Quantitative Easing, Stablecoins, and Bitcoin’s Fixed Supply: Why Neither Crypto ‘Solution’ Fixes the Money Problem
Money matters because it enables exchange, provides a unit of account for pricing goods, services and assets, and acts as a store of value in a complex capitalist economy. In modern economies, fiat money fills these roles thanks to legal and institutional backing, and because a productive private sector gives people reasons to use it.
Money, Banking, the Overnight Rate and QE
Money is important to any functioning capitalist society. It facilitates the exchange of goods and services. It serves as a unit of account, providing a standardised way of measuring wealth, asset prices and profits. It acts as a store of value, allowing individuals and businesses to store wealth in a convenient form. When we talk about money, generally with cryptocurrencies aside, we are talking about fiat money. Fiat means let it be in Latin. It has no intrinsic value and is used in an economy based on government pronouncement. Ultimately, the stability of fiat money is based on that economy’s productive capacity and the state’s endorsement and protection of its use (Bank of England 2014; Bank of England 2025a).
Governments do not create most of the money in an economy, but they are the only entity that can print physical currency. Technically, central banks issue banknotes and create reserves, but they do so within a legal framework set by government, and alongside the Treasury’s debt and cash operations. In any case, this is only a small proportion of the money in an economy. Most of the money in an economy comes from private banks making loans to individuals and businesses. Every time money is lent, this creates a loan which is an asset for the bank and a liability for the customer. I.e., the customer owes the bank £X. It also creates a deposit, which is a liability to the bank and an asset to the customer. I.e., the customer is credited £X by the bank. Private banks compete with each other to create money by issuing loans. The primary constraint that private banks face in creating money is their ability to remain profitable. They can’t make too many loans to borrowers who will not eventually be able to pay the loans back. The ideas of fractional reserve banking and the money multiplier effect, where banks take in deposits and then make loans based on those deposits are incorrect. Fractional reserve banking is not how money works in the modern economy. As long as a bank believes that it will make a profit on a loan, it will make the loan, creating money out of thin air. Therefore, borrowing is the money creating process that allows for saving, and not the other way around (McLeay, Radia and Thomas 2014).
As money moves around the private banking system, banks need to keep an eye on their net flows of money. If bank A extends a loan to a customer running a manufacturing business and the customer goes and buys equipment from their supplier who uses bank B, the money leaves bank A and moves to bank B. Bank A has then had a net negative flow from the transaction. Banks clear their net flows through a central clearing house at the end of each day, using a special kind of money called bank reserves. If during a given day more money leaves a bank than comes in, the bank owes the central clearing house. The bank will cover that shortfall by borrowing reserves in the overnight lending market. A bank with a net positive flow for that day, might lend their excess money to a bank with a net negative flow (Bank of England 2025b).
Once loans exist, the bank has to fund the assets on its balance sheet with some mix of customer deposits, longer-term bonds and wholesale funding, equity or short-term borrowing in the overnight lending market. Deposits, whilst not required for lending, are still important for banks because it is cheaper to pay interest on deposits than it is to borrow in the overnight lending market. A bank will always make a loan that they expect to be profitable, knowing that they can borrow to settle their net flows in the overnight lending market. The interest rate on overnight loans between banks is important to the economy. If the overnight lending rate increases, then banks need to charge their customers more for loans in order to remain profitable. Central banks try to influence the rate at which banks lend to each other by supplying or removing liquidity from the overnight lending market. In some extreme cases, like 2008, banks had trouble settling their net flows in the overnight lending market and this is where the central bank becomes and important backstop to the banking system. Instead of allowing the overnight lending interest rate to skyrocket due to a lack of liquidity, central banks will create bank reserves out of thin air to provide liquidity to private banks. This is why central banks are referred to as the lender of last resort. Central banks are responsible for executing monetary policy, which consists of central bank actions that are designed to promote maximum employment, stable prices and moderate long-term interest rates. Setting a target for the overnight lending rate, is one of the ways that central banks execute monetary policy. By doing this, central banks can, to an extent, influence the demand for loans from credit-worthy borrowers in the private banking system. If interest rates are lower, people will be more willing to take out loans and the economy should be stimulated (Anson et al. 2017; Bank of England 2025b).
