Stablecoins and the US Treasury Market

Discover how stablecoins and the US Treasury market are intertwined, affecting financial stability and liquidity.

Paper reviewed:

Yadav, Yesha and Malone, Brendan, Stablecoins and the US Treasury Market (June 05, 2025). Vanderbilt Law Research Paper No. 5286924, Available at SSRN: https://ssrn.com/abstract=5286924 or http://dx.doi.org/10.2139/ssrn.5286924

Summary

This research paper explores the critical relationship between stablecoins and the US Treasury market, highlighting the mutual benefits and risks. It examines the impact of Treasury market liquidity on stablecoin issuers and the potential implications for US government financing costs.

Key Findings

• The US Treasury market is critical for stablecoins as it provides the risk-free assets needed to back their value, with major stablecoin issuers like Tether and Circle holding significant amounts of US Treasuries.
• The interdependence between stablecoins and the US Treasury market creates mutual benefits but also risks, as disruptions in the Treasury market can impact stablecoin liquidity and vice versa.
• The Treasury market's liquidity has been strained at times, affecting its ability to support stablecoin redemptions, particularly during periods of stress or high volatility.
• Stablecoin issuers face challenges due to the Treasury market's operating hours and liquidity conditions, which can impact their ability to meet redemption demands.
• The growth of stablecoins is likely to influence US Treasury issuance, potentially leading to a greater focus on short-term Treasury bills, which could have implications for the US government's financing costs and flexibility.

Implications

Business and Policy Implications

• Regulators need to coordinate oversight between the Treasury market and stablecoin industry to address the risks and benefits of their interdependence.
• Policymakers should ensure that market-making practices in the Treasury market are robust enough to handle increased demand from stablecoin issuers.
• The US government may need to adapt its debt issuance strategy to accommodate the growing demand for short-term Treasury bills from stablecoin issuers.
• Maintaining the health and liquidity of the US Treasury market is crucial for the success and stability of the stablecoin industry.

Introduction

The rise of stablecoins as a transformative force in payments has significant implications for the global monetary system. Stablecoins are digital representations of money that can be used to settle transactions quickly and cheaply on public blockchains. Their growth has been rapid, with the circulating supply worldwide exceeding $230 billion by the first quarter of 2025. This expansion is closely tied to the US Treasury market, which provides the risk-free assets necessary to back the value of stablecoins. As stablecoins continue to grow, understanding the interdependence between the stablecoin industry and the US Treasury market is crucial for policymakers and business leaders.

Background and Context

The US Treasury market is a critical component of the global financial system, providing a safe-haven asset that is essential for maintaining financial stability. The market's liquidity and depth are vital for supporting a wide range of financial activities, including the issuance of stablecoins. The growth of stablecoins has been driven by their potential to improve payment systems, making transactions faster, cheaper, and more accessible. However, this growth also raises important questions about the risks and implications of the interdependence between stablecoins and the US Treasury market. As the stablecoin industry continues to evolve, it is essential to examine the potential risks and benefits of this relationship and to consider the implications for policymakers and business leaders.

The stablecoin industry's reliance on the US Treasury market for safe assets creates a complex dynamic. On one hand, the availability of US Treasuries as a reserve asset allows stablecoin issuers to maintain the value of their tokens and provides a source of passive income through interest earnings. On the other hand, the concentration of stablecoin reserves in US Treasuries creates a potential risk if the Treasury market experiences liquidity strains or other disruptions. Furthermore, the growth of stablecoins may influence the US Treasury market's dynamics, potentially affecting the government's financing costs and the overall stability of the financial system.

As the stablecoin industry continues to grow and mature, it is likely to have significant implications for the US Treasury market and the broader financial system. Policymakers and business leaders must carefully consider these implications and work to ensure that the benefits of stablecoins are realized while minimizing the potential risks. This will require close coordination between regulators, stablecoin issuers, and other stakeholders to develop effective oversight frameworks and to address the challenges and opportunities presented by the growth of stablecoins.

In the next part of this article, we will examine the risks and challenges associated with the interdependence between stablecoins and the US Treasury market, and explore the implications for policymakers and business leaders.

Main Results

The interconnection between stablecoins and the US Treasury market is a complex and multifaceted phenomenon. The main findings of this research can be summarized as follows:

The Significance of US Treasuries for Stablecoins

The US Treasury market has emerged as a critical engine enabling the growth of the stablecoin industry. US Treasuries constitute the preferred type of asset for assuring that an issuer can back up its promise to maintain the one-to-one dollar token peg. The reliance on Treasuries as a preferred mechanism to protect an issuer's solvency reflects a widespread assumption within market practice and regulation that US Treasuries constitute the safest, most liquid asset anywhere in the world.

The Impact of Stablecoins on the Treasury Market

The expanded growth and uptake of US Dollar-pegged stablecoins has emerged as an important national policy objective. As US Dollar-pegged stablecoins emerge as essential policy tools in geopolitical monetary gamesmanship, the interconnection between stablecoins and the US Treasury market requires a thorough review. The analysis reveals that the Treasury market's healthy functioning becomes essential for a digitizing global US dollar payments system.

Risks and Challenges

The interconnection between stablecoins and the US Treasury market creates novel paths for risks to move from one space to the next. The main risks identified include:

• Illiquidity and price distortion in the Treasury market, which can negatively impact the moneyness of stablecoin claims.
• Uneven intraday liquidity in the Treasury market, which can pose serious dangers for stablecoin issuers.
• Institutional and credit risks, including the risk of a changing economic and political environment, and the potential for a renegotiation of existing issues.

