Cryptocurrencies were originally conceived as a hedge against the US dollar, as their creators viewed the dollar as an unreliable currency. However, one of the fastest-growing segments of the crypto market today is gaining popularity precisely because it is pegged to the dollar.
These digital assets, known as stablecoins, are often backed by US Treasury reserves. With support from former President Donald Trump, they are positioned to reshape key parts of the financial system, bringing both systemic risks and commercial opportunities.
Following a private meeting with a crypto industry leader last Tuesday, Trump criticized banks on social media, accusing them of attempting to interfere with legislation he signed last year that expanded the legal framework for stablecoins within traditional finance.
He stated that the "GENIUS Act is a significant step for the US to become the global leader in cryptocurrency," adding that banks "should not try to undermine" the law but instead "need to cooperate effectively with the crypto industry."
Stablecoins are designed to function like cash equivalents, maintaining a value of approximately one dollar. They have become essential in crypto markets by helping traders reduce overall portfolio risk. Investors can move into stablecoins during periods of high volatility in other cryptocurrencies, while remaining within the blockchain ecosystem.
As a result, the total market value of stablecoins has surged from around $20 billion in 2020 to approximately $300 billion today. The Federal Reserve projects this figure could reach $3 trillion within five years.
Since stablecoins primarily use US Treasury bonds as collateral to ensure their cash-like stability, crypto capital is effectively flowing into the US Treasury market—the core of the US-dominated global financial system. Issuers such as Circle and Tether now hold more US Treasuries than major US creditor nations like Saudi Arabia and South Korea.
Some experts worry that a future crypto market crash could significantly disrupt the highly sensitive short-term Treasury market. A key question for regulators, banks, and the Trump administration is whether the growing prominence of stablecoins represents more opportunity or more risk.
Proponents highlight benefits such as extending dollar dominance into the digital realm and using fast crypto blockchains to lower costs and increase efficiency in international payments.
Brent Donnelly, President of research firm Spectra Markets and a seasoned trader, noted that new regulations could make the stablecoin sector "less like the Wild West than it used to be." However, he added, "On the margin, it remains an existential risk. It’s not economically compelling, but it is convenient for crypto investors."
Many in both public and private sectors view the rise of stablecoins as a natural evolution. Over the past two years, major Wall Street banks, payment companies like Visa, and asset managers such as Fidelity and BlackRock have begun endorsing stablecoins and expanding digital asset operations centered around them through significant hiring efforts.
The first paradox of stablecoins is that cryptocurrencies are now deeply tied to the government-issued US dollar. This leads to a second issue: whether making stablecoins safer and more widely usable requires deeper integration into the traditional financial regulatory framework and greater reliance on its safest assets—cash and US Treasuries.
In recent weeks, regulators under the Trump administration have been refining rules under last year's GENIUS Act. Key issues include what assets besides Treasuries can qualify as stablecoin collateral, which financial institutions can issue stablecoins, and how these complex assets should be legally used—covering areas such as anti-money laundering rules and dividend policies.
Nellie Liang, a former official in the Biden administration and now a senior fellow at the Brookings Institution, expressed concern that stablecoins are "being adopted too quickly without adequate rules."
She stated, "We tried to advance legislation for two to three years. Had it passed, it would have been more stringent."
Stablecoins are currently available for purchase on retail crypto exchanges like Coinbase Global, Inc. Most issuers claim their stablecoins are fully backed one-to-one by US dollars. However, they are not legally obligated to redeem them immediately for dollars. Unlike bank deposits, stablecoins are not protected by the Federal Deposit Insurance Corporation (FDIC).
A near-term concern among financial economists is that, given current growth rates, stablecoins could soon account for a significant share of the approximately $7 trillion US Treasury bill market. This market is crucial for corporate cash management and for the Federal Reserve to ensure smooth credit flow and payment system operation.
Systemic risks also loom. Because stablecoin issuers use these T-bills as collateral, the Treasury market itself could become more vulnerable to volatility in the crypto market.
Some issuers have already experienced such turbulence. During crypto market and platform collapses in 2022 and 2023, investor redemptions caused stablecoins from Tether and Circle to temporarily deviate from their one-dollar peg. This chain reaction began with a run on the FTX exchange, whose founder, Sam Bankman-Fried, was accused of fraud, leading to billions in investor losses.
Circle's USD Coin fell below $0.87, while the largest stablecoin, USDT, dropped under $0.94. Both companies ultimately fulfilled redemption requests.
The prevailing fear is that another crypto crash could force stablecoin issuers to sell large amounts of US Treasuries to meet customer redemptions, potentially triggering market disarray.
In November last year, rating agency S&P Global downgraded Tether's rating from "constrained" to "weak." S&P analysts pointed to an increase in riskier assets within Tether's collateral, including Bitcoin, gold, and corporate bonds, rather than just cash and US Treasuries. Still, S&P acknowledged that Tether maintained "considerable price stability" over the past year despite recent crypto declines.
Although stablecoins are widely known for crypto trading, they are also developing uses tied to the Treasury market. For example, foreign investors can hold these digital dollars to hedge against local currency instability, and immigrants working in the US can use stablecoins for remittances, avoiding high fees or unfavorable exchange rates.
Monica Guerra, an investment strategist at Morgan Stanley, believes that growing demand for stablecoins both domestically and internationally will increase demand for US Treasuries and the dollar. Expansion of the stablecoin market "could push down government bond yields," thereby lowering borrowing costs for governments, corporations, and households.
Federal Reserve Governor Christopher Waller has expressed similar views, suggesting that if regulators "allow" stablecoin expansion, "it would only strengthen the dollar's status as the reserve currency."
US Treasury Secretary Scott Bessent has stated that this is precisely the Trump administration's plan, saying last year, "We will maintain the dollar's role as the world's leading reserve currency, and stablecoins will be a tool to achieve that."
However, some senior economic officials remain uneasy about specific rules regarding stablecoin collateral.
Fed Governor Michael Barr noted in a speech last year that "qualified reserve assets" permitted under new crypto laws include "uninsured deposits," which were a key risk factor during the banking turmoil in March 2023.
A research report from the New York Fed last month warned that stablecoins could soon "transmit liquidity stress to the banking system," meaning their continued growth might complicate or raise the cost of safe bank lending.
Other experts are cautious about including certain types of short-term corporate debt as eligible collateral. While these financing instruments are relatively stable in calm markets, they froze during panics like those in 2008 and 2020.
Nevertheless, leaders at some traditional financial institutions remain confident in their ability to manage these risks and are moving aggressively into the stablecoin business.
BNY Mellon, one of Wall Street's oldest institutions, recently partnered with asset manager WisdomTree on stablecoin initiatives. WisdomTree collaborates with stablecoin issuers like Circle and PayPal.
Stephanie Pierce, a deputy head at BNY Investments overseeing short-term debt markets and stablecoin operations, said the company conducts rigorous client due diligence before entering partnerships.
She stated, "We believe that within the existing regulatory framework, combined with our strict partner selection, we can mitigate risks to our institution and minimize other potential exposures."
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