Stablecoins, Currency Digitalization and Optimal Policy

Speaker: A/Prof Sylvia Xiao

Affiliation: Guanghua School of Management, Peking University

Location: Room 213, Chamberlain Building (#35), St Lucia Campus

Zoom: https://uqz.zoom.us/j/82603079317

Abstarct: We study how stablecoins and digital payments reshape taxation, seigniorage, and public debt in a two-sector monetary framework (formal/TradFi vs. informal/crypto). Extending a baseline cash economy to include government bonds, commercial banks, fully reserved stablecoins, and a central bank digital currency (CBDC), four main results emerge. (i) The economy exhibits a strict Laffer-curve trade-off between extracting inflation seigniorage and preserving the formal tax base. (ii) Endogenous sector choices generate multiple macroeconomic steady states. (iii) Private stablecoins create a profound macro-fiscal tension: tokens cannibalize fiat seigniorage, but issuers' massive demand for reserve assets compresses nominal yields, subsidizing Treasury borrowing. Systemically, however, this reserve hoarding starves commercial banks of collateral, crowding out formal trade. Furthermore, a monopolistic issuer restricts token supply, yielding a safer intrinsic reserve ratio and easing bank collateral scarcity, but substantially diminishing the fiscal yield subsidy. (iv) Conversely, a public CBDC preserves seigniorage and eliminates TradFi collateral frictions, but lacks captive safe-asset demand. This exposes the sovereign to a strict debt volume burden, where high debt necessitates a uniform inflation tax that depresses all trade, risking an inflation-driven sovereign debt spiral.