The law of conservation of energy teaches that in a closed system energy can neither be created nor destroyed, only transformed. In modern finance, liquidity behaves in much the same way: money moves between bank deposits, stablecoins, government securities, and other custody arrangements, but the total “economic energy” remains constant. Recent stablecoin regulations in Hong Kong and the United States have brought these transformations into sharp relief, highlighting unintended consequences for credit creation, fiscal influence, and trust in sovereign currency.

Financing Cost vs. Transaction Cost

When a purchase is made for fiat-backed stablecoins, domestic deposits becomes assets under custody held by the issuers. Those custody liabilities remain on banks’ balance sheets but cannot be re-lent. As deposits migrate into custody, banks lose loanable funds, tightening credit supply and driving up financing costs across the economy. Stablecoins may streamline transactions, yet the diversion of deposits undermines the very credit‐creation role banks play.

Trump vs. Powell

This emerging dynamic gives policymakers a potent new lever. Rather than relying almost exclusively on interest-rate adjustments and large-scale asset purchases, authorities can influence financial conditions simply by shaping the rules and incentives around stablecoin issuance. In effect, stablecoins convert ordinary transactional balances into a steady, predictable bid for government paper.

Debt Ceiling: Guiding flows rather than erecting barriers

With the debt ceiling looming, government faces a stark choice. It has been attempted to shrink the debt level but they can now shore up demand for Treasuries by easing funding pressures with targeted stimulus and regulatory relief. By calibrating reserve requirements and streamlining approval processes for stablecoin issuers, the government could absorb much of the extra borrowing without resorting to painful austerity. This approach would let markets allocate capital efficiently while ensuring the Treasury can finance itself. In practice, it offers a way to avert default and sustain growth without the blunt instruments of punitive cuts or aggressive monetary intervention.

At The End

The rising popularity of cryptocurrencies and stablecoins also signals an erosion of confidence in government-issued money. Every deposit converted into a private digital token challenges the monopoly of central banks over currency issuance. This shift underscores the need for a more resilient monetary framework—one that embraces innovation while preserving the integrity of credit markets and fiscal stability.