One of the ways that the central bank influences the overnight lending rate, is through open market operations. Open market operations involve the central bank transacting with private banks to add or remove the amount of bank reserves in the private banking system. In order to decrease the overnight lending rate, the central bank would create bank reserves in order to purchase short-term government securities from private banks. The net effect on the private banking system’s balance sheet is neutral given it is an asset swap of bank reserves for short-term government securities. However, this action influences short-term interest rates by increasing demand and thus price, and, in turn, decreasing yields.
Private banks may end up with large positive balances at the end of the day. When this happens, the central bank will pay interest on the positive balances. In this instance, bank reserves are really just another form of short-term government debt (Bank of England 2025b; Bank of England 2025c).
Affecting the overnight lending rate is known as a conventional approach to monetary policy. This approach starts to run into problems when the overnight lending rate is already at or near zero. This happened in 2008 during the GFC and in Japan from 2001. In both cases, the solution was an unconventional tool, known as QE, quantitative easing. The execution of QE is nearly identical to the open market operations used to influence short-term interest rates every day. To recap: open market operations are the routine purchase or repo of small amounts of shorter-dated assets to keep the overnight interest rate on target. A key difference between open market operations and QE, though, is that QE involves buying much larger amounts of longer-dated maturity government bonds and other private sector assets like corporate bonds and asset backed securities over an extended period of time.
Crucial to understand, however, is that QE is an asset swap, where bank reserves are used to buy government securities from private banks. Private banks then enjoy interest paid by the Treasury on any surplus bank reserves. With excess reserves, private banks may likely feel more able to loan and, at lower interest rates, in order to put those excess reserves to productive use. Therefore, the intention of QE is to increase liquidity so as to reduce the longer-term interest rate which will theoretically stimulate economic activity (Bank of England 2014; Bank of England 2025a; Tenreyro 2023).
The claim that QE, often dubbed ‘money printing’, must cause inflation is too simple. After all, QE is an asset swap. The central bank buys bonds and pays with newly created reserves, so the private sector holds fewer gilts and more reserves but its net financial assets do not rise at the moment of purchase. Banks cannot lend reserves to households or firms. New credit still requires willing banks and credit-worthy borrowers. QE is typically used when private risk appetite and loan demand are weak, which is why the near-term concern is often deflation rather than inflation (McLeay, Radia and Thomas 2014; Bank of England 2014).
However, there is still a sense in which QE does look like money printing. Indeed, the central bank does in fact create reserves from nothing and uses them to buy government bonds and, in some programmes, high-quality private assets. Those reserves are remunerated at the bank rate, which channels interest income to private banks.
Crucially, though, QE is not a ‘helicopter’ cash transfer to households and businesses and so it cannot be considered pure ‘money printing’. What QE does do, is to lower the longer-term interest rate and to ‘grease’ already dry and unlubricated capital markets with the goal of creating more fertile lending conditions to stimulate the economy (Tucker 2023; Bank of England 2025a).
A Critic’s Perspective
Critics argue that QE has morphed from a crisis tool into an expensive habit. In the early years it appeared to pay for itself, as the Bank of England made huge profits when interest rates were at record lows of 0.1% because government gilts it bought returned far higher yields than the interest due on bank reserves. Indeed, more than £123bn was transferred from the Bank of England to the Treasury between 2009 and 2022. However, once interest rates rose from late 2021, the arithmetic flipped. The cost of remunerating bank reserves jumped and gilt prices fell, particularly for longer dated gilts, and capital losses mounted. Indeed, from early 2022 to mid 2025, the Treasury has sent over £85bn back to the Bank of England to service QE arrangements it made and commercial banks have earned sizeable interest on their reserves. ‘NatWest, Barclays, Lloyds and Santander received more than £9bn in interest on Bank of England reserves in 2023 – a 135pc increase on the previous year, according to the Treasury committee of MPs’ (Telegraph 2025, 8 June). Worryingly, the OBR now projects a large cumulative loss of £133.7bn across the life of the programme. For some perspective, this is bigger than the annual education budget and more than twice what the UK spends on defence (Telegraph 2025, 8 June).
