# Stablecoins Challenge Traditional Currency System

Stablecoins are emerging as a contender to traditional currency systems. Stablewatch has recently introduced a tool that visually compares the supply of stablecoins to that of U.S. dollars. To understand this comparison, it’s essential to first comprehend how central banks and economists define and measure “money supply.”

The money supply refers to the total assets in an economy that can be used directly for transactions or savings. The Federal Reserve uses this data to influence interest rate policies, control inflation, and ensure economic stability.

# How Money Supply Metrics are Classified

The money supply is categorized based on liquidity into base money (M0), M1, M2, M3, and M4. Base money consists of physical currency and bank reserves. The Federal Reserve currently manages this through CURRCIR (currency in circulation) and BOGMBASE (base money).

M1 includes the most liquid assets such as cash, checking accounts, savings accounts, and traveler’s checks. Following 2020, savings accounts were also included, causing the metric to surge. M2 expands on M1 by including money market accounts, small-time deposits, and retail money market funds, making it a commonly cited indicator in the economy.

M3 and M4 encompass larger deposits, institutional funds, and short-term bonds, which are less liquid but more comprehensive in terms of asset volume. However, the Federal Reserve ceased publishing M3 data in 2006 and does not officially release M4 figures.

# Stablecoins: Comparable Asset Classes

Stablecoins, fundamentally aiming to mimic a digital form of the dollar, include “classic stablecoins” like USDT and USDC. These stablecoins maintain a 1:1 pegging to the dollar and are backed by reserve assets, making them akin to M1 assets. Conversely, “yield-bearing stablecoins,” which generate interest, function more as investment assets and are less likely to be classified as currency.

Taking this into account, Stablewatch’s visualization tool excludes yield-bearing tokens and compares only classic stablecoins with traditional money metrics. This approach avoids overlap in calculations and allows for a direct comparison with money supply.

# Implications of the Comparison Metrics

The inferences drawn from comparing each money metric with stablecoins vary. A comparison with CURRCIR indicates the potential for digital replacement of traditional currency. Comparing with M1 validates the functionality of stablecoins as a medium for everyday transactions. When contrasted with M2, it reveals the extent to which stablecoins can replace various financial functions within the economy.

Moreover, tracking the growth rate of stablecoins relative to money supply highlights the prominence of digital assets in financial markets. Regulatory changes are also a crucial factor. Easier regulations could lead to increased adoption and supply, while stricter regulations might curtail growth.

# Digital Age Currency: Anticipating Policy Changes

Traditional money expands through central bank policies such as purchasing government bonds, adjusting reserve ratios, and lowering benchmark interest rates. The structure of private banks generating income through interest margin also amplifies indicators like M2 significantly.

However, stablecoins are issued on decentralized blockchains and are not integrated into the banking system, limiting such expansion effects. Additionally, their operation outside central bank control introduces new risk factors to the financial system.

As stablecoins begin to constitute a significant portion of M1 and M2, central banks like the Federal Reserve might need to consider them during monetary policy formulation. Stablewatch’s visualization tool provides foundational data to observe these structural changes numerically.

Understanding the relationship between traditional currencies and stablecoins is becoming increasingly crucial for both investors and policymakers. The rise of digital dollars is no longer a tale of the future.