Stablecoins and the US Treasury Market: A Growing Relationship

As the US national debt surpasses the $37 trillion mark and continues to climb, a new player is emerging in the Treasury market: stablecoin issuers like Tether and Circle. They are increasingly viewed as significant purchasers of US Treasury bonds.

The GENIUS Act and Its Impact on the Stablecoin Market

A recent pivotal development has been the enactment of the GENIUS Act. This legislation provides a clear regulatory framework and establishes key milestones for the stablecoin industry, encouraging major Wall Street financial institutions to adopt these dollar-pegged digital currencies on a wider scale.

Stablecoins and the US Dollar: A Complementary Relationship

HSBC analysts have previously noted that a well-regulated stablecoin market could bolster the dominance of the US dollar in the digital finance realm, aligning with former President Donald Trump's goal of making the United States a global cryptocurrency hub.

Legal Requirements Boosting Treasury Demand

Under the new law, stablecoin issuers are required to maintain reserves that cover the value of the issued currencies at a 1:1 ratio, using US dollars or high-quality liquid assets. This makes short-term Treasury bills a highly attractive option as collateral for these reserves.

Benefits of the GENIUS Act: A Comprehensive View

Bensent highlighted the multiple benefits of the GENIUS Act, noting that it strengthens the US dollar's position as a global reserve currency, expands access to the dollar-based economy for billions of people worldwide, and leads to a significant increase in demand for US Treasury bonds as collateral for stablecoins. This creates a win-win situation for everyone: stablecoin users, issuers, and the US Treasury Department.

Tether and Circle Dominate the Stablecoin Market

Tether and Circle dominate the $250 billion stablecoin market, which saw growth of 22% in 2023. Tether (USDT) holds approximately 65% of the total market capitalization of stablecoins, while Circle (USDC) holds another 25%, together accounting for 90% of the market.

Tether's Strategic Expansion in the United States

In a strategic move, Tether announced the appointment of Bo Hines, a former White House cryptocurrency policy executive, as a strategic advisor to help guide its expansion in the United States.

A Growing, but Not Yet Dominant, Role

Although the majority of stablecoin issuers' reserves consist of short-term US Treasury bonds, this sector has not yet been seen as a major component of the Treasury market.

Analysis of Current Reserves

The Federal Reserve Bank of Kansas City points out that stablecoin issuers hold approximately $125 billion in Treasury bills, which represents less than 2% of the total outstanding Treasury bills of $6 trillion. In comparison, insurance companies hold approximately five times this amount, while mutual funds, the largest private buyer, hold $4.5 trillion, or 36 times as much.

Future Growth Projections

Economist Stefan Jacewitz of the Federal Reserve Bank of Kansas City believes that although the stablecoin market is currently too small to significantly impact Treasury demand, it is expected to grow substantially in the coming years.

Optimistic Wall Street Forecasts

This is what Wall Street is betting on. JPMorgan Chase expects the market size to double by 2028, reaching $500 billion, while Standard Chartered predicts it will reach $2 trillion over the same period. Bernstein expects it to reach $4 trillion by 2035.

Changes in the Treasury Market

As demand for stablecoins increases, the US Treasury Department is increasingly relying on issuing short-term Treasury bills, while traditional buyers such as China, Japan, and Canada are reducing their purchases.

Decline in Foreign Creditor Share

Ark Invest's analysis shows that the share of the largest foreign creditors in US Treasury bonds has fallen from 23% to just over 6% over the past 13 years. This trend is expected to continue under Trump's tariff policies and the broader shift of foreign central banks towards reducing their bond holdings.

Effects of Monetary Tightening

At the same time, the Federal Reserve is gradually reducing its bond purchases in the process of quantitative easing.

Tether as a Major Treasury Buyer

In 2024, Tether was the seventh-largest buyer of US Treasury bonds, after the United Kingdom and Singapore. Lorenzo Valente of Ark Invest wrote in June: "Clearly, Tether, Circle, and the broader stablecoin industry could create one of the largest sources of demand for US Treasury bonds in the coming years, and could potentially replace Japan as the largest holder by 2030. If so, the stablecoin industry could make a significant contribution to the goal of lowering US long-term interest rates."

Impact of Stablecoins on Treasury Yields

According to the Bank for International Settlements (BIS), stablecoins backed 1:1 by the US dollar may be affecting short-term yields. Their data shows that stablecoin inflows of $3.5 billion over five days could lower three-month Treasury bill yields by about 2-2.5 basis points within 10 days.

Potential Impact on Debt Issuance Policy

Christopher Vecchio, co-head of global macro at futures and options trading network tastylive, points out that "If industry forecasts are even slightly accurate, and demand for stablecoins surges to over $1 trillion in the coming years, stablecoins will not only continue to impact short-term yields, but will also become an important factor for the Treasury Department to consider when determining its debt issuance schedule."

Warnings About Capital Flows

Industry watchers warn that as funds shift to stablecoins, it is likely that these funds will flow out of bank deposits, reducing bank balances and lowering reserve requirements. Jacewitz of the Federal Reserve Bank of Kansas City wrote: "This potential flow of funds from bank deposits to stablecoins could increase demand for Treasury bonds, but it could also reduce the supply of loans in the economy."

An Overall Positive Outlook

Despite this, industry participants believe that the net effect is positive. Will Beeson, founder of fintech infrastructure company Uniform Labs, notes: "Stablecoins will become a meaningful accelerator of economic growth in the United States and beyond."