Set against this is the uncomfortable reality that modern capital markets seem to require a lender-of-last-resort with a big balance sheet. QE helped stabilise borrowing and kept the payments system functioning when private risk appetite vanished in 2008. The bill looks steep in hindsight and the wealth distributional outcomes are poor, but the alternative may well have been far worse. There could very well have been mass business failure and, in turn, mass unemployment and subsequent chronic socio-economic problems going forward. So, on balance, even if the critics have a point, QE, and therefore the broader centralised banking system, remain a necessary evil for a market-based financial system that depends on confidence and liquidity.
Stablecoins: Cochrane’s Critique in Context
With the pre-requisite understanding above in place, we can turn to cryptocurrency and ask whether it offers a viable alternative to centralised banking.
Stablecoins are a natural starting point. They are designed to maintain a fixed price against state money, typically promising that one token can be redeemed for one unit of fiat currency at price at redemption (par). In practice, stablecoins are private, short-term liabilities issued by a company and backed by a portfolio of assets chosen by that issuer. A governance structure then decides how many tokens to issue, how and when redemptions are honoured, what assets can be held in reserve, how much information is disclosed, and what emergency tools can be used in a crisis. All of this is discretionary. History suggests that whenever par promises rest on portfolios that can become illiquid or fall in value, those promises are vulnerable to ‘bank-run’ dynamics, as holders rush to redeem before the backing assets can be sold or restructured.
To understand this further, we turn to John Cochrane’s work. John Cochrane is a financial economist known for work on asset pricing and macroeconomics. He writes clearly about money and banking in his blog, ‘The Grumpy Economist’, and often connects theory to policy debates (Cochrane 2018; Cochrane 2017). Cochrane’s central critique is that stablecoins are not a monetary breakthrough but a replay of free banking with new plumbing. In his writing on ‘Basecoin’ and related designs he asks who receives seigniorage* when supply expands, who bears losses when it contracts, and what legally enforceable claim holders have if the peg fails. He notes that the credibility of par depends on discretionary policies and balance sheets rather than on any hard budget constraint, which brings the classic run problem back into view (Cochrane 2018; Cochrane 2017). Empirically we have already seen modern runs. When Silicon Valley Bank (SVB) failed on 10th March 2023, Circle disclosed that about 3.3 billion dollars of USDC (a digital dollar issued by Circle) reserves were at SVB. USDC traded below par across venues and other stablecoins moved as arbitrageurs and holders rushed to exit until clarity on redemptions emerged (Watsky 2024; Ahmed, Devasabai and Song 2024). Official analyses generalise the point: stablecoins struggle with singleness** and elasticity*** because they lack central bank settlement, often trade at issuer-specific prices, and cannot deliver the no-questions-asked convertibility that underpins money claims inside the public backstop (Gorton and Zhang 2021; Aldasoro, Mehrling and Neilson 2023; BIS 2025). Regulation can set tight rules, but a stablecoin that promises par still needs people to manage a reserve portfolio. Management means choices, and choices mean discretion.
This involves the following:
What to hold. Even with strict lists like ‘T-bills and cash’, someone chooses maturities, roll schedules, counterparties, and how much to keep overnight versus term. Those choices impact liquidity, interest-rate risk and fire-sale risk.
How to value and liquidate. Reserves must be priced, custodied and, in stress, sold or repo’d****. Managers decide when to sell, which line to tap, how to queue redemptions, whether to use fees or gates, and how to handle settlement delays. These are judgement calls that affect whether par holds.
Governance levers. Prospectus terms, DAO votes or board decisions can alter collateral haircuts, redemption windows, disclosures and fees. Rules can tighten or loosen over time, which is discretion by design.
No lender of last resort. Even a perfectly compliant reserve can face a gap between ‘market value’ and ‘cash today’. Without a central bank to bridge that gap, managers must improvise with the tools above.
Overall, stablecoins revive discretionary money issuance without a sovereign lender of last resort. They improve settlement and transparency on-chain, but they do not solve the core trust problem. They shift it to private issuers and their governance.
