Stablecoins backed by U.S. Treasury bonds are quietly constructing an on-chain version of the broad money supply (M2). Leading stablecoins like USDT and USDC now have a combined circulation of approximately $2.2–2.56 trillion, accounting for about 1% of the U.S. M2 money supply, which stands at $21.8 trillion. Roughly 80% of their reserves are allocated to short-term U.S. Treasuries and repurchase agreements, making these issuers significant players in the sovereign debt market.
This trend is generating widespread implications:
- Stablecoin issuers have become major buyers of short-term U.S. Treasuries, with estimated holdings between $150–200 billion, comparable to the holdings of mid-sized sovereign nations.
- On-chain transaction volumes have surged, reaching $27.6 trillion in 2024 and projected to hit $33 trillion in 2025—surpassing the combined volumes of Visa and Mastercard.
- Proposed U.S. fiscal policies could increase public debt by approximately $3.3 trillion, with stablecoins positioned to absorb a significant portion of this new debt supply.
- Forthcoming legislation is expected to explicitly classify Treasury bills as legal reserve assets, institutionalizing the link between fiscal expansion and stablecoin supply and creating a feedback loop where private-sector entities absorb public deficits while extending dollar liquidity globally.
How Stablecoins Expand the Broad Money Supply
The issuance process of stablecoins is straightforward yet carries profound macroeconomic implications:
- Users send fiat U.S. dollars to the stablecoin issuer.
- The issuer uses these funds to purchase U.S. Treasury bonds.
- The issuer mints an equivalent amount of stablecoins, backed by these Treasuries held on its balance sheet.
- The stablecoins circulate freely on blockchain networks.
This mechanism effectively creates a form of "monetary replication." The base money (wire-transferred funds) is used to purchase government bonds, while the stablecoins themselves function like demand deposits or payment tools. Thus, even though the base money supply remains unchanged, the broad money supply expands outside the traditional banking system.
Stablecoins currently represent 1% of M2. Each 10-basis-point increase in this share injects approximately $22 billion of "shadow liquidity" into the financial system. According to Standard Chartered and the U.S. Treasury Borrowing Advisory Committee (TBAC), the total stablecoin supply is projected to reach $2 trillion by 2028. If M2 remains constant, stablecoins would account for about 9% of M2—roughly equivalent to the current size of institutional money market funds.
By legally enshrining T-bills as compliant reserves, the U.S. is effectively turning stablecoin expansion into an automatic source of marginal demand for Treasury debt. This mechanism partially privatizes U.S. debt financing, transforming stablecoin issuers into systematic supporters of fiscal policy. Simultaneously, it advances the internationalization of the dollar by enabling global users to hold and transact in dollars without needing access to the U.S. banking system.
Implications for Various Investment Portfolios
For digital asset portfolios, stablecoins form the foundational liquidity layer of crypto markets. They dominate trading pairs on centralized exchanges, serve as the primary collateral in decentralized finance (DeFi) lending markets, and act as default units of account. Their total supply serves as a real-time indicator of investor sentiment and risk appetite.
Notably, stablecoin issuers earn returns on T-bill holdings (currently 4.0% to 4.5%) but pay no interest to stablecoin holders. This creates a structural arbitrage difference compared to government money market funds. Investors choosing between holding USDT/USDC and participating in traditional cash instruments are essentially trading yield for 24/7 liquidity.
For traditional dollar asset allocators, stablecoins are becoming a persistent source of demand for short-term Treasuries. Their current reserves of $150–200 billion could absorb nearly one-quarter of the expected Treasury issuance for fiscal year 2025 under proposed fiscal expansions. If stablecoin demand grows by an additional $1 trillion by 2028, models suggest that the yields on 3-month Treasury bills could decline by 6–12 basis points, leading to a steeper front-end yield curve and potentially lowering short-term financing costs for corporations.
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Key Trading Themes to Monitor
Macroeconomic Impact of Stablecoins
U.S. Treasury-backed stablecoins introduce a channel for monetary expansion that bypasses traditional banking mechanisms. Each stablecoin unit backed by Treasuries represents disposable purchasing power, even though the underlying reserves remain locked.
Moreover, stablecoins circulate much faster than traditional deposit accounts—approximately 150 times per year. In high-adoption regions, this could amplify inflationary pressures even without growth in the base money supply. Currently, global demand for digital dollars as a store of value dampens short-term inflation transmission but accumulates long-term external dollar liabilities for the U.S., as increasing on-chain assets ultimately represent claims on U.S. sovereign assets.
