Federal Reserve research says: stablecoins may be included in M1 or M2

Federal Reserve researchers propose inclusion of stablecoins in the money supply statistics framework

On September 4, Federal Reserve researchers proposed a framework to determine how stablecoins and other blockchain-based financial products will be included in U.S. money supply statistics.

Summary of Core Views

• Payment type stablecoins are ultimately eligible to be included in the M1 or M2 statistical category.
• If it is mainly used for daily payments, it tends to be classified as M1; if it is mainly used for short-term value storage, it tends to be classified as M2.
• Tokenized bank deposits are still traditional deposits legally and are currently included in the existing total currency.
• Retail tokenized money market funds have been included in M2 along with traditional retail funds.
• Until any statistical inclusion is achieved, stablecoin measurement still faces challenges such as reporting standards, double counting of reserves, and global liquidity.

Currently, payment stablecoins have not been included in M1 or M2 statistics, but their future classification may depend on how households and businesses use them. Authors Kristen Payne and Mary-Frances Styczynski examined payment stablecoins, tokenized bank deposits, and tokenized money market funds in a Federal Reserve study. They considered the economic function of each asset and whether reliable data could be collected without double counting funds. The author emphasized that the paper only represents personal views and does not represent the Fed's policy decision, nor does it involve an active review process to change the monetary aggregate.

Payment stablecoin: M1 or M2?

The Federal Reserve releases three monetary aggregate indicators. The base currency covers real currency and bank reserves. M1 includes highly liquid funds that are ready to be spent. M2 includes M1 plus less liquid savings products such as small time deposits and retail money market funds.

According to the researchers 'framework, assets used primarily as a medium of exchange should usually be classified as M1. Assets mainly used for short-term savings are more in line with the non-M1 part of M2. Payment stablecoins can fall into either category. Tokens used for home purchases, corporate payments, or instant transfers will have M1 transaction characteristics. Stability coins, which are mainly used to trade cryptocurrencies or temporarily store value, are similar to assets placed in M2.

The researchers use the USDC as the closest existing reference, while pointing out that few payment stablecoins currently operate under the framework of relevant bills. USDC is widely used as an on-chain clearing asset, but users also hold it for subsequent transactions or invest it in products that provide indirect returns. This difference cannot be resolved by technology alone. Although U.S. dollar tokens can be transferred instantly, they can still primarily function as a savings or trading tool. Therefore, the researchers recommend observing its dominant use before assigning categories.

This functional approach also explains why the Fed previously revised the definition. In 2020, savings deposits were moved into M1 as regulatory changes made savings deposits more transferable. The latest H.6 report continues to measure M1 and M2 based on liquidity and economic use.

Double counting risk posed by stablecoin reserves

Adding stablecoins to M1 or M2 is not simply a calculation of all tokens in circulation. Issuers hold reserve assets that support these tokens. Some of these assets may already appear in other monetary aggregate indicators.

Stabilocin reserves may include bank deposits, treasury bonds and other allowed liquidity instruments. Bank deposits have appeared in M1 or M2. Retail government money market funds may also form part of M2. Unless statisticians make adjustments, counting stablecoins with these reserve holdings could cause the measured money supply to expand. Treasury bonds are not part of M1 or M2. Therefore, the size of the adjustment will depend on the reserve composition of each issuer, rather than just the total volume of stablecoins in circulation.

The disclosure requirements of relevant laws can provide some necessary data. The law requires approved issuers to disclose information on their reserve holdings. However, regulators still need uniform reporting standards to identify circulating supplies, reserve composition, and tokens that may not be accessible or frozen. Implementation work has not yet been completed. The proposed regulations by the Office of the Comptroller of the Currency (OCC) cover reserves, redemption, risk management and issuer supervision. The agency has not yet completed final rule development.

stablecoins also circulate beyond the U.S. border. Tokens issued by a regulated U.S. company can be passed between wallets around the world. Public blockchains typically display addresses and transactions, but not the reliable geographical location of the holder. As a result, distinguishing domestic circulation from international use may require additional reporting, the researchers said.

Tokenized deposits have been counted as currency

Tokenized deposits require a different treatment because they remain liabilities of regulated banks. Tokenization changes how deposits are recorded and transferred, but does not automatically change their legal or economic nature.

Tokenized demand deposits are still immediately available and can function as a medium of exchange. Therefore, it is included in M1 along with traditional demand deposits. Tokenized small time deposits will remain a savings product and enter the non-M1 portion of M2. However, banks have reported these balances through the same regulatory forms used for traditional deposits. The Fed currently does not separate tokenized balances from deposits maintained through the traditional banking system.

The researchers found that tokenized deposits had no additional double counting issues. Its underlying bank assets, including loans and securities, are usually outside the monetary aggregate. When the Fed calculates the amount of cash held by the public, the cash on hand has been adjusted. Independent reporting may still be useful. Independent tracking of tokenized deposits will give researchers a clearer understanding of how quickly banks and customers are adopting blockchain for settlement. Several agencies are already testing this model. In addition, recent banking initiatives have explored shared networks for programmable deposits and corporate payments. Unlike stablecoins, these instruments represent direct claims on the issuing bank.

Tokenized money market funds remain in M2

Tokenized money market funds represent shares in regulated investment funds rather than bank deposits or payments in stablecoins. Investors hold securities backed by short-term assets and receive income generated by the investment portfolio.

Retail money market funds are already part of M2. Tokenizing their shares does not move them out of the category. They are mixed together in traditional fund shares along with data provided by the Investment Company Research Institute. Researchers classify these funds mainly as stores of value. Although blockchain transfers can occur quickly, converting fund shares into cash still requires redemption. This process usually takes one to two working days.

Tokenized funds are increasingly used as collateral, cross-border transactions and collateral for on-chain lending. If direct payment use ends up becoming its primary function, the authors say reclassification could be considered. This is a conditional assessment, not a planned change. These products also differ from stablecoins in terms of revenue recipients. Tokenized money market funds typically pass on portfolio income to shareholders, while under the model reviewed by the researchers, payment stablecoin issuers retain reserve income.

Any changes require data standards and a decision by the Federal Reserve

This study did not set a timetable for adding stablecoins to M1 or M2. Instead, it identifies conditions that must be met before the Fed can release reliable numbers. Officials need standardized circulation data, consistent reporting channels and a way to deduct reserve assets that have been captured elsewhere. They also need to decide whether the statistics should include global holdings of U.S. issued tokens or only holdings related to domestic users.

A temporal evaluation of the use of stablecoins is then required. Transaction-based uses will support the M1 classification, while trading and saving behaviors will support the M2 classification. Mixed models may require more detailed statistical processing. Until these issues are resolved and the Federal Reserve formally changes its methodology, payment stablecoins will remain outside the announced U.S. monetary totals. The September 4 paper provided an analytical path, but did not establish new policies.