Federal Reserve Board economist says lenders’ demand helps keep stablecoins pegged; presents model and MLB instrument evidence

Sharon Ross, an economist at the Federal Reserve Board, presented a paper titled 'Leverage and Stablecoin Pegs' that argues stablecoins can sustain a $1 peg because holders earn returns by lending coins in secondary markets to leveraged crypto traders.

Ross summarized a model with three agent types—stablecoin issuer, stablecoin investor, and cryptocurrency trader—and described two channels an issuer can use to restore a peg when shocks hit: (1) the liquid‑asset‑share channel, where the issuer shifts holdings toward more liquid reserves (for example treasuries), and (2) the redemptions channel, where a fall in demand reduces circulating supply and raises lending rates. She explained that holders are not paid interest on the primary market but can be compensated in secondary markets when they lend their stablecoins.

On the empirical side, Ross said the paper tests the model using perpetual futures funding rates as a proxy for speculative demand and, to isolate exogenous variation, uses nationally televised Major League Baseball viewership (July 2021–Nov. 5, 2022) as an instrument: "We're going to use Major League Baseball viewership," she said, describing the FTX sponsorship that made the patch prominently visible. In two‑stage regressions the authors find higher speculative demand is associated with higher stablecoin lending rates; an increase in the instrumented speculative demand translates into a substantively larger lending rate, consistent with model priors.

Ross also presented evidence for the two peg‑stabilization channels. Using Tether quarterly disclosures (a small sample of points), she reported a negative relationship between measures of speculative demand and the liquid share of Tether's portfolio, consistent with issuers shifting into safer assets when speculative demand falls. Separately, regressions of changes in token face value on funding‑rate measures show that lower speculative demand is associated with net redemptions, which in turn are associated with higher margin lending rates for stablecoin holders.

Ross acknowledged data limits—quarterly reserve disclosures and a short sample for some series—but argued the model and empirical results together show how speculative demand and secondary‑market lending can reconcile how runnable debt sustains a peg in practice. She framed the findings as relevant to financial stability because reserve reallocation and redemptions can transmit shocks between crypto markets and traditional money markets.

During discussion she and the audience debated instrument validity, small‑sample caveats for Tether quarterly data, and how the channels operate under different reserve‑disclosure regimes. Ross said the paper provides a framework and empirical evidence but that more work is needed to test alternative instruments and longer panels.

The paper highlights a tradeoff: stablecoins can remain pegged while enabling leveraged trading, but that linkage is a potential conduit for shocks between crypto speculation and traditional financial markets.