The United States' landmark stablecoin legislation is sparking heated debate on Wall Street: can this digital asset truly and significantly strengthen the dollar's position and become a major source of demand for short-term U.S. Treasury bills (T-bills)?
Original: The $3 Trillion Stablecoin Link That's Got Wall Street Doubting
By Ye Xie & Anya Andrianova, Bloomberg
Compiled by: Felix, PANews
The United States' landmark stablecoin legislation is sparking heated debate on Wall Street: can this digital asset truly and significantly strengthen the dollar's position and become a major source of demand for short-term U.S. Treasury bills (T-bills)?
Despite differing opinions, strategists at firms like JPMorgan Chase, Deutsche Bank, and Goldman Sachs agree that it is premature to declare stablecoins "game changers," no matter how optimistic President Donald Trump and his advisors may be about their prospects as a new pillar of the U.S. financial system. Moreover, some see inherent risks.
Steven Zeng, a U.S. market strategist at Deutsche Bank, said: "The predicted size of the stablecoin market is too exaggerated. Everyone is watching and waiting, but no one dares to make a directional bet. There are also many skeptics."
Stablecoins are digital tokens whose value is pegged to traditional currencies, most commonly the US dollar, and exhibit significantly lower volatility than market-based cryptocurrencies like Bitcoin. They act as an alternative to cash on the blockchain, serving as digital stores of funds similar to bank accounts, and can also be used for real-time transfers or transactions.
Since the stablecoin legislation known as the Genius Act officially took effect in July of this year, industry supporters have regarded it as a key breakthrough that will pave the way for the wider adoption of dollar-denominated digital currencies in the financial system. Last month, U.S. Treasury Secretary Scott Bessent estimated that the bill could boost the dollar-denominated stablecoin market from its current size of approximately $300 billion to $3 trillion by 2030.
Under the new law, stablecoin issuers must back their dollar-denominated stablecoins 100% with reserves of short-term Treasury bonds and other cash equivalents. Bessent believes the upcoming surge in demand driven by stablecoins will allow the Treasury to issue more short-term Treasury bonds, thereby reducing reliance on long-term bonds and easing pressure on mortgage rates and other borrowing costs pegged to long-term benchmarks.
Robert Tipp, chief investment strategist and head of global bonds at PGIM Fixed Income, said, "The Treasury is focused on borrowing costs. Stablecoins can play a role in this process."
Currently, stablecoins (primarily Tether's USDT and Circle's USDC) hold approximately $125 billion in U.S. Treasury securities, approaching 2% of the short-term Treasury stock at the end of last year (August research by the Federal Reserve Bank of Kansas City). According to data from the Bank for International Settlements, these issuers purchased approximately $40 billion in short-term Treasury securities last year alone. However, compared to U.S. money market funds holding approximately $ 3.4 trillion in Treasury securities, stablecoins remain a relatively small player .
Most analysts believe the stablecoin market will certainly expand under the gradually taking shape regulatory framework over the next year, but predictions vary widely. JPMorgan Chase expects the market to grow to as much as $ 700 billion in the coming years, while Citigroup's optimistic forecast could reach as high as $ 4 trillion.
Teresa Ho, head of short-term strategy for the U.S. at JPMorgan Chase, said: “Of course, we’ve seen a lot of positive momentum over the past year. But the growth rate—I don’t think it will grow to $2 trillion, $3 trillion or $4 trillion in just a few years.”
The ultimate goal of crypto industry proponents is to make stablecoins a mainstream payment method, which will directly challenge the traditional banking system. Small and medium-sized banks are particularly concerned about deposit outflows leading to credit contraction; large banks, on the other hand, plan to issue their own stablecoins and profit from interest on reserves.
Currently, stablecoins are primarily used for cryptocurrency transactions. Recent market volatility demonstrates the rapid shifts in sentiment towards digital assets, and stablecoins may experience capital outflows. Even if the most optimistic growth forecasts materialize, the actual boost to demand for government bonds may be far less than expected.
Is the net effect zero?
Skeptics point out that stablecoins receive inflows primarily from four sources: government money market funds, bank deposits, cash, and overseas demand for the US dollar.
Stablecoin issuers represent a very small percentage of bondholders and remain a "minor player."
Given that the Genius Act prohibits stablecoins from paying interest, yield-seeking investors have little incentive to move funds out of savings accounts or money market funds, limiting their potential growth . Moreover, even if investors did move funds from money market instruments (currently the largest buyers of short-term Treasury bonds), the net effect would likely be zero: it would not create new demand for short-term Treasury bonds, but merely change the identity of the holder.
Brad Setser, a senior fellow at the Council on Foreign Relations, said: “I’m skeptical. If demand for stablecoins surges, some existing holders of Treasury bonds will be squeezed out of the market and turn to other alternatives, such as other short-term securities.”
Stephen Miran, White House chief economist and current Federal Reserve governor, acknowledged that domestic demand for stablecoins may be limited, but he believes the real opportunity lies overseas — where investors are willing to accept zero returns in exchange for exposure to dollar assets .
In a recent speech, Federal Reserve Governor Miran linked the potential impact of stablecoins to the Fed’s quantitative easing policy and the global “savings glut” that has driven interest rates down significantly.
Standard Chartered estimates that by 2028, the shift of funds to stablecoins could lead to approximately $1 trillion in capital outflows from banks in developing countries. This will almost certainly prompt regulators in these countries to restrict the adoption of stablecoins. The European Central Bank and others are developing their own digital currencies to counter competition from private dollar-denominated stablecoins.
Goldman Sachs analysts Bill Zu and William Marshall wrote: "If capital controls restrict access to traditional dollars, then they may also apply to dollar stablecoins."
Federal Reserve factors
Another factor that could weaken the impact of stablecoins on demand for Treasury bonds might be the Federal Reserve itself. CIBC strategist Michael Cloherty points out that if stablecoins "isolate" circulating dollars (a liability on the Fed's balance sheet), then the Fed would need to correspondingly reduce its asset size, including its $4.2 trillion Treasury bond portfolio. This means that "most" of the demand for Treasury bonds generated by stablecoins might simply be a replacement for the Fed's existing holdings.
Over-reliance on short-term debt also comes at a cost: it reduces the predictability of government financing, necessitates more frequent debt rollovers, and exposes the U.S. to the risk of changing market conditions. And no change happens overnight.
Zeng of Deutsche Bank estimates that stablecoins could grow by $1.5 trillion over the next five years, funded by outflows from domestic and overseas liquidity pools. This will generate approximately $200 billion in incremental demand for Treasury bonds annually—a considerable amount, but a drop in the ocean compared to the massive scale of U.S. government borrowing. Federal debt has already ballooned to over $30 trillion and is projected to increase by another $22 trillion over the next decade.
Steven Barrow, head of G10 strategy at Standard Bank in London, said: “ I wouldn’t be blindly optimistic about the dollar and U.S. Treasuries just because governments may have new ideas . It’s wrong to say that stablecoins can’t solve anything, but what’s really worrying is that they ‘ can’t get you out of the quagmire of debt and deficits . ’”
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