Can stablecoins save U.S. debt?

Author: GMF Research; Source: Tantu Macro

Editor's note: On May 21, 2025, the Senate passed the procedural motion of the GENIUS stablecoin bill at 69:31, entering the stage of full debate and amendment. This is the first comprehensive federal regulatory bill for stablecoins in U.S. history, marking a key step in stablecoin legislation. Interestingly, the launch of this stablecoin bill coincides with the time when demand for US Treasury bonds is poor and long-term interest rates continue to rise. Some bond investors have high hopes for the bill, believing that the growth of the scale of stablecoin will bring about new demand for US Treasury bonds, thereby alleviating US debt pressure. What is a stablecoin? What is its relationship with US debt? Can stablecoins (Bill) save U.S. debt? In this article we try to answer these questions.

1. What is a stablecoin?

Simply put, a stablecoin is a cryptocurrency. The most obvious difference between it and Bitcoin and Ethereum is to maintain its relative stability in its value by anchoring fiat currency (mainly the US dollar).

Stablecoins are not "indigenous" of blockchain. Each blockchain (such as Bitcoin chain, Ethereum chain) usually has only one "native token", such as Bitcoin (BTC) or Ethereum (ETH). Stablecoins are "derivative tokens" added to the blockchain by developers by writing code (usually smart contracts, such as Ethereum's ERC-20 standard). They are like installing a new plug-in for the blockchain to implement the function of anchoring fiat currency. Currently, about 50% of stablecoins are deployed on the Ethereum public chain, but more and more stablecoins are migrating to other smart public chains such as Solana and Tron. As of May 2025, the total size of stablecoins is approximately US$240 billion, accounting for 7% of the entire crypto asset market, of which approximately 80-85% are denominated in US dollars.

Why do cryptocurrency investors need stablecoins? The answer is to facilitate transactions and store of value on blockchain. The fiat currency price fluctuations in Bitcoin and Ethereum are comparable to roller coasters, with annualized volatility as high as 100%. In comparison, the S&P 500 index is only 20%, gold is 18%, and crude oil is about 40%. This drastic volatility makes them more like speculative risk assets than currency that is stable to store value, trade or denominated. The emergence of stablecoins is to solve this problem: it is 1:1 pegged to the US dollar and is on the blockchain, so it is easier to convert quickly with crypto assets than bank deposits, connecting the on-chain and off-chain markets. If the US dollar is the "vehicle currency" in the traditional financial field, then stablecoins are the "intermediate currency" in the crypto asset world.

A stablecoin is not always stable, it is highly dependent on the stability mechanism of the stablecoin. According to currency stability and market size, stablecoins are roughly divided into three types: Off-Chain Collateralized (about 90%) that uses traditional financial assets as collateral, on-Chain Collateralized (about 6%) that uses on-Chain Collateralized (about 6%) that uses on-Chain Collateralized (about 2%) that uses on-Chain Collateralized (about 2%) that uses on-Chain Collateralized (about 2%) that uses almost purely algorithms to maintain currency stability. Among these three types of stablecoins, the one that is most closely related to the traditional financial market, is also the main target of this US stablecoin bill, which is an off- chain collateralized stablecoin.

Simply put, off-chain mortgage stablecoins are stablecoins backed by the "real money" of the traditional financial market. Their essence is money market funds on the blockchain. The issuer's asset side mainly holds highly secure and liquid traditional financial assets (such as bank deposits, short-term treasury bonds, commercial paper) to ensure the stability of the value of fiat currency. From the perspective of the stability mechanism, since stablecoin holders can always redeem the corresponding amount of fiat currency to the issuer as needed, the price of stablecoins in the secondary market will not deviate significantly from $1, otherwise arbitrage will occur. Of course, in reality, these stablecoins have set certain redemption thresholds, so they are not perfect arbitrage. The most famous representative of off-chain pledged stablecoins is the USDT issued by Tether. It was born in 2014 and has a total market value of US$150 billion (i.e., circulating USDT). In addition to USDT, the larger off-chain collateralized stablecoin also has USDC issued by Circle, with a current market value of approximately US$60 billion.

2. What is the US stablecoin bill?

Stable coins are very similar to currency or even a currency, but they are free from regulation. Their rapid development implies several layers of financial stability risks.