Stablecoin demand for 3–6 month Treasuries also creates steady, price-insensitive buying pressure at the front end of the yield curve. This persistent demand compresses bill-OIS spreads and reduces the effectiveness of Federal Reserve policy tools such as interest on excess reserves (IOER) and reverse repurchase agreements (RRP). As stablecoin circulation grows, the Fed may need more aggressive quantitative tightening or higher policy rates to achieve the same tightening effect.
Structural Shift in Financial Infrastructure
The scale of stablecoin infrastructure can no longer be ignored. Annual on-chain transaction volumes have reached $33 trillion, exceeding the combined totals of Visa and Mastercard. Stablecoins offer near-instant settlement, programmability, and ultra-low-cost cross-border transactions (as low as 0.05%)—far superior to traditional remittance channels (6–14%).
Stablecoins have also become the preferred collateral in DeFi lending, supporting over 65% of protocol loans. Tokenized T-bills—yield-bearing, on-chain instruments tracking short-term Treasuries—are expanding rapidly, with annual growth exceeding 400%. This trend is fostering a "dual dollar system": zero-interest coins for transactions and interest-bearing tokens for holding, further blurring the line between cash and securities.
Traditional banks are taking notice. The CEO of Bank of America has publicly expressed willingness to "issue a bank stablecoin once legally permitted," reflecting concerns about the migration of client funds to on-chain environments.
Larger systemic risks stem from redemption mechanisms. Unlike money market funds, stablecoins can be liquidated within minutes. Under stress scenarios such as depegging, issuers might need to sell tens of billions in Treasuries intraday. The U.S. Treasury market has not yet been stress-tested under such immediate selling pressure, posing challenges to its resilience and interconnectedness.
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Strategic Priorities and Future Outlook
- Reconceptualizing Money: Stablecoins should be viewed as a new form of eurodollar—operating outside traditional regulation, difficult to measure, but wsignificant influence on global dollar liquidity.
- Interest Rates and Treasury Issuance: Short-term U.S. rates are increasingly influenced by stablecoin issuance cycles. Monitor net issuance of USDT/USDC alongside primary Treasury auctions to identify rate anomalies and pricing distortions.
Portfolio Allocation Strategies:
- For crypto investors: Use zero-interest stablecoins for daily trading and allocate idle funds to tokenized T-bill products for yield.
- For traditional investors: Consider equities of stablecoin issuers and structured notes linked to returns on reserve assets.
- Systemic Risk Preparedness: Large-scale redemption volatility could directly transmit to sovereign debt and repo markets. Risk management teams should model scenarios involving sharp Treasury yield spikes, collateral shortages, and intraday liquidity crises.
U.S. Treasury-backed stablecoins are no longer just convenient tools for crypto trading. They are rapidly evolving into "shadow money" with macro-critical impact—funding fiscal deficits, reshaping interest rate structures, and reconfiguring the global circulation of dollars. For multi-asset investors and macro strategists, understanding and adapting to this trend is no longer optional—it is essential.
Frequently Asked Questions
What are U.S. Treasury-backed stablecoins?
They are digital currencies pegged to the U.S. dollar and backed primarily by short-term U.S. Treasury securities. Examples include USDT and USDC, which hold Treasuries as reserves to ensure stability and redeemability.
How do stablecoins affect the traditional banking system?
Stablecoins create a parallel financial system outside traditional banks by offering on-chain dollar liquidity. They reduce reliance on bank-mediated payments and may compete with deposits, prompting banks to explore their own digital currency initiatives.
Can stablecoins influence U.S. Treasury yields?
Yes. Large-scale purchases of short-term Treasuries by stablecoin issuers can increase demand pressure, potentially lowering front-end yields and distorting yield curve dynamics, especially in periods of high issuance growth.
What risks do stablecoins pose to financial stability?
Key risks include rapid large-scale redemptions forcing fire sales of Treasuries, collateral shortages in repo markets, and operational vulnerabilities in on-chain settlement systems during stress events.
How can investors benefit from stablecoin growth?
Investors can use stablecoins for efficient transactions, yield generation through tokenized T-bills, or exposure to issuers' equity. They also provide real-time indicators of crypto market liquidity and risk appetite.
Are stablecoins regulated?
Regulatory frameworks are evolving. U.S. legislation is expected to clarify reserve requirements and redemption rules, potentially enhancing stability but also imposing compliance costs on issuers.