Digital Payments, Stablecoins 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 nested monetary framework with two sectors where multiple assets coexist and differ in anonymity and liquidity. The baseline economy (cash and digital payments) is extended to include one-period government bonds and then fully reserved, redeemable stablecoins whose issuers choose reserve portfolios subject to a redemption wedge and fees. Four key results emerge. (i) With an exogenous sector size, a Ramsey planner exploits policy instrument substitutability and relies more on taxation, less on inflation, which raises the formal share and reduces distortions. Welfare is highest in the Digital economy and Hybrid economy performs close to it under common policy targets. (ii) When the sector size is endogenous, small policy changes can shift the economy across multiple steady states, and optimal policy steers toward the formal equilibrium with a larger tax base. (iii) The adoption of stablecoins creates a core policy trade-off: while stablecoin issuance erodes the government's seigniorage base, the issuers' demand for government bonds as reserves lowers yields, easing government borrowing costs. (iv) Universal adoption of stablecoins is difficult to sustain alongside digital fiat money due to redemption frictions and fees, suggesting that stablecoins may naturally remain confined to specific sectors.