*Seigniorage can be formally defined as the difference between the market value of a currency and its intrinsic value. That is, the value that the currency would have if no one used it as a currency. For ancient currencies like grain, the seigniorage was essentially zero. However, as economies and currencies got more and more complex, this ‘phantom value’ generated by money seemingly out of nowhere would grow bigger and bigger, eventually reaching the point where, in the case of modern currencies like the US dollar and Bitcoin, the seigniorage represents the entire value of the currency (Buterin 2022). Monetary seigniorage is where government bonds are exchanged for newly created money by a central bank, allowing debt monetisation.
**Singleness means a pound is worth the same pound-for-pound everywhere. In bank money, that works because all banks settle with each other in central bank money, so deposits clear at par. Stablecoins settle on private balance sheets or on a blockchain that is outside the central bank, so convertibility can slip below par when reserves look shaky or redemptions slow. That breaks singleness because one ‘pound-like’ token may trade at 0.99 whilst bank deposits stay at 1.00.
***Elasticity means the money supply can expand or contract to meet payment needs at par. Central banks add reserves in stress and drain them in calm, which keeps payments smooth. Stablecoins cannot tap a lender of last resort, so when demand for redemptions jumps they must sell reserves fast or gate withdrawals. If they cannot, the price falls below par and the system tightens just when it should loosen.
****A repo is a short-term loan secured by high-quality collateral, usually government bonds. You sell the bond today for cash and agree to buy it back later at a slightly higher price. The difference is the interest. Lenders apply a haircut so you borrow less cash than the bond’s market value to protect them against price moves. Repos can be overnight or for a fixed term, and they can be bilateral (direct with a counterparty) or tri-party (a custodian manages collateral and settlement).
In the stablecoin context, ‘repo’ing the reserves’ means turning gilts or Treasury bills into same-day cash without selling them outright. It is a way to meet redemptions quickly whilst keeping the bonds on the books, subject to available lines, haircuts and market conditions.
Why Bitcoin Cannot Suffer a Classical Run, and What That Does and Does Not Buy You
A classical run occurs when holders of a redeemable claim rush to convert it into its backing asset because they fear the issuer will not honour par. A stablecoin run targets tokens that promise conversion into bank deposits or cash. Bitcoin does not fit this template for several reasons:
No issuer and no redemption promise. Bitcoin has no balance sheet and no institution promising convertibility. A unit of bitcoin is not a claim on reserves. It is a bearer asset recorded on a public ledger. There is nothing to redeem and no entity that can default on redemption. A plunge in the bitcoin price is a market repricing rather than a failure to honour par, which is why runs in the banking sense cannot occur at the base layer (Nakamoto 2008).
Full-reserve accounting on-chain. The protocol tracks every unit through unspent transaction outputs. Total supply is algorithmically limited and publicly auditable in real time. There is no scope for fractional claims on the base asset to appear on the ledger itself, so there is no hidden maturity transformation at layer one (Nakamoto 2008).
Finality is protocol-based, not promise-based. Settlement occurs when blocks are confirmed to the depth users require. The assurance is cryptoeconomic rather than institutional. That eliminates redemption risk at layer one, although off-chain custodians can still fail.
This strength does not make Bitcoin good base money for a large, dynamic economy for several reasons:
Inelastic supply and demand shocks. With a fixed stock and variable demand, purchasing power must absorb shocks. Volatility undermines the medium-of-exchange and unit-of-account roles.
Deflationary bias and contract frictions. As real output grows against a fixed supply, the price level must trend lower, although this may be partially offset by increased velocity (the speed at which money changes hands). Downward nominal rigidities in wages and debts cause massive economic problems. Think of it this way, employers find it hard to cut pay because workers will resist nominal pay cuts for morale and fairness reasons, and contracts or minimum wage laws can block wage cuts. A worker’s mortgage, rent, or an owner’s business loan is a fixed number of pounds each month. If general prices fall, your income may fall or your job may be at risk, but the pound amount you owe does not fall.
The big picture goes: if wages and debts cannot fall easily, the economy adjusts through reduced output and employment, i.e., everyone becomes poorer. This obviously makes a currency with a fixed supply really bad.
No lender of last resort. There is no mechanism to expand base money to meet a scramble for liquidity or to backstop solvent but illiquid intermediaries. That is a feature for protocol credibility but a problem for macro-economic stabilisation.
