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

Written by: Ye Xie & Anya Andrianova, Bloomberg

Translated by: Felix, PANews

The US has ignited a fierce debate on Wall Street with its milestone stablecoin legislation: Can this digital asset truly strengthen the dollar’s position and become a significant new source of demand for short-term US Treasuries (T-bills)?

Despite differing views, strategists at companies such as JPMorgan, Deutsche Bank, and Goldman Sachs agree that—no matter how optimistic President Donald Trump and his advisors may be about stablecoins as a new pillar supporting US finance—it’s still too early to call stablecoins a “game changer.” Some also see significant risks.

Steven Zeng, US market strategist at Deutsche Bank, said: “Forecasts for the stablecoin market size are highly exaggerated. Everyone’s waiting and watching, but nobody dares make a directional bet. There are plenty of skeptics.”

A stablecoin is a digital token whose value is pegged to a traditional currency—most commonly the US dollar—and is far less volatile than market-traded cryptocurrencies like Bitcoin. Stablecoins serve as a cash substitute on blockchains, can be used to store funds digitally like a bank account, and can be used for real-time transfers or transactions.

Since the stablecoin legislation known as the “Genius Act” officially took effect in July, industry supporters have viewed it as a key breakthrough that will pave the way for broader adoption of dollar-denominated digital currencies in the financial system. US Treasury Secretary Scott Bessent estimated last month that the law could help grow the dollar stablecoin market from its current size of about $300 billion to $3 trillion by 2030.

Under the new law, stablecoin issuers must back dollar stablecoins 100% with short-term Treasuries and other cash equivalents. Bessent believes the coming “surge” in stablecoin demand will allow the Treasury Department to issue more short-term debt, reducing reliance on long-term bonds and easing 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: “What the Treasury cares about is borrowing costs.” Stablecoins “can play a role in that 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 (according to an August study by the Kansas City Federal Reserve). Data from the Bank for International Settlements shows these issuers bought about $40 billion of short-term Treasuries just last year. But compared with the $3.4 trillion in Treasuries held by US money market funds, stablecoins are still “bit players.”

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

Most analysts agree that with the regulatory framework taking shape over the next year, the stablecoin market is certain to expand, but projections vary widely. JPMorgan expects the market to grow to as much as $700 billion in the next few years, while Citigroup’s optimistic forecast puts it as high as $4 trillion.

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

The crypto industry’s ultimate goal is for stablecoins to become a mainstream payment method, which would directly challenge the traditional banking system. Small and midsize banks are especially concerned about deposit outflows leading to credit contraction; big banks plan to issue their own stablecoins and profit from interest on reserves.

Currently, stablecoins are mostly used for crypto trading, and recent market volatility shows how quickly sentiment toward digital assets can change—stablecoins could just as easily see 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 stablecoin inflows mainly come from four channels: government money market funds, bank deposits, cash, and overseas demand for dollars.

Stablecoin issuers are still “bit players” among bondholders.

As of December 2024, stablecoin issuers’ Treasury holdings

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. And even if investors do shift funds from money market instruments (currently the largest buyers of short-term Treasuries), the net effect could be zero: it does not create new demand for Treasuries, but merely changes who holds them.

Brad Setser, senior fellow at the Council on Foreign Relations, said: “I’m skeptical. If demand for stablecoins surges, some existing Treasury holders will be squeezed out of the market and shift into other alternatives, like other short-term securities.”

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

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 policies and the global “savings glut” that sharply lowered interest rates.

Standard Chartered estimates that by 2028, the shift of funds into stablecoins could cause 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 restrict access to traditional dollars, they could also apply to dollar stablecoins.”

The Fed Factor

Another factor that could dampen stablecoins’ impact on Treasury demand is the Federal Reserve itself. CIBC strategist Michael Cloherty noted that if stablecoins “isolate” 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 simply substitute for the Fed’s own holdings.

There are also costs to relying too heavily on short-term debt: less predictability in government funding, more frequent need to roll over debt, and increased vulnerability to changes in market conditions. And any changes will not happen overnight.

Deutsche Bank’s Zeng estimates that stablecoins could grow by $1.5 trillion over the next five years, funded by outflows from US and overseas funds. This would bring about $200 billion in incremental Treasury demand per year—a significant amount, but a drop in the bucket compared with the US government’s massive borrowing. Federal debt has already swelled to over $30 trillion and is projected to rise by another $22 trillion over the next decade.

Steven Barrow, G10 strategy head at Standard Bank London, said: “I’m not going to be blindly optimistic about the dollar and Treasuries just because the government has a new idea. Saying stablecoins solve nothing is wrong, but they ‘won’t get you out of the debt and deficit quagmire’—and that’s the real concern.”