Monetary Transmission in the Age of Code

What happens when billions of dollars move at the speed of code? According to the Bank for International Settlements (BIS), the effect on U.S. Treasury markets is material—and not necessarily benign. A $3.5 billion inflow into stablecoins caused 3-month Treasury yields to drop by 2 basis points (BPS); the same volume flowing out led to a 6 BPS increase. This isn't background market noise—it’s a measurable monetary signal, revealing the capacity of code to co-opt traditional policy tools.

Stablecoins, once confined to back-end infrastructure in crypto markets, have now become influential actors in the pricing of safe assets. BIS Working Paper No. 1270, Stablecoins and Safe Asset Prices, provides the first empirical evidence that stablecoin flows are impacting the short end of the yield curve.

At scale, it positions stablecoins not as fringe instruments, but as macro-relevant channels of liquidity that are functionally similar to money-market funds, yet operating outside traditional regulatory guardrails.

This coincides with growing institutional acceptance of blockchain-based tokenization. At the time of writing, Circle (CRCL), issuer of USDC, just debuted on the NYSE with a valuation exceeding $18 billion. Circle's IPO marked a watershed moment, establishing stablecoins as legitimate financial infrastructure.

And yet, as BIS reminds us, these flows are now large enough to distort key benchmarks of monetary policy. Their growing impact invites a deeper look at how digital money is reshaping the transmission of liquidity—and whether emerging models like deposit tokens might offer a more stable path forward.

Empirical Findings from BIS: A Structural Signal

The BIS paper provides quantitative evidence that stablecoin transactions correlate with movements in the short end of the yield curve. Specifically, it documents that

• Inflows into stablecoins—capital moving from traditional financial instruments into stablecoins—lead to a decline in 3-month U.S. Treasury yields by approximately 2 to 2.5 BPS.

• Outflows—where investors redeem stablecoins into fiat—can cause yields to rise by as much as 6 BPS.

The asymmetry in these movements highlights a vulnerability: while the system absorbs liquidity influxes with limited friction, it reacts sharply to redemptions. This dynamic introduces volatility to what are typically considered risk-free assets, and it does so outside the traditional scope of central bank policy instruments.

Note: The left-panel plots the daily market capitalization of six USD-backed stablecoins: USDT and USDC, with ‘Other’ containing the sum of TUSD, BUSD, FDUSD, and PYUSD. The right-panel plots daily US Treasury yields for several maturities. BIS Working Paper No. 1270, Figure 2 (p. 8)

This is not merely an academic nuance. Short-term Treasuries underpin global capital markets and act as benchmarks for lending, pricing, and risk. If flows in and out of decentralized digital assets can shift these benchmarks, then stablecoins are no longer merely financial plumbing—they are structural participants in the monetary transmission mechanism.

Stablecoins as Monetary Infrastructure

Stablecoins initially emerged as a convenience layer for digital asset markets. Their promise of 24/7 liquidity and composability created efficiencies for trading, cross-border transfers, and emerging financial protocols. But in the process, they have also become repositories of value that functionally resemble money-market funds—albeit without the regulatory oversight or policy integration.

The BIS findings place stablecoins in historical context alongside other forms of “shadow money,” such as eurodollars. Originating during the Cold War, eurodollars were U.S. dollar-denominated deposits held in banks outside the United States. Their inception is often traced back to Soviet-linked institutions transferring dollar reserves into European banks to avoid potential U.S. asset seizures. These offshore dollars quickly became the foundation of a vast international lending market beyond the direct jurisdiction of the Federal Reserve.

By the 1970s and 1980s, the eurodollar system had grown into a critical source of dollar liquidity for non-U.S. borrowers. It facilitated global trade and investment but also contributed to the growth of opaque credit structures and offshore financial activity. Today, the eurodollar market exceeds $10 trillion and remains a key component of the global financial system—yet one that eludes conventional monetary oversight.

Stablecoins echo many of these dynamics. They are dollar-based claims circulating outside traditional banking rails, used by individuals and institutions for transactions, lending, and collateral—sometimes without geographic anchoring or regulatory parity. As with eurodollars, the issue is not the existence of the instrument itself, but the structural blind spots it introduces.

Like their predecessor, stablecoins now influence global liquidity conditions while remaining largely outside the remit of central banks. Their proliferation raises the same question eurodollars once did: how should policymakers adapt when monetary transmission mechanisms evolve outside their formal control?

