The Economics of Stablecoins

Stablecoins are digital tokens designed to hold a constant value — almost always one US dollar — by being backed by reserves and made freely transferable on public blockchains. They have quietly become one of the most consequential financial innovations of the last decade: a form of private digital money that settles globally, instantly, and around the clock.

But a stablecoin is not interesting because it is “crypto.” It is interesting because of its economics — how it stays pegged, who bears the risk in its reserves, how it competes with banks and card networks, and what happens to monetary policy and financial stability when dollars can move at the speed of the internet. Those are the questions my research has worked on since the earliest design discussions around Libra/Diem.

What keeps a stablecoin stable

A peg is a promise, and promises are only as strong as the balance sheet behind them. Fiat-backed stablecoins hold reserves — typically cash and short-dated Treasuries — and let holders redeem one token for one dollar. The peg holds because arbitrageurs can profit whenever the market price drifts from par: buy below a dollar and redeem for a dollar, or mint at a dollar and sell above. Confidence in redemption, not code, is what does the work.

That is also where the risk lives. The composition, transparency, and liquidity of the reserve determine whether redemption stays credible under stress. Algorithmic designs that try to manufacture stability without full backing have repeatedly failed because they remove exactly that anchor. The economic design question is not “can we hold a peg in calm markets” — it is “does the structure survive a run.”

Why stablecoins compete with payments, not just crypto

Most dollars already live as private money — as deposits issued by commercial banks. Stablecoins are a new entrant in that same category: privately issued claims on the dollar, but with programmability and global reach built in. Their real competition is the existing payments stack — correspondent banking, card networks, and remittance rails — where fees are high and settlement is slow.

This reframes the policy debate. The right comparison is not stablecoins versus Bitcoin; it is stablecoins versus the walled gardens of today’s payment system. When verification and settlement become cheap, the strategic question becomes who captures the resulting user relationship — incumbents, new issuers, or the platforms that route payments.

Stablecoins, CBDCs, and the future of public money

Central banks are responding with their own designs, from tighter reserve standards to central bank digital currencies. The most durable outcome is unlikely to be purely public or purely private. A public-private partnership — public money as the anchor, private issuers competing on products and distribution — captures the benefits of innovation while preserving the stability and trust that only the public sector can ultimately backstop.

Getting the standards right matters more than picking a winner: reserve requirements, disclosure, interoperability, and clear rules for failure. Those choices determine whether digital dollars expand financial inclusion and competition, or simply concentrate power in a new set of intermediaries.

Selected papers & writing

• Some Simple Economics of StablecoinsAnnual Review of Financial Economics, 2021 — with Alonso de Gortari and Nihar Shah

• On the Economic Design of StablecoinsWorking paper, 2021 — with Alonso de Gortari

• Stablecoins and the Future of MoneyHarvard Business Review, 2021 — with Jai Massari

• Setting Standards for Stablecoin ReservesWorking paper, 2021 — with Nihar Shah

• Are Stablecoins Winner-Take-All?Competition Policy International, 2024 — with Jai Massari

See all digital assets & stablecoin papers →