Bloomberg: Stablecoins May Not Help the US Escape Debt and Deficit Quagmire

Written by: Ye Xie & Anya Andrianova, Bloomberg

Translated by: Felix, PANews

The passage of landmark stablecoin legislation in the US is sparking fierce debate on Wall Street: Can this digital asset truly strengthen the dollar’s position and become a significant source of demand for short-term US Treasuries (T-bills)?

Despite varying opinions, strategists at companies such as JPMorgan, Deutsche Bank, and Goldman Sachs agree that, no matter how optimistic US President Donald Trump and his advisors are about stablecoins as a new pillar supporting American finance, it’s still too early to call stablecoins a “game changer.” Some even see risks involved.

Deutsche Bank US market strategist Steven Zeng stated, “The projected size of the stablecoin market is exaggerated. Everyone is watching, but no one dares to make a directional bet. Skeptics are not in short supply.”

Stablecoins are digital tokens pegged to traditional currencies—most commonly the US dollar—and are far less volatile than market-traded cryptocurrencies like Bitcoin. They serve as cash substitutes on blockchains, can be used to store funds digitally like a bank account, and facilitate real-time transfers or transactions.

Since the so-called “Genius Act” stablecoin legislation came into effect in July this year, industry supporters have hailed it as a key breakthrough that will pave the way for wider use of dollar-denominated digital currencies in the financial system. US Treasury Secretary Scott Bessent estimated last month that the act could help grow the dollar stablecoin market from about $300 billion now to $3 trillion by 2030.

Under the new law, stablecoin issuers must fully back dollar stablecoins with 100% reserves in short-term Treasuries and other cash equivalents. Bessent believes the coming surge in demand driven by stablecoins will allow the Treasury to issue more short-term debt, reducing reliance on long-term bonds and easing pressure on mortgage rates and other lending costs tied to long-term benchmarks.

Robert Tipp, chief investment strategist and head of global bonds at PGIM Fixed Income, said, “The Treasury is concerned about borrowing costs.” Stablecoins “can play a role in this process.”

Currently, dollar stablecoins (mainly Tether’s USDT and Circle’s USDC) hold about $125 billion in US Treasuries, close to 2% of the outstanding short-term Treasury market at the end of last year (Kansas City Fed research, August). According to the Bank for International Settlements, these issuers bought about $40 billion in short-term Treasuries just last year. However, compared to US money market funds holding about $3.4 trillion in Treasuries, stablecoins remain a “bit player.”

Over the past year, the number of Tether and Circle tokens has surged.

Most analysts believe the stablecoin market will surely expand under the evolving regulatory framework over the coming year, but forecasts vary widely. JPMorgan expects the market to grow to as much as $700 billion in the next few years, while Citi’s optimistic scenario projects up to $4 trillion.

Teresa Ho, head of US short-term strategy at JPMorgan, said, “Of course, we’ve seen a lot of positive momentum over the past year. But its growth rate—I don’t think it will surge to $2 trillion, $3 trillion, or $4 trillion within just a few years.”

The ultimate goal of crypto industry supporters is for stablecoins to become a mainstream payment method, directly challenging the traditional banking system. Smaller banks are especially concerned about deposit outflows leading to a credit crunch, while big banks plan to issue their own stablecoins and profit from interest on reserves.

For now, stablecoins are still mainly used for crypto trading; recent market volatility shows how quickly digital asset sentiment can change, and stablecoins are also susceptible to outflows. Even if the most optimistic growth forecasts come true, the actual boost to Treasury demand may fall far short of expectations.

Net effect: zero?

Skeptics point out that inflows into stablecoins mainly come from four sources: government money market funds, bank deposits, cash, and overseas demand for dollars.

Stablecoin issuers represent a very small share among bondholders and remain “bit players.”

As of December 2024, the amount of Treasuries held by stablecoin issuers

Given that the Genius Act prohibits stablecoins from paying interest, yield-seeking investors have little incentive to move funds from savings accounts or money market funds, limiting potential growth. Moreover, even if investors do shift money from money market instruments (currently the largest buyers of short-term Treasuries), the net effect could be zero: it doesn’t create new demand for short-term Treasuries, it just changes who holds them.

Brad Setser, senior fellow at the Council on Foreign Relations, said, “I am skeptical about this. If stablecoin demand surges, some existing holders of Treasuries will be crowded out and shift to other alternatives, such as other short-term securities.”

White House chief economist and current Fed governor Stephen Miran acknowledges that domestic US demand for stablecoins may be limited, but he believes the real opportunity lies overseas—where investors are willing to accept zero yields in exchange for dollar exposure.

Fed governor Stephen Miran believes dollar-denominated stablecoins will attract overseas demand

In a recent speech, Fed governor Miran linked the potential impact of stablecoins to the Fed’s quantitative easing policy and the global “savings glut” that has sharply pushed down interest rates.

Standard Chartered estimates that by 2028, the shift of funds into stablecoins could lead to about $1 trillion in capital outflows from banks in developing countries. This scenario would almost certainly prompt regulators in these countries to limit stablecoin adoption. The European Central Bank and others are developing their own digital currencies to counter competition from private dollar stablecoins.

Goldman Sachs analysts Bill Zu and William Marshall wrote, “If capital controls restrict access to traditional dollars, they may also apply to dollar stablecoins.”

Fed factor

Another factor that could dampen the impact of stablecoins on Treasury demand is the Fed itself. CIBC strategist Michael Cloherty points out that if stablecoins “sequester” dollars in circulation (a liability on the Fed’s balance sheet), the Fed would need to shrink its asset holdings accordingly, including its $4.2 trillion Treasury portfolio. This means “most” of the Treasury demand created by stablecoins may merely replace Fed holdings.

Excessive reliance on short-term debt also comes at a cost: it makes government financing less predictable, requires more frequent debt rollovers, and exposes the US to greater risk from market changes. And none of these changes will happen overnight.

Deutsche Bank’s Zeng estimates that stablecoins could grow by $1.5 trillion over the next five years, drawing from both domestic and overseas pools. This would bring about $200 billion in incremental annual Treasury demand—a sizable number, but a drop in the bucket compared to the US government’s massive borrowing needs. Federal debt has already ballooned to more than $30 trillion and is expected to rise by another $22 trillion over the next decade.

Steven Barrow, head of G10 strategy at Standard Bank London, said, “I wouldn’t be blindly optimistic about the dollar and US Treasuries just because the government might have new ideas. To say stablecoins solve nothing is wrong, but they ‘won’t get you out of the debt and deficit mire,’ and that’s the real concern.”