Are Stablecoins Money? Understanding M0, M1, M2, M3 and M4

Stablecoins combine payment utility, liquidity, reserve assets, and—in some designs—yield. That makes a simple question surprisingly difficult: are stablecoins money, and if so, where do they belong within the traditional M0, M1, M2, M3, and M4 framework?

This explainer is based on the Kaspa Ecosystem Foundation paper “An Economical Analysis of Stable Coin: M1, M2, M3 or M4?” The classifications below describe the paper's analytical framework; they are not presented as a single universally accepted official classification of stablecoins.

On August 10, 2025, the Kaspa Ecosystem Foundation (KEF) released a research paper titled "An Economical Analysis of Stable Coin: M1, M2, M3 or M4?", which explores stablecoins and real-world assets (RWA) through the Modern Monetary Theory (MMT).

The paper seeks to address a question that is still debated amongst economists: to what extent can stablecoins be classified as money? As it notes, "From a macroeconomic perspective, money is commonly defined as a medium of exchange, as a unit of account, and as a store of value."

Monetary assets are generally classified as M1, M2, M3, or M4 assets, with the definitions evolving.

In 1944, the U.S. Federal Reserve Board defined M1 money as: 1) physical cash held by the public, and 2) demand deposit accounts at commercial banks. Later in 1971, the Fed broadened the definition of M2 to include forms of money used as short-term stores of value, like savings accounts and money market instruments. Eventually, the classification system grew to include M0 to M4, and was based on the liquidity and rate-adjusted discount rate (RADR). RADR, also known as risk-adjusted discount rate, adjusts the base discount rate, usually by the weighted average cost of capital (WACC) or risk-free rate, to reflect the risk associated with the asset. (RADR = Base Rate + Risk Premium.) This idea is the simple principle: higher risk, higher return.

The classification framework describes the asset's purpose and capacity within the financial system. Cash remains the most widely used and recognized form of money, classified as M0 for its high liquidity and low risk. However, physical cash is limited by its form, and inflation erodes its ability to preserve wealth.

The KEF paper cites a McKinsey study projecting stablecoin transaction volume to grow from $230B in 2025 to$2T over the next three years. Meanwhile, stablecoin-issuer Circle (NYSE: CRCL) has seen its stock price rise by more than 200% since going public. This surge in adoption raises a key question: Where do stablecoins belong on the RADR scale—M0, M1, M2, M3, or M4?

M0: Under the paper's framework, privately issued stablecoins are not classified as M0 because they are not central-bank money. Major dollar stablecoins are instead issued by private entities such as Circle and Tether.

M1: Stablecoins can display M1-like characteristics when they function as immediately available payment instruments or deposit-like balances. The comparison concerns their economic function; it does not mean that every regulator or statistical authority formally records stablecoins as M1.

M2: This category covers time deposits that earn interest over a fixed term. Stablecoins qualify here when staked or lent to earn a predictable yield.

M3: Stablecoins can be viewed as demandable debt instruments issued by private entities, whose issuance and collateral reuse expand liquidity much like M3 assets such as Treasuries, marketable securities, and commercial paper.

M4: Stablecoins could also resemble M4 assets—tokenized bundles of financial instruments, such as a money market account of U.S. dollars and low-risk bonds. Stablecoins differ from managed funds in that users derive benefit from utility, not from returns.

The paper summarizes this view:

"The novelty of stablecoin relies on its combining feature of the liquidity and immediacy of M0, the transaction volume typical of M1, the yield-bearing properties of M2, the marketable nature of M3, and potentially even the asset securitization features associated with M4. This hybrid profile positions stablecoin as a multi-dimensional money."

It also stresses that not all stablecoins are created equal, and that their characteristics vary significantly across issuers and structures.

The authors close with a reminder that monetary policy must adapt to meet the challenges and opportunities of new asset classes:

"For governments and regulatory authorities, a nuanced comprehension of stablecoins will be critical for fostering innovation, enhancing monetary policy, and reshaping the architecture of the global financial system."