Are stablecoins the savior of US debt and deficit? Wall Street pours cold water: Don’t dream about it

After the United States passed stablecoin legislation, Wall Street has been engaged in intense discussions about whether it can truly strengthen the dollar’s position and become a major buyer of short-term U.S. Treasury bills. Most analysts believe it is too early to claim stablecoins are a “game changer.” This article is based on a Bloomberg piece, compiled, translated, and written by PANews. (Previous context: IMF warns stablecoins will erode central bank monetary sovereignty like a “Trojan horse”) (Background supplement: Financial Times—U.S. banks warn of loopholes in “Stablecoin Act,” fearing $6.6 trillion deposit outflows)

The U.S. passage of milestone stablecoin legislation is sparking heated debate on Wall Street: Can this digital asset significantly strengthen the dollar’s position and become a major source of demand for short-term U.S. Treasuries ((T-bills))?

Despite differing views, strategists from firms such as JPMorgan, Deutsche Bank, and Goldman Sachs agree that, no matter how optimistic President Donald Trump and his advisors are about stablecoins as the new pillar supporting American finance, it is too early to call stablecoins a “game changer.” Additionally, some see risks involved.

Steven Zeng, U.S. market strategist at Deutsche Bank, commented: “The predicted scale of the stablecoin market is exaggerated. Everyone is watching, but no one dares to make a directional bet. There are plenty of skeptics.”

Stablecoins are digital tokens pegged to traditional currencies, most commonly the U.S. dollar, and are far less volatile than market-based cryptocurrencies like Bitcoin. They serve as cash substitutes on blockchains, can be used for digital fund storage like a bank account, and are also used for instant transfers or trading.

Since the stablecoin legislation known as the (Genius Act) officially took effect this July, industry supporters have viewed it as a key breakthrough, paving the way for wider application of dollar-denominated digital currencies in the financial system. U.S. Treasury Secretary Scott Bessent estimated last month that the act could drive the dollar stablecoin market from its current size of about $300 billion to $3 trillion by 2030.

According to the new law, stablecoin issuers must back dollar stablecoins 100% with short-term government bonds and other cash equivalents. Bessent believes the coming surge in demand driven by stablecoins will enable the Treasury to issue more short-term bonds, reducing reliance on long-term bonds and alleviating pressure on mortgage rates and other borrowing costs tied to long-term benchmarks.

Robert Tipp, chief investment strategist and head of global bonds at PGIM Fixed Income, said: “The Treasury is focused on 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 U.S. Treasuries, close to 2% of last year’s short-term Treasury market ((Kansas City Fed August research)). According to BIS data, these issuers purchased about $40 billion in short-term Treasuries last year alone. However, compared to U.S. money market funds holding about $3.4 trillion in Treasuries, stablecoins are still “minor players.”

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

Most analysts believe that under a gradually forming regulatory framework over the next year, the stablecoin market will definitely expand, but predictions vary widely. JPMorgan expects the market to grow up to $700 billion in the coming years, while Citigroup is optimistically forecasting as much as $4 trillion.

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

The ultimate goal of crypto industry supporters is to make stablecoins a mainstream payment method, directly challenging the traditional banking system. Small and medium-sized banks are particularly worried about deposit outflows causing credit contraction; large banks plan to issue their own stablecoins and profit from interest on reserves.

Currently, stablecoins are still mainly used for cryptocurrency trading, and recent market volatility shows how quickly digital asset sentiment can change, with funds potentially flowing out of stablecoins as well. Even if the most optimistic growth forecasts come true, the actual boost to Treasury demand may be much less than expected.

Net effect: zero?

Skeptics point out that stablecoin inflows primarily come from four channels: government money market funds, bank deposits, cash, and overseas demand for dollars.

Stablecoin issuers still account for a very small share among bondholders—a “minor player.”

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 their potential growth. Also, even if investors do move funds from money market instruments ((currently the largest buyers of short-term Treasuries)), the net effect may be zero: instead of creating new demand for short-term Treasuries, it would merely change the identity of the holders.

Brad Setser, senior fellow at the Council on Foreign Relations, said: “I’m skeptical. If stablecoin demand surges, some existing Treasury holders will be crowded out of the market and turn to other alternatives, such as other short-term securities.”

White House chief economist and current Fed board member Stephen Miran admits that domestic U.S. demand for stablecoins may be limited, but he believes the real opportunity lies overseas, where investors are willing to accept zero returns in exchange for dollar asset exposure.

Fed board member Stephen Miran believes dollar-denominated stablecoins will attract overseas demand.

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

Standard Chartered Bank estimates that by 2028, the shift of funds to stablecoins could lead to about $1 trillion in capital outflows from banks in developing countries. This would almost certainly prompt regulators in those countries to restrict 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 limit access to traditional dollars, they could also apply to dollar stablecoins.”

The Fed factor

Another factor that could weaken the impact of stablecoins on Treasury demand may be the Fed itself. CIBC strategist Michael Cloherty points out that if stablecoins “isolate” dollars in circulation (which are liabilities on the Fed’s balance sheet), the Fed would have to shrink its asset holdings accordingly, including its $4.2 trillion Treasury portfolio. This means “most” of the Treasury demand brought by stablecoins may just replace the Fed’s holdings.

Overreliance on short-term debt also comes at a cost: reduced predictability of government financing, more frequent debt rollovers, and increased risk for the U.S. in the face of changing market conditions. And no change will happen overnight.

Deutsche Bank’s Zeng estimates that in the next five years, stablecoins could grow by $1.5 trillion…