What does Gov. Waller's "skinny" master account mean for stablecoin issuers?

What does Gov. Waller's "skinny" master account mean for stablecoin issuers? The simple answer is possible access to the payments system. The deeper answer is safer stablecoins, especially if paired with Fedwire Security Services (FSS).

Roughly speaking, stablecoin reserves must be bank deposits and T-bills. Bank deposits are liquid, but don't earn much (if any) yield. T-bills pay interest, but aren't as liquid. Issuers will generally want to keep reserves as T-bills.

It’s possible an issuer will at some point run out of bank deposit reserves. When that happens, the issuer must sell T-bills. Getting bank deposits from T-bill sales is called T+1 settlement and typically takes a day. Stablecoin users are used to immediate liquidity. If they can't redeem immediately, they may panic and run on the issuer. T+1 isn’t always fast enough. Enter Fedwire Security Services.

What’s Fedwire Security Services? 

FSS is one of the services the Fed offers to banks. The Fed custodies banks’ Treasurys. Treasurys don't live in the master account, but in a separate FSS securities account. In practice, the master account and the securities account are tightly coupled: Fedwire lets participants instantly exchange reserves for T-bills and vice versa. (Yes, the Fed has been doing atomic settlement since before it was cool.)

Why does FSS matter to stablecoins? 

FSS moves settlement from T+1 to real-time. If an issuer runs out of deposits, it can sell T-bills for reserves that immediately show up in its master account. The issuer can then use those reserves to redeem stablecoins.

I don’t do crypto. Why should I care about a run on a stablecoin issuer? 

There’s real concern that a run on stablecoins will spill into the Treasury market. (My friend Yesha Yadav and Brendan Malone wrote THE paper, https://lnkd.in/esFAa8hK.) Dysfunction in the Treasury market would probably cause general panic in the financial markets. That never ends well for anyone.

How do we mitigate the risk of a run? 

We let issuers sell T-bills with instant settlement. With a skinny master account and FSS, the issuer can do just that. The Fed could further mitigate risk by running Fedwire 24x7, so issuers can immediately settle T-bills sales at all hours (current hours are 8:30 AM to 3:30 PM ET). More radically, the Fed could admit stablecoin issuers to its standing repo facility, letting issuers borrow reserves against T-bills during market malfunctions.

How does the Fed benefit from combining access to the FSS with a "skinny" master account? 

The Fed benefits by decreasing the chance of a stablecoin run spilling over into the rest of the financial system. The Fed could also obtain valuable information on fund flows from stablecoin issuers that it could use to spot emerging risks (though it probably wouldn’t do that because it might discourage banks from using Fedwire). In a pinch, the Fed could buy T-bills from stablecoin issuers to stop a run, similar to what it did in 2020.

A version of this post originally appeared on LinkedIn.