"Stablecoins Contribute to Government Bond Demand and Inflation Stabilization"

Inflation: Stablecoins Provide Partial Solutions
Concerns About a "Repeat of the 2008 Subprime Mortgage Crisis" Are Premature

In the United States, there has been a case where IPO funds were received in stablecoins. Following regulatory improvements, stablecoins are rapidly spreading in practice as well. However, in Korea, opinions remain sharply divided over the adoption of stablecoins.

On the 21st, NH Investment & Securities released a report titled "The Impact of Stablecoin Expansion in the Economy and Financial Markets," stating, "In an environment of elevated government bond yields and inflation, the spread of stablecoins can partially contribute to government bond demand and inflation stabilization." The report also noted, "While there are inherent risks in DeFi (Decentralized Finance), its scale is still too small to pose a systemic risk."

Inflation: Stablecoins Provide Partial Solutions

The issuance of U.S. government bonds is expected to continue increasing due to persistently high fiscal deficits. As intended by the Trump administration, the spread of stablecoins is likely to expand the demand base for U.S. Treasury bonds. While stablecoins can help expand this demand base and contribute to curbing inflation, they may also increase volatility in the government bond market.

The Bank for International Settlements (BIS) analyzed that when an asset manager purchases $3.5 billion in government bonds to issue stablecoins, the government bond yield falls by 2.5 basis points. By 2028, when the issuance volume is expected to reach as much as $2 trillion, the inflow of funds for coin issuance could lower short-term Treasury yields by up to 25 basis points. However, if redemption requests surge abruptly, Treasury yields could rise by about 80 basis points.

NH Investment & Securities analyst Kim Yung stated, "Inflation continues to exceed target levels, but stablecoins can unexpectedly help limit money supply growth and partially stabilize inflation." He further analyzed, "The current spread of stablecoins in the U.S. is similar to the 'Free Banking Era' of the mid-19th century when private banks issued currency." The Free Banking Era is often criticized from a financial stability perspective. However, in terms of inflation trends alone, inflation during the Free Banking Era was lower than after the central banking system was established.

Meanwhile, stablecoins improve payment efficiency by reducing fees and shortening settlement periods. This can increase the velocity of money, which is a component variable in the quantity theory of money equation (Nominal GDP = Money Supply x Velocity of Money). However, if stablecoins replace bank deposits, the money multiplier may decrease, leading to a reduction in money supply. It is difficult to determine which effect will be greater, but the volatility of nominal GDP could decline.

Concerns About a 'Repeat of the 2008 Subprime Mortgage Crisis' Are Premature

In the United States, the enactment of the Clarity Act, which clarifies the legal status and supervisory authority over digital assets, along with the spread of stablecoins, is fueling the growth of DeFi. However, concerns are being raised that the inherent "decentralized" nature of DeFi could undermine financial market stability. Many cite the 2008 global financial crisis, which was triggered by subprime mortgage derivatives backed by housing assets.

DeFi refers to financial products and services programmed through smart contracts on the blockchain. Smart contracts are coded on blockchains (typically Ethereum) and are executed automatically when specific contract conditions are met. As a result, DeFi can implement all traditional financial services, including deposits, loans, derivatives, and asset management.

Analyst Kim Yung stated, "Given the lack of regulation, the potential for increased leverage, and the rigidity of smart contracts, these are inherent characteristics of DeFi that could spread systemic risk in financial markets." He added, "Nevertheless, at this stage, it is more important to focus on its expansion rather than the risks." The DeFi market is currently valued at around $220 billion, which is just 0.8% of the U.S. GDP. In comparison, subprime mortgage loans in 2007 amounted to $1.4 trillion, or 10% of U.S. GDP at the time, making the current scale relatively insignificant.

Furthermore, it is difficult to say that current DeFi lending services are "excessively risk-seeking." DeFi lending typically requires over-collateralization, with collateral ratios generally ranging from 150% to 200%. This means that to borrow $100, a virtual asset worth $150 is required as collateral. Even if the value of the collateral drops by 33% to 50%, liquidation does not occur.

Analyst Kim Yung emphasized, "Considering the still small market size, high collateral ratios, and the declining number of ICOs, DeFi may have the potential to become a second shadow banking system, but it will take time before it poses an actual systemic risk to financial markets." He added, "For now, rather than worrying about the lack of regulation in the DeFi system, we should focus on its scalability."