So where does this leave us? If stablecoins are shaping monetary benchmarks but have yet to be governed by clear global regulation, what does a safer, policy-aligned alternative look like? Is there a way to capture the technological gains of programmable liquidity without amplifying systemic fragility?

If stablecoins represent a yet to be regulated channel of monetary influence, then what comes next must address both the technological and policy gaps. The solution must combine the high-speed, programmable nature of digital assets with robust institutional safeguards.

Deposit Tokens: Bridging Innovation and Policy

Deposit tokens are digital representations of bank deposits, issued by licensed financial institutions and backed 1:1 by customer funds. Unlike stablecoins, which often operate in regulatory grey zones, deposit tokens are minted on private blockchains, and stay within the perimeter of central bank oversight and bank capital requirements. They combine the core benefits of stablecoins—programmability, composability, and interoperability—with the regulatory trust of traditional deposits.

Central banks and financial institutions globally are actively exploring deposit token models. For example, the Monetary Authority of Singapore’s Project Guardian and the Bank for International Settlements’ Project Agora are both investigating how tokenized deposits could operate across borders, interact with DeFi protocols, and comply with AML/CFT and prudential (regulatory requirements around capital, risk management, and liquidity) norms.

Importantly, deposit tokens are not just a potential countermeasure to stablecoins, they’re a forward-looking strategy to ensure that digital money evolves without fracturing the monetary system. Their value lies in their ability to preserve institutional accountability while unlocking efficiencies in settlement, reconciliation, and cross-border interoperability.

Conclusion: Monetary Policy in the Age of Programmable Liquidity

The BIS working paper is more than a data point but rather a structural diagnosis that shows digital instruments have evolved beyond being mere channels for risk into becoming sources of it themselves. The challenge ahead is not about resisting digital innovation, but ensuring it aligns with public policy objectives.

Stablecoins may continue to grow in volume and utility, but unchecked, they risk becoming a parallel system that influences macro outcomes without accountability. Deposit tokens, by contrast, offer a bridge that combines the efficiency of programmability with the safeguards of institutional oversight.

So what happens when billions move at the speed of code? The BIS working paper offers a preliminary answer: they reroute liquidity in ways monetary authorities can’t immediately see or control. They pressure benchmarks like Treasury yields, destabilize traditional money market dynamics, and challenge the tools policymakers use to maintain financial stability. In effect, programmable liquidity introduces new transmission channels—some beneficial, others volatile—that require both institutional visibility and regulatory adaptability. While not definitive, these empirical findings strongly suggest that digital money is already influencing the mechanisms central banks rely on to steer economic outcomes. Whether through stablecoins or deposit tokens, programmable liquidity has become a macro force. The key question remains: who will govern digital money, and how will banks and regulators respond before monetary policy and traditional banking are transformed by emerging technology companies?

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Sources & References

Bank for International Settlements (2024) Stablecoins and Safe Asset Prices. BIS Working Paper No. 1270, April. Available at: https://www.bis.org/publ/work1270.htm (Accessed: 6 June 2025).

Financial Times (2025) 'Circle IPO Raises $5bn in Watershed Moment for Digital Assets'. Available at: https://www.ft.com/content/0c58937b-2cda-4028-a921-64653ece7a34 (Accessed: 6 June 2025).

Bloomberg (2025) 'The Hidden History of Eurodollars Part 1: Cold War Origins', Bloomberg News. Available at: https://www.bloomberg.com/news/articles/2025-01-14/transcript-the-hidden-history-of-eurodollars-part-1-cold-war-origins (Accessed: 6 June 2025).

Lopes, B. (2025) 'The Finance of Tomorrow's Bank', LinkedIn. Available at: https://www.linkedin.com/posts/biasmlopes_money2020europe-stablecoins-visa-activity-7335641248344477696-CHIM (Accessed: 6 June 2025).

JP Morgan (2025) 'Project Guardian: Exploring the Future of Tokenized Deposits'. Available at: https://www.jpmorgan.com/kinexys/content-hub/project-guardian (Accessed: 6 June 2025).

Bank for International Settlements (2024) Project Agora: Exploring Institutional DeFi and Tokenized Deposits. Available at: https://www.bis.org/about/bisih/topics/fmis/agora.htm (Accessed: 6 June 2025).