How the cryptocurrency market is connected to the financial market

I show that increases in Tether’s circulation, the largest reserve-backed stablecoin, are followed by higher commercial paper issuance and lower commercial paper yields. The joint price–quantity response is consistent with stablecoin reserve flows generating demand pressure for short-term safe assets. To further examine the relationship between stablecoin activity and commercial paper market outcomes, I instrument stablecoin issuance with the issuance of Dai, a decentralized crypto-collateralized stablecoin. I also show that this relationship disappears entirely after Tether began reducing commercial paper holdings in its reserve portfolio in late 2021 and eventually eliminated them in 2022, consistent with the reserve-demand channel. Overall, the results provide suggestive evidence that stablecoin reserve management can transmit cryptocurrency-market activity into the pricing and supply of traditional private money.