Methodology Insights

The research approach employed in this study involves a comprehensive analysis of the interconnection between stablecoins and the US Treasury market. The methodology is important because it provides a thorough understanding of the complex relationships between these two critical components of the financial system.

The innovative aspect of this methodology lies in its ability to identify the risks and challenges associated with the interdependence between stablecoins and the US Treasury market. By examining the transmission channels for risk between the stablecoin and US Treasury markets, this research provides valuable insights for policymakers and business leaders.

Analysis and Interpretation

The findings of this research have significant implications for policymakers and business leaders. The interconnection between stablecoins and the US Treasury market creates a complex web of risks and challenges that must be carefully managed.

The patterns and trends identified in this research suggest that the growth of stablecoins is likely to continue, driven by their increasing adoption in emerging markets and their potential to provide a more efficient and cost-effective means of making cross-border payments.

However, this growth also poses significant risks for the US Treasury market, including the potential for illiquidity and price distortion, as well as the risk of a changing economic and political environment.

To mitigate these risks, policymakers and business leaders must work together to develop effective oversight frameworks and to address the challenges and opportunities presented by the growth of stablecoins. This will require close coordination between regulators, stablecoin issuers, and other stakeholders to ensure that the benefits of stablecoins are realized while minimizing the potential risks.

In the next part of this article, we will explore the implications of these findings for policymakers and business leaders, and examine the potential risks and challenges associated with the interdependence between stablecoins and the US Treasury market.

Practical Implications

The interdependence between stablecoins and the US Treasury market has significant practical implications for businesses, policymakers, and regulators. As stablecoins continue to grow in popularity, their reliance on the Treasury market for safe and liquid assets will only increase.

Real-World Applications

The findings of this article have several real-world applications:

• Stablecoin Issuers: Issuers must be aware of the potential risks associated with their reliance on the Treasury market. They should consider diversifying their reserve assets and developing contingency plans to mitigate potential liquidity crises.
• Treasury Market Participants: Market makers, primary dealers, and other participants in the Treasury market must be aware of the growing demand from stablecoin issuers and the potential impact on market liquidity.
• Regulators and Policymakers: Regulators must develop effective oversight frameworks to address the risks associated with stablecoins and their interdependence with the Treasury market.

Strategic Implications

The interdependence between stablecoins and the Treasury market has significant strategic implications for businesses and policymakers:

• Risk Management: Businesses and policymakers must be aware of the potential risks associated with stablecoins and the Treasury market. They should develop strategies to mitigate these risks and ensure the stability of the financial system.
• Regulatory Coordination: Regulators must work together to develop effective oversight frameworks that address the interdependence between stablecoins and the Treasury market.
• Innovation and Growth: The growth of stablecoins presents opportunities for innovation and growth in the financial sector. Businesses and policymakers should work together to foster this growth while minimizing the potential risks.

Who Should Care

The findings of this article are relevant to a wide range of stakeholders, including:

• Stablecoin Issuers: Issuers must be aware of the potential risks and opportunities associated with their reliance on the Treasury market.
• Treasury Market Participants: Market makers, primary dealers, and other participants in the Treasury market must be aware of the growing demand from stablecoin issuers and the potential impact on market liquidity.
• Regulators and Policymakers: Regulators must develop effective oversight frameworks to address the risks associated with stablecoins and their interdependence with the Treasury market.
• Business Leaders: Business leaders should be aware of the potential opportunities and risks associated with stablecoins and their interdependence with the Treasury market.

Actionable Recommendations

To address the challenges and opportunities presented by the growth of stablecoins, businesses and policymakers can take several actionable steps:

1. Develop Effective Oversight Frameworks: Regulators should work together to develop effective oversight frameworks that address the interdependence between stablecoins and the Treasury market.
2. Diversify Reserve Assets: Stablecoin issuers should consider diversifying their reserve assets to mitigate potential liquidity crises.
3. Improve Treasury Market Liquidity: Market makers and primary dealers should work to improve liquidity in the Treasury market to meet the growing demand from stablecoin issuers.
4. Foster Innovation and Growth: Businesses and policymakers should work together to foster innovation and growth in the financial sector while minimizing the potential risks associated with stablecoins.

Implementation Considerations

To implement these recommendations, businesses and policymakers should consider the following:

• Regulatory Coordination: Regulators must work together to develop effective oversight frameworks that address the interdependence between stablecoins and the Treasury market.
• Industry Collaboration: Stablecoin issuers, market makers, and other industry participants should work together to develop best practices and standards for the industry.
• Risk Management: Businesses and policymakers should develop strategies to mitigate the potential risks associated with stablecoins and the Treasury market.

Conclusion

The interdependence between stablecoins and the US Treasury market presents both opportunities and challenges for businesses, policymakers, and regulators. To realize the benefits of stablecoins while minimizing the potential risks, it is essential to develop effective oversight frameworks, diversify reserve assets, improve Treasury market liquidity, and foster innovation and growth in the financial sector.

By working together, businesses and policymakers can ensure that the growth of stablecoins is accompanied by robust risk management practices, effective regulatory oversight, and a deep understanding of the interdependence between stablecoins and the Treasury market. Ultimately, this will require a coordinated effort from regulators, industry participants, and business leaders to ensure that the benefits of stablecoins are realized while minimizing the potential risks.