Security budget in a fee-only future. When Bitcoin first started, hardly anyone was using it, so there were almost no transaction fees to pay people to run the network. To solve this, Bitcoin includes a built-in block subsidy: a reward of new bitcoins that is paid to the miner whose computer wins the cryptographic ‘race’ to add the next block of transactions to the blockchain. Miners compete in this race by repeatedly hashing the block’s data until one of them finds an alphanumeric string (a hash) that meets Bitcoin’s difficulty target; the first miner to find a valid hash earns the right to add the block and collect the subsidy, plus any transaction fees. This block subsidy exists so that, from day one, there is a clear financial incentive for people to spend electricity and hardware securing the system. Over time this subsidy is cut in half every four years or so, so that new issuance slowly winds down under the 21 million bitcoin cap and the system is meant to transition from being funded by newly created coins to being funded by users’ fees (Budish 2025).
In Budish’s framework, the ‘guards’ securing the ledger have to scale roughly one-for-one with the economic value at risk: in equilibrium, the ongoing ‘flow’ cost of honest mining has to remain of the same order of magnitude as the one-off gains from a majority attack (Budish 2025). If aggregate fee revenue does not grow in line with Bitcoin’s adoption, the real cost of corrupting the chain falls relative to the value secured, making it cheaper in economic terms to buy or rent enough hash power to behave dishonestly. Theory and simulations show that fee-only regimes can therefore generate unstable miner incentives and a greater probability of fraud, especially when activity is low or fees are volatile, because an attacker can time their move to periods when honest ‘guards’ are thin on the ground and temporarily overwrite recent blocks or execute profitable double-spends (Budish 2025; Carlsten et al. 2016; Hasu, Prestwich and Curtis 2019).
To summarise, Bitcoin avoids the classical ‘bank’ run by design but the cost is rigidity. Without elasticity or a public backstop, it does not solve the monetary problem that fiat institutions address. It also does not fix the stablecoin problem, because stablecoins are promises backed by reserves, not base-layer assets.
Conclusion
Money is not just a clever database or a token on a ledger, it is a set of promises embedded in institutions. Fiat money works in modern economies not because it is backed by gold or has intrinsic value, but because the state can levy taxes in it, the central bank stands behind it as lender of last resort, and the banking system clears its liabilities at par in reserves. QE and other monetary tools sit within that institutional framework. They can be overused or misused, but at root they are ways of adjusting the quantity and composition of safe assets in order to stabilise credit conditions and the real economy.
By contrast, stablecoins and Bitcoin each illuminate what happens when you strip different parts of that framework away. Stablecoins reintroduce private, discretionary money issuance without a public backstop, so they inherit the old problems of bank runs, governance and lack of opacity in a new technological wrapper. Bitcoin removes issuers and redemption promises altogether, which avoids classical runs at the base layer but creates new vulnerabilities: a rigid supply that cannot adjust to shocks or an expanding economy and a security model that relies on ongoing fee revenue to keep economic attacks uneconomic. In both cases, the technical innovation is real, but it does not magic away the underlying economics of trust, incentives and balance sheets. If anything, the crypto and stablecoin experiments underline why the unglamorous plumbing of central banking, bank regulation and public money remains so central to a complex capitalist economy.
TLDR;
Centralised banking is vastly more efficient than decentralised cryptocurrency because for the former you only need a small number of trusted intermediaries to update ledgers and clear payments, rather than thousands of anonymous nodes all reaching consensus on every transaction. That means higher throughput, faster and more predictable settlement, and far lower energy and hardware costs. Permissionless consensus has to assume that anyone might be an attacker, so it burns resources on validation, redundancy and Sybil-resistance that a regulated, account-based banking system can avoid, making decentralised cryptocurrencies inherently slower and more expensive per transaction than traditional fiat-based transactions.
References
Aldasoro, Iñaki, Perry Mehrling, and Daniel H. Neilson. 2023. ‘On Par: A Money View of Stablecoins’. BIS Working Paper No. 1146. Bank for International Settlements.
Ahmed, Reda, Anushree Devasabai, and Joonseok Song. 2024. ‘Public Information and Stablecoin Runs’. BIS Working Paper No. 1164. Bank for International Settlements.