One is the risk of bank runs and asset sell-offs. Roughly speaking, stablecoins are the "shadow bank" of the current cryptocurrency system - they exercise the functions of liquidity transformation, maturity transformation and credit transformation, but do not have a deposit insurance mechanism, nor can they obtain liquidity support from the central bank like banks, and there is a clear risk of bank runs. Gorton and Zhang (2021) compared the current stablecoins to the free banking era of the 19th century, believing that stablecoins, like private banknotes, do not meet the information-insensitive characteristics of "No Question Asked". Once a stablecoin encounters a large- scale run, it will inevitably sell its traditional world financial assets such as corporate bonds and commercial paper, and panic will even trigger a run in the traditional money market fund market. For example, after Lehman went bankrupt on September 15, 2008, Reserve Primary Fund, one of the largest money market funds in the United States, fell below the break the buck due to holding Lehman's commercial paper, which subsequently triggered a full run of money in the United States money market funds. Similarly, in 2023, USDC was temporarily decoupled to $0.95 due to the Silicon Valley banking crisis, but fortunately, the US Treasury Department and the Federal Reserve took timely action to ensure that all Silicon Valley banks have paid in full.

Second, it may lead to disintermediation of deposit moving and finance. The interest on stablecoin deposits (pled) on some blockchain platforms is much higher than the interest on bank deposits or money market funds in the real economy. On the one hand, the large number of transaction speculation activities on the blockchain have spawned the demand for "borrowing and leverage", which has pushed up the borrowing interest rates of stablecoins; on the other hand, new DeFi projects are emerging one after another, just like newly established banks, they often choose to provide high interest rates to "gather deposits". In the 1970s, the birth of US money market funds and high interest rates triggered deposit moves and exacerbated the savings and loan crisis. The current rapid growth of stablecoins may trigger a new round of bank deposits or money market share loss. If decentralized finance represented by stablecoins and smart contracts develop further, it may even aggravate the business loss of traditional financial institutions and cause financial disintermediation.

Third, the stablecoins themselves face criticism of lack of compliance and transparency. A few years ago, there were endless doubts about USDT's issuance of opaque, Tether's "market manipulation" and "issuance of stablecoins out of thin air" (Griffin and Shams, 2020). In March 2021, Tether agreed to disclose its reserve assets composition every quarter after paying a $40 million fine. As the Bank for International Settlements (BIS) said: "Stablecoins are creating a new parallel monetary system, but their risk control mechanisms remain in the steam era."

Against this backdrop, the Senate and the House of Representatives each promoted the corresponding stablecoin bill in 2025. Among them, the Senate's GENIUS Act (Guiding and Establishing National Innovation for US Stablecoins Act) is the first comprehensive federal stablecoin regulatory framework in the United States. It was presented by Senator Bill Hagerty (R-Tennessee) on February 4, 2025 and was voted on May 21 and entered the full debate and correction phase. The bill requires stablecoin issuers to obtain federal or state licenses, and all stablecoins must be reserved for 100% in US dollars, short-term US Treasury or equivalent high-liquid assets to ensure 1:1 redemption. Issuers need to regularly publicly make up reserves, publish monthly reports and undergo annual audits, especially issuers with market value of more than $10 billion need to undergo federal supervision. The bill also prohibits stablecoins from paying interest or income, restricts large technology companies and foreign companies from issuing stablecoins, emphasizes compliance requirements such as anti-money laundering (AML), understanding of customers (KYC), and requires issuers to have the technical ability to freeze or destroy tokens to meet law enforcement and national security needs. Since 1:1 reserve redemption is required, the GENIUS Act is equivalent to directly banning algorithmic stablecoins. The House's STABLE Act (Stablecoin Transparency and Accountability for a Better Ledger Economy Act) is similar to the Senate, but focuses more on consumer protection and dollar sovereignty.

The House is said to be coordinating with the Senate, aiming to pass a unified stablecoin bill before Congress adjourns in August.

3. What is the relationship between stablecoins and US debt?

Simply put, in order to maintain the stability of the currency value and cope with redemption pressure, off-chain mortgage stablecoins usually hold large amounts of short-term U.S. bonds.

