Stablecoin analysis by the U.S. Treasury explores potential benefits of interest-earning crypto assets
The latest presentation to the US Treasury's Borrowing Advisory Committee (TBAC) delved into the potential impact of interest-bearing stablecoins on the demand for short-term Treasuries. The discussion was framed within the context of the GENIUS Act, a Senate bill that mandates stablecoins to be backed by short-term Treasury securities.
One of the key topics in the presentation was the potential for stablecoins to offer interest. This could significantly increase demand for short-maturity U.S. Treasury securities, particularly Treasury bills with remaining maturities of 93 days or less, as required under the GENIUS Act. This influx of demand could modestly lower short-term Treasury yields and borrowing costs for the U.S. government.
However, the extent of rate compression will depend on other market factors and substitution effects. For instance, the Federal Reserve’s existing programs and market dynamics may offset some yield downward pressure, as investors might shift between Treasury bills and repo markets if bill yields fall below certain thresholds.
The GENIUS Act, signed into law in July 2025, mandates that stablecoins be fully backed 1:1 by reserves consisting largely of short-term Treasury securities, cash, deposits, or money market funds holding similar assets. This legal framework formalizes and expands the link between stablecoins and Treasury demand.
Currently, stablecoin issuers collectively hold about $130 billion in Treasury bills, about 2% of outstanding short-term T-bills. Projections suggest that stablecoin-related demand could grow by up to $2 trillion in the coming years. This growing demand is seen as incrementally supportive of Treasury bill prices, potentially “juicing up” demand and exerting downward pressure on yields in the short-term Treasury market.
The GENIUS Act's detailed backing requirements aim to reduce stablecoin risks, enforce greater transparency, and channel investment into low-risk government assets. However, this could also raise supervisory and systemic risk considerations as stablecoins compete with bank deposits and traditional short-term investments.
Stablecoins paying interest introduce competition with bank deposits, possibly forcing banks to raise deposit rates or seek wholesale funding, impacting broader financial market funding costs and dynamics. The GENIUS Act could also indirectly impact Treasury issuance patterns and yields by shifting traditional investors’ demand if some depositors or money market investors migrate toward stablecoins.
The presentation also explored potential opportunities for banks and financial institutions, such as issuing stablecoins and managing reserves. These opportunities could provide new avenues for these institutions to adapt to the evolving digital asset landscape.
The President's Executive Order on digital assets aims to promote the use of US dollar stablecoins beyond US borders to increase demand for US Treasuries. However, the current iteration of the Senate's stablecoin bill, the GENIUS Act, includes a clause that bans the payment of stablecoin interest before receiving a positive vote by the Senate Banking Committee.
The withdrawal of support by pro-crypto Democrats for the latest version of the GENIUS Act could potentially affect the progress of stablecoin regulation. Backtracking on the yield clause in the GENIUS Act could further delay the progress of the stablecoin bill. The TBAC report identifies transactional demand deposits at banks, totaling $6.6 trillion, as being "at risk" from stablecoins.
In summary, the growing issuance of interest-bearing, short-maturity backed stablecoins under the GENIUS Act is creating a new, sizable source of demand for short-term U.S. Treasuries. This new demand is likely to put modest downward pressure on short-term Treasury yields and borrowing costs, while raising important financial stability and market structure considerations. The degree of impact will hinge on future stablecoin growth, regulatory enforcement, and interactions with Federal Reserve policy tools.
- The discussion about stablecoins at the TBAC presentation considered the potential increase in demand for short-term Treasury securities, particularly those with maturities of 93 days or less, due to their interest-bearing nature as mandated by the GENIUS Act.
- The GENIUS Act's detailed backing requirements aim to reduce stablecoin risks and enforce greater transparency, but this could also raise supervisory and systemic risk considerations as stablecoins compete with bank deposits and traditional short-term investments.
- Interest-bearing stablecoins could potentially introduce competition with bank deposits, compelling banks to raise deposit rates or seek wholesale funding, which in turn could impact broader financial market funding costs and dynamics.
- The presentation also examined potential opportunities for banks and financial institutions, such as issuing stablecoins and managing reserves, providing new avenues for these institutions to adapt to the evolving digital asset landscape.
- The pro-crypto Democrats' withdrawal of support for the latest version of the GENIUS Act could potentially affect the progress of stablecoin regulation, particularly if they backtrack on the yield clause, which would further delay the bill's progress.
