Stablecoins have hit the headlines of late, as a groundbreaking US bill to regulate the cryptocurrency market was signed into federal law. This article takes a closer look at these digital assets and the implications of their growing adoption for the US Treasury market and investors.

Stablecoins are a class of digital assets that are designed to maintain a steady value by being pegged to a reference asset, typically a fiat currency such as the US dollar (USD). Unlike traditional cryptocurrencies, whose prices can fluctuate rapidly, stablecoins combine the transparency and speed of blockchain technology with minimal volatility for users.

Stablecoins were launched in 2014 with the development of Tether (USDT), the largest stablecoin to date, which, alongside USD Coin (USDC), accounts for over 85% of the total supply, which has topped $230 billion this year.

The vast growth in stablecoins highlights their evolving role as financial infrastructure. This has profound implications for policymakers, financial institutions, companies and, ultimately, investors, as stablecoins challenge traditional financial systems, necessitate robust regulatory frameworks and open new channels for capital flow.

The role of stablecoins

Initially, stablecoins were used predominantly as a stepping stone to trading cryptocurrencies, as they allow investors to quickly execute in and out of volatile cryptocurrencies without converting back to fiat currency. However, with the broader rise of decentralisation, the role of stablecoins has become more diverse.

First, stablecoins can act as a store of value, providing individuals, particularly in countries with volatile currencies, an alternative location to store deposits. This is particularly evident in emerging markets, where heightened inflation can erode the purchasing power of local currencies. As such, banks exposed to international deposits may see increasing deposit competition during periods of high currency market volatility.

Second, the cryptocurrency offers near instant and cost-effective payment capabilities, as transactions occur on a blockchain, which can reduce companies’ dependence on payment providers (see graphic below). This attribute allows merchants and retailers handling large payment volumes to improve margins by reducing the amount of transaction fees paid. In fact, companies like Amazon and Walmart have already expressed interest in creating their own stablecoins.

Third, stablecoins play a key role in decentralised lending protocols, which use smart contracts to eliminate the need for a central authority, such as banks, and thus allow counterparties to lend and borrow directly from each other. In such transactions, stablecoins are either borrowed by users, who deposit cryptocurrencies as collateral in exchange for liquidity, or lent by holders seeking yield from stable assets.

Regulatory environment

The growing adoption of stablecoins has unsurprisingly attracted attention from regulators, who are seeking to protect consumers from the risks that stablecoins pose. The regulatory environment differs by geography, with regions such as Europe, Hong Kong and Singapore already having some form of cryptocurrency regulation. Whilst the US has been slower to initiate a stablecoin bill, the US administration has recently passed the so-called ‘GENIUS’ act — a groundbreaking bill that established the first federal regulatory framework for payment stablecoins, which has important implications for the US Treasury market.

Implications for the Treasury market

Stablecoins are typically backed by a variety of assets held in reserve funds, with the GENIUS act requiring stablecoin issuers to maintain 100% reserve backing for every stablecoin issued. Reserve holdings are concentrated in short-term investments, the largest asset being Treasury bills, as issuers tend to hold short-term, highly liquid assets to reduce underlying volatility risk.

As such, the growth of stablecoin supply is becoming an increasingly important source of demand in the short-term government debt market, which can support Treasury liquidity in times of heightened issuance and reduce short-term borrowing costs.

To put that into perspective, Tether, the issuer of USDT, was the seventh-largest buyer of US Treasuries in 2024, surpassing countries like Germany and Canada, with a total of $121 billion worth of Treasuries. That said, accelerated adoption could increase volatility in Treasury markets, should stablecoin owners redeem balances at a rapid pace, similar to a bank run.

Adoption risks

Whilst stablecoin adoption has promising implications for the financial industry, this is not without risks. Arguably, the biggest fear with stablecoins is the risk of de-pegging. This occurs when a stablecoin loses its 1:1 ‘peg’ to the underlying currency. This might be due to volatility shocks across crypto markets, which is what caused the fall of the Terra Luna stablecoin, UST, in May 2022. However, in contrast to USDT and USDC, which are backed by reserves like US Treasuries, UST relied on a complex algorithm relationship with another cryptocurrency, something that the GENIUS act prohibits.

Another risk, not addressed by the GENIUS act, is the counterparty risk associated with stablecoin issuers. Whilst stablecoins act as an alternative to a bank deposit, balances are not insured by the Federal Deposit Insurance Corporation, as provided by the government-backed organisation to savers at banks. This means that consumers can lose the entirety of their holdings should their issuer experience a credit event.

Widespread adoption, and the implied increase in T-bill demand, are thus conditional on the extent to which consumers are willing to hold stablecoin balances and transact through them. This could be more difficult than many expect.

Although consumers can earn interest via decentralised lending, stablecoin balances are ultimately a non-interest-bearing product (as regulated by the GENIUS act), so the incentives for consumers are debatable. Stablecoin adoption is still in its infancy, but the direction of travel is clear and future innovations within the space could drive more widespread stablecoin use.