Currently, USDT and USDC hold approximately US$120 billion in short-term debt. Like money market funds, off-chain collateralized stablecoins also need to frequently deal with large inflows and redemption requirements, and ensure that they can achieve "rigid redemption", which means that ultra-short-term US bonds with extremely high liquidity, security and almost no fluctuations in market value are their most important holding products. According to USDT's audit report for the first quarter of 2025, about 2/3 of its total assets are short-term T-bills, with a total amount of approximately US$100 billion; 15% are cash and equivalents (repurchase, money-based), precious metals and Bitcoin each account for 5%, and other investments are about 10% (Figure 2). In terms of term, USDT clearly stated in its audit report that the remaining term of the US Treasury it holds is within 3 months. Looking at USDC, as of the end of March, about 40% of USDC's total assets were short-term US T-bills, with a total amount of about US$20 billion, 50% were reverse repurchases, and the remaining 7% were cash assets (Figure 3). Similar to USDT, USD debts held by USDC are also short-term debts, and the remaining term is shorter, only 12 days. Although the reverse repurchases they issue may provide financing for other investors to hold long-term U.S. bonds, stablecoins themselves do not directly hold any U.S. bonds of more than one year.

However, since the total scale of stablecoins is too small, the current demand for US bonds for stablecoins is not worth mentioning in order to calm down US bond selling pressure. The short-term U.S. Treasury bonds account for only about 2% of the total U.S. Tbills scale and 0.4% of the total U.S. tradable U.S. Tbills scale. In addition, from the perspective of term, both USDT and USDC hold Tbills with a duration of 3 months, and there is no relief to the upward pressure on long-term interest rates.

4. Can stablecoins (Bill) save U.S. debt?

On May 22, Eastern Time, the House of Representatives officially passed the House version of Trump's tax cut bill - the Great Beauty Act (OBBB), with a slight advantage (215:214), and handed over to the Senate for discussion. Although the total deficit increase on the 10-year scale is not an exaggeration (not considering the cumulative deficit increase of US$2.3 trillion in the 10-year period), it shows the characteristics of "tax cuts before and after spending" from a rhythm (Figure 4), that is, the main deficit growth is in 2026-2028 (before Trump's step down). The result of this pre- position is that once the new president takes office in 2029, the budget coordination process may be restarted to modify the "original austerity clause" in the next few years. The result is that "the deficit is literally increasing, and austerity is only reflected in the CBO's estimates." It once again reflects the House Republicans' exploitation of rule loopholes and their political stance of "wanting to tighten but not daring to tighten." What's more, the fiscal position of Senate Republicans may be more relaxed than that of the House of Representatives. In the future, OBBB will need to be adjusted by the Senate, which is at risk of further expanding the deficit.

In fact, since the beginning of the year, Republicans' spending and deficit reduction have always been in a state of "high thunder and little rain." Neither Musk’s government efficiency department nor the budget coordination bill mentioned above (to modify taxes and necessary expenditures over the next 10 years), and the appropriations bill for fiscal 2025 (dominates non- essential expenditures), have fulfilled its austerity commitments, and market concerns about U.S. fiscal sustainability and the supply of U.S. bonds. At present, the only income that really could significantly hedge tax cuts still comes from tariffs. In addition, the US exceptional narrative has faded, and investors are actively seeking non-US investment opportunities, which has caused the long-term interest rates in the United States to fluctuate and rise in the long-term interest rate since April, driven by the maturity premium (Figure 5). "Who will buy US debt" has become a topic of concern in the market. Against this background, this stablecoin bill has been given high hopes by bond bulls, hoping to increase market demand for US bonds and resolve U.S. debt pressure.

Logically speaking, the boost in demand for US bonds by the stablecoin bill will come from two aspects: pushing up the allocation ratio of stablecoins to US bonds, and pushing up the total scale of stablecoins. We discuss it separately.

The new bill cannot effectively increase the proportion of U.S. bonds in assets held by stablecoin issuers. Whether it is the GENIUS or the STABLE Act, it does not require stablecoins to only hold US Treasuries, but only requires them to be allocated in high-security, high-liquidity assets (similar to banks' high-quality and liquid assets, HQLA). This means that the current mainstream stablecoins USDT and USDC are likely to have basically met the asset allocation requirements of the bill - they have allocated almost all assets to cash and cash equivalents such as US bonds and reverse repurchases, and the motivation to further push up the share of US bonds is unclear.

