Researchers from the Federal Reserve Bank of New York recently published an academic-style study in which they sought to estimate the impact on bank lending under three different regulatory frameworks for stablecoins. According to the researchers, the circulating supply of stablecoins jumped fivefold to nearly $ 130 billion in September, reaching the current $ 155 billion.

"If stablecoins were to see widespread adoption across the financial system, they could have a significant impact on financial institutions' balance sheets," the New York Fed researchers wrote. "With adequate safeguards and regulations, stablecoins have the potential to provide a level of stability that is on par with traditional forms of safe value," the document states.

The researchers decided to "analyze several plausible scenarios in which stablecoins, backed by reserves, see widespread adoption in the financial system". In this stablecoin framework, physical money would be tokenized and issuers would be required to back their stablecoins with central bank reserves. The impact on bank lending (the researchers used the terms "provision of credit" and "credit intermediation") would be largely minimal.

When it comes to deposits, however, this picture could have a negative impact as deposit-backed funding for loans would be reduced as normal commercial bank deposits would move to segregated accounts at the central bank. "A tight banking framework ... minimizes the risk of 'runs' on stablecoins, but can potentially reduce lending," the document states.

Since stablecoins would effectively act as a central bank pass-through digital currency, their pegs - by pricing at $ 1, for example - would have guaranteed stability. In times of financial panic, however, large migrations of regular commercial bank deposits into tight bank stablecoins could disrupt lending and could increase the Fed's balance sheet to meet the demand of stablecoin issuers.

In this scenario, stablecoins would be supported by deposits held with commercial banks. And then the banks could lend the stablecoins to new borrowers. For this to work, the treatment of stablecoin deposits should be the same as that of non-stablecoin deposits when it comes to regulatory limits.

Contrary to the narrow bank approach, large inflows to stablecoins could have a positive impact on lending, while overall balance sheets and assets held by commercial and central banks would remain unchanged. This framework would require cash equivalents to be held as collateral for stablecoins. The central bank balance sheet would shrink slightly with lower bank reserves.

The impact on loans would be neutral because commercial bank deposits would be laundered into the banking system. The researchers concluded that the 'two-tier' system could help maintain traditional forms of bank lending even as stablecoins grow. The "tight bank" framework, meanwhile, could lead to "credit disintermediation" but could "bring maximum stability," according to the document.