Frances Coppola, a CoinDesk columnist, is a freelance writer and speaker on banking, finance and economics. Her book “The Case for People’s Quantitative Easing” explains how modern money creation and quantitative easing work, and advocates “helicopter money” to help economies out of recession.
Why are interest rates on dollar-pegged stablecoins so much higher than interest rates on actual dollars? You’d think that a stablecoin worth a dollar would command the same interest rate as a dollar, namely zero. But a quick search of lending rates on stablecoins reveals rates of anything from 9% to 13%, or even more.
The easy explanation is that high interest rates compensate people for the risk that the stablecoin will fall off its peg. But prime stablecoins like USDC and Pax (USDP) are fully backed by high-quality dollar assets, so the risk that people will lose their money is small. No, there is another reason – and it highlights a fundamental conflict in the purposes for which stablecoins are used.
Frances Coppola, a CoinDesk columnist, is a freelance writer and speaker on banking, finance and economics. Her book “The Case for People’s Quantitative Easing,” explains how modern money creation and quantitative easing work, and advocates “helicopter money” to help economies out of recession.
We know why interest rates on actual dollars are so low. The Federal Reserve has cut interest rates to zero, so banks have no reason to pay interest on deposits. And the Fed has issued trillions of new dollars, so there are far more cash dollars circulating in conventional markets than anyone has a use for. No one wants dollars so they don’t command any interest.
But the reverse is true for stablecoins. Demand for stablecoins constantly exceeds supply. So people with stablecoins to lend can charge premium interest rates, and crypto platforms desperate for stablecoins offer high interest rates to attract new stablecoin lenders. That’s why stablecoin interest rates are so high. It’s simple economics.
You’d think stablecoin issuers would issue enough coins to satisfy demand. There are, after all, no limits on stablecoin issuance. Stablecoins can be created from thin air at the press of a button. They are the crypto world’s equivalent of quantitative easing (QE), only without the asset purchases. And, indeed, stablecoin issuers have been minting new coins at an extraordinary rate. But Jeremy Allaire printing billions of USDC doesn’t bring down interest rates. The market simply swallows everything he prints and comes back for more. Where is all this demand coming from?
The most obvious place is exchanges. Stablecoins make great liquidity for crypto exchanges. They enable people to trade