Anadu, Kenechukwu E., Marco Cipriani, Giulio Macchiavelli, and Joseph Camine Malfroy. 2023. ‘Runs on Stablecoins’. Liberty Street Economics, Federal Reserve Bank of New York, 12 July.
Anson, Mark, Thomas Bush, Stephen Hills, Richard Kahn, and Michael Roberts-Sklar. 2017. ‘The Bank of England as Lender of Last Resort: New Historical Evidence from Daily Transactional Data’. Bank of England Staff Working Paper No. 691.
Bank for International Settlements (BIS). 2025. Annual Economic Report 2025, Chapter III: ‘The Next-Generation Monetary and Financial System’. Bank for International Settlements.
Bank of England. 2014. ‘Money Creation in the Modern Economy’. Quarterly Bulletin 2014 Q1.
Bank of England. 2025a. ‘Quantitative Easing’. Web page, updated 12 June 2025.
Bank of England. 2025b. ‘Market Operations Guide: Our Objectives’. Web page, 25 June 2025.
Bank of England. 2025c. Bank of England Market Operations Guide. Landing page, 10 June 2025.
Budish, Eric. 2025. ‘Trust at Scale: The Economic Limits of Cryptocurrencies and Blockchains’. Quarterly Journal of Economics 140 (1): 1–62. https://doi.org/10.1093/qje/qjae033
Buterin, Vitalik. 2022. Proof of Stake: The Making of Ethereum and the Philosophy of Blockchains. Edited by Nathan Schneider. New York: Seven Stories Press.
Carlsten, Miles, Harry Kalodner, Arvind Narayanan, and S. Matthew Weinberg. 2016. ‘On the Instability of Bitcoin Without the Block Reward’. In Proceedings of the 2016 ACM SIGSAC Conference on Computer and Communications Security (CCS 2016).
Cochrane, John H. 2017. ‘Bitcoin and Bubbles’. The Grumpy Economist (blog), 30 November.
Cochrane, John H. 2018. ‘Basecoin’. The Grumpy Economist (blog), 22 April.
Financial Times (FT). 2025. ‘Stablecoins “perform poorly” as money, central banks warn’. 24 June.
Hasu, James, James Prestwich, and Brandon Curtis. 2019. ‘A Model for Bitcoin’s Security and the Declining Block Subsidy’. Research note.
Hong Kong Monetary Authority (HKMA). 2022. ‘An Event Study on the May 2022 Stablecoin Market Crash’. Research Memorandum 09/2022.
McLeay, Michael, Amar Radia, and Ryland Thomas. 2014. ‘Money Creation in the Modern Economy’. Bank of England Quarterly Bulletin 2014 Q1.
Nakamoto, Satoshi. 2008. ‘Bitcoin: A Peer-to-Peer Electronic Cash System’. White paper.
Reuters. 2025. ‘Central bank body BIS delivers stark stablecoin warning’. 24 June.
Royal Mint. 2020. ‘The Royal Mint’. GOV.UK organisation page.
Tenreyro, Silvana. 2023. ‘Quantitative Easing and Quantitative Tightening’. Speech, Bank of England, 4 April.
Telegraph. 2025. ‘Bank of England claims money-printing spree saved £125bn’ The Telegraph, 11 November. https://www.telegraph.co.uk/business/2025/11/11/bank-of-england-claims-money-printing-spree-saved-125bn. Accessed 12 November 2025.
Telegraph. 2025. ‘Reform launches attack on Bank of England’. The Telegraph, 8 June. Available at: https://www.telegraph.co.uk/business/2025/06/08/reform-launches-attack-bank-of-england/. Accessed 12 November 2025.
Tucker, Paul. 2023. ‘Quantitative Easing, Monetary Policy Implementation, and the Public Finances’. Institute for Fiscal Studies.
Appendix
Clarifying a common confusion with regard to bank ‘run-like’ events:
Run-like events can happen to custodians and exchanges that issue off-chain bitcoin claims, because those are redeemable promises backed by the custodian’s balance sheet. That is a run on the intermediary, not on Bitcoin itself. The base protocol keeps working through price crashes, exchange failures and forks, because no redemption promise is being tested.