Legislation being considered by US lawmakers could lead stablecoin issuers like Tether to increase their treasury bill holdings, potentially making them significant buyers of US government debt.

The bill may require stablecoin issuers to back their tokens with liquid assets such as US dollars and treasury bills.

Currently, stablecoin issuers hold US$166 billion in US treasuries, with the market valued at US$247 billion and projected to grow to US$2 trillion by 2028, according to Standard Chartered.

Experts warn that closer ties between crypto and traditional finance may introduce risks.

Cristiano Ventricelli of Moody’s Ratings said sudden market shocks in the stablecoin sector could lead to widespread liquidations, affecting treasury prices and market stability.

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🔗 Source: Reuters

🧠 Food for thought

1️⃣ The rise of stablecoins as significant treasury market players

Stablecoins are quickly becoming major players in the U.S. Treasury market, with potential systemic implications far beyond their original crypto ecosystem.

Tether and Circle already hold approximately $166 billion in U.S. Treasuries according to Bain & Company data cited in the article, with Tether alone managing around $154 billion in market value 1.

This represents a dramatic evolution from 2020, when the entire stablecoin market was valued at just $20 billion, compared to today’s $246 billion market cap 1.

JP Morgan analysts project stablecoin issuers could become the third-largest buyer of Treasury bills if regulatory clarity accelerates adoption, potentially adding significant new demand for government debt.

This growing interconnection between digital assets and traditional finance demonstrates how financial innovation creates new market dynamics that can impact even the most established markets like U.S. Treasuries.

2️⃣ The dual-edged impact of stablecoin regulation on financial stability

Regulation of stablecoins presents both opportunities and challenges for broader financial stability, particularly in Treasury markets.

The proposed legislation requiring stablecoins to be backed by liquid assets like U.S. dollars and short-term Treasury bills could enhance transparency through mandatory monthly reserve disclosures, addressing a key concern about stablecoin stability.

However, as Moody’s analyst Cristiano Ventricelli notes in the article, large-scale liquidations triggered by confidence issues could potentially depress Treasury prices and disrupt fixed-income markets.

The 2023 incident where Circle’s USD Coin lost its dollar peg after revealing exposure to Silicon Valley Bank demonstrates how quickly stablecoins can face pressure, though that event didn’t significantly impact Treasury markets.

This highlights a fundamental regulatory challenge: creating frameworks that facilitate innovation while preventing new systemic risks, particularly as the market could expand from today’s $247 billion to a projected $2 trillion by 2028 according to Standard Chartered’s estimates.

3️⃣ Stablecoins’ evolving role in global dollar dominance

Stablecoins represent a new dimension in the international role of the U.S. dollar, potentially reinforcing its global reserve currency status through digital channels.

Dollar-pegged stablecoins account for over 90% of the stablecoin market, effectively creating digital dollar equivalents that circulate globally outside the traditional banking system.

This aligns with Treasury Secretary Scott Bessent’s argument, mentioned in the article, that stablecoin legislation could lead to increased demand for U.S. government debt while expanding dollar usage internationally.

As Bitwise CIO Matt Hougan notes in the article, “If we pass stablecoin legislation, dollars will be exported around the world, which will extend the strength of the dollar as the world’s reserve currency.”

This digital extension of dollar dominance represents a significant evolution in how monetary influence functions in the global economy, potentially addressing concerns about de-dollarization through the creation of a parallel digital dollar ecosystem.

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