Both a reserve-based or an activity-based remuneration model for stablecoins will lead to far reaching macro-financial implications, according to a report by the Bank for International Settlements.
Under the reserve-based model, yields track policy rates – similar to yields on cash-management instruments – whereas under the activity-based model, yields are much more volatile.
Each remuneration models could offer a different yield dynamic after a change in the policy rate.
For the reserve-based model, the link is direct: changes in the policy rate alter the general level of benchmark yields in the economy, which in turn alters the return on reserve assets and, ultimately, the yield paid to holders.
However, under the activity-based model the holding yield is impacted by both the benchmark yields and the scale of stablecoin-related activities.
If stablecoin-related activities continue to rise, this would in turn strengthen exchanges’ willingness to raise the holding yield in order to attract funding in stablecoins.
The report highlighted that the two channels may work in opposite directions. For instance, a policy rate hike raises benchmark yields, which should increase stablecoin holding yields, but it may also tighten broad financial conditions and reduce crypto market activity, thus putting downward pressure on holding yields.
As a result, the underlying remuneration model for stablecoins could have macro-financial implications.
The report recommends further analysis of how the corresponding risk factors could generate boom-bust dynamics, with massive inflows into stablecoins followed by abrupt conversion back into fiat instruments as the remuneration risk factors evolve.
Meanwhile, stablecoin adoption could also affect monetary policy transmission, as reserve-based remuneration potentially leads to shifts between bank deposits and stablecoins. As a result, remuneration may influence the policy rate sensitivity of bank funding and, in turn, of bank lending conditions.
By contrast, activity-based remuneration may help exchanges alter the amount of funding for their stablecoin-related activities as general financial conditions evolve.
