of which liquidity risk is a significant component. The impact of treasury price action is significant with regard to stabelcoin liquidity and solvency. Quantifying this risk is valuable in the future as Concrete expands supported collateral and stablecoin types, especially so if permisionless token and lender integrations are implemented in the future.

Formula is derived as a combination of three alternatives to stablecoin purchases pursued by investors.
- Case 1: All money that would’ve been spent on stablecoins is kept in bank account.
- Case 2: All money is invested in T-bills and bonds rather stables according to US expenditure trends.
- Case 3: All money is invested in alternative asset classes (not treasuries or crypto)
The total effect of the issuance of stablecoins on US money supply will be a signed weighted sum of MS1 and MS2 changes according to these three cases.
∆MS = −W1 × MS1 + W2 × MS2 where 0 ≤ W1, W2 ≤ 1, W1 + W2 = 1 are two weighting factors. W2 represents the probability of investment in US treasuries (in the absence of stablecoins) and W1 represents the probability of investment in anything other than US treasuries (in the absence of stablecoins).
Empirically, W1 and W2 are 98.15% and 1.85% respectively.
US M2 money multiplier swung between 3.53 to 4.01 in 2022 - this was tangibly impacted by a rise in stable coin issuance.

The issuance of stables clearly has a causal effect on monetary supply that is material to the growth of the industry. However, this is unlikely to be material to Concrete in the next 5 (at least) years.