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.