The new bill may stimulate growth in stablecoins. From the perspective of total scale, the passage of the stablecoin bill will mean that traditional companies such as banks can legally launch their own stablecoins to promote business, which may indeed lead to a steady growth in the total scale of the stablecoin, but the geometry of the amplitude is not easy to say. In early May, the U.S. Treasury Department's Borrowing Advisory Committee (TBAC) made a calculation that it believes that the total size of stablecoins will increase by 8 times to 2 trillion in the next three years. Assuming 50% of these are short-term US Treasury bonds, it can bring about an incremental US Treasury demand of approximately 1 trillion yuan. But TBAC estimates may overestimate the future demand for new U.S. bonds for stablecoins. First, stablecoins do not grow out of thin air, but are likely to come from the outflow of funds from traditional banks and money market funds. This means that the increase in demand for US bonds by stablecoins will also affect the demand for US bonds by banks and money market funds. Second, the 8-fold growth in three years (doubled at an average of one year) is relatively optimistic. The cumulative scale of stablecoins has only increased by 70% in the past three years. The cumulative growth of stablecoins from mid-2020 to mid-2023 is about 8 times, but the background coincides with the Fed's massive easing from 2020 to 2021 and the "Summer of DeFi" (explosive growth of decentralized finance). These conditions are not likely to occur in the current high inflation and high interest rate environment. Ultimately, the size of the stablecoin depends on investors' demand for DeFi activity and crypto asset trading, not the introduction of regulatory policies. Third, strict supervision of the bill may lead to regulatory arbitrage. The bill requires issuers to audit monthly and AML/KYC compliance, and requires cooperation in law enforcement at any time, which increases issuance and use costs, conflicts with the concept of decentralization and may drive funds to flow to loose-regulated stablecoins such as on-chain collateralized stablecoins or non-U.S. issuers, which will further weaken the demand for U.S. bonds.

The more important problem is that the demand for US bonds is concentrated on the ultra-short end, which cannot directly alleviate the long-term upward trend caused by the current poor demand in the US bond market. In fact, from August to October 2023, the interest rate of long-term U.S. bonds rose sharply due to the continued issuance of medium- and long-term U.S. bonds (coupons) of more than one year. The 10-year interest rate once rose from 3.8%, highlighting the poor market demand for duration. In view of this incident, the US Treasury Department stopped issuing additional issuances to private sector coupons after 2024 (issuance remains unchanged), and all additional financing gaps are filled by Tbills. Ridiculously, US Treasury Secretary Scott Bessent publicly criticized former Treasury Secretary Janet Yellen for continuing to issue additional Tbills before taking office, believing that excessive reliance on short-term debt increases the risk of refinancing of the Treasury and recommends issuing additional 10-year and 30-year long-term bonds. But after he came to power, he chose the same strategy, and even further conveyed the message that the pace of coupon issuance will remain unchanged in the quarterly refinancing meeting (see the refinancing meeting in May this year). The problem of poor U.S. debt-to-demand demand is really "you can't stomp it."

However, if the Ministry of Finance is willing to cooperate with the growth of stablecoin scale and further reduce the proportion of US bond issuance in the future, the duration problem may still turn around. A simple estimate is that if stablecoins bring an additional 1 trillion Tbills demand in the next three years, the Federal Reserve's balance sheet reduction ends and returns to slow balance sheet expansion (mainly increasing its holdings of Tbills) brings a total of 1 trillion Tbills demand (estimated based on the rate of restarting the expansion of balance sheets from October 2019 to the eve of the epidemic), and combined with the incremental demand for Tbills brought by the natural growth of funds in the money market, the market may be able to digest an additional 2-3 trillion Tbills, accounting for 7-10% of the current total stock of tradable US Tbills. If Bessent is willing to make full use of these factors, the proportion of Tbills can theoretically increase from the current 21% to more than 30%. Although it is significantly higher than the current TBAC recommendation of 15-20%, it does reduce the market's duration supply. Of course, there is no free lunch in the world. The cost of doing so is that the US Treasury bond quota that the Ministry of Finance rolls out every month will further increase significantly, and the short-term interest rate risks it bears will also further increase.

It should be noted that whether it is relying on stablecoins, choosing to issue additional T-bills, or revaluing the market price of the Ministry of Finance's gold reserves, they are short-term trade-offs rather than fundamental solutions. Treasury technocrats are trying their best to make a trade-off between interest rate levels and interest rate fluctuations, and the real lesions of U.S. debt – as Powell, Dario or Drucken Miller said – is that U.S. finance is on an unsustainable path, and neither Republicans nor Democrats have the courage and will to take the initiative and significantly tighten the fiscal policy. In a political environment with lack of fiscal discipline, any seemingly clever way to delay debt problems is to cover up the bell and dig your own grave.