A Crypto Coin Is Gobbling Up U.S. Treasuries
A new generation of cryptocurrency, pegged to the dollar, is growing rapidly, promising faster payments and potentially lower interest rates. But regulators and bankers warn of risks.
Cryptocurrencies were designed to be a hedge against the U.S. dollar, which crypto creators viewed as an unreliable currency. Yet one of the fastest-growing crypto coins has risen in popularity precisely because it’s pegged to the greenback.
Stablecoins, as they are known, are also backed by U.S. government debt, known as Treasuries. And with President Trump’s blessing, they are poised to rework key parts of finance, presenting potential systemic risks and business opportunities in equal measure.
After meeting privately with a crypto industry leader on Tuesday, Mr. Trump criticized banks in a social media post, saying they were trying to meddle with a law he signed last year that widened legal avenues for adopting stablecoin in traditional finance.
“The Genius Act was the U.S.A.’s first big step to make the United States the Crypto Capital of the World,” he wrote, adding that banks “should not be trying to undercut” the legislation and “need to make a good deal with the Crypto Industry.”
Engineered to consistently trade at $1, like a cash equivalent, stablecoins have become a key asset in the crypto market by allowing traders to reduce the overall risk of their portfolios. They can trade out of wild price swings in the coins they bet on and into stablecoins, all while staying within the crypto blockchain.
As a result, stablecoins have grown to $300 billion in market value from roughly $20 billion in 2020. The Federal Reserve estimates they could be worth $3 trillion in five years.
Because stablecoins use Treasuries as the primary collateral to create this cashlike safety, cryptocurrencies have effectively flooded into the Treasury market, the central artery of the U.S.-led global financial network. Stablecoin-issuing companies, like Circle and Tether, now hold more Treasury debt than major U.S. government creditors like Saudi Arabia and South Korea.
Some experts fear that the next crypto crash could cascade into major losses for the highly sensitive short-term U.S. debt markets in which Treasuries predominate. The open question for regulators, bankers and the Trump administration is whether the growing centrality of the coins carries more upside or downside risks.
Proponents point to the opportunities, such as the potential digital expansion of the U.S. dollar’s hegemony and ability of the lightning-quick crypto blockchain to make the international payments system less expensive and more nimble.
New regulations may make the stablecoin sphere “less Wild West,” said Brent Donnelly, a longtime trader and the president of Spectra Markets, a research firm. “But it is an existential risk at the margins. It’s not economically attractive, but it’s convenient if you’re a crypto person.”
Others, in both the public and private sectors, see the rise of stablecoins as an organic evolution. In the past two years, stablecoins have received the mainstream blessing of leading Wall Street banks, payment companies like Visa, and asset managers like Fidelity and BlackRock, which have been on a “crypto expansion” hiring spree, expanding their stablecoin-led “digital asset” lines of business.
For all involved, the first paradox of stablecoins — that crypto is now deeply tied to the government’s dollar — leads to another: the question of whether making stablecoins safe for broader use requires tying them more deeply to the regulations of traditional finance and its traditionally safest assets, cash and Treasuries.
Through the early weeks of this year, Trump administration regulators have been finishing rules under last year’s GENIUS Act. The key questions they are deciding include what assets other than Treasuries will count as valid collateral for these dollar-backed coins, which financial institutions will be allowed to issue stablecoins and what the legal use of these complex assets will look like in practice (from anti-money-laundering protections to rules about dividends).
Nellie Liang, a senior fellow in the Hutchins Center on Fiscal and Monetary Policy at the Brookings Institution who served in the Biden administration, said she was concerned about stablecoins “being used too quickly without good rules in place.”
“We tried to get legislation done for two to three years,” she added, “that would have been stricter.”
Stablecoins can already be bought on retail cryptocurrency exchanges, like Coinbase. And most issuers do market a fully redeemable one-to-one backing by U.S. dollars. But they have little legal obligation to immediately redeem coins for dollars. And unlike bank deposits, stablecoins are not protected by the Federal Deposit Insurance Corporation.
For financial economists, a primary near-term concern is that at their current pace of growth, stablecoins could become a sizable fraction of the roughly $7 trillion Treasury bill market. This “T-bill” part of the Treasury debt market is where major corporations go for no-nonsense cash management and where the Fed works to make sure credit flows and checks clear on time.
It is also where the tricky details of systemic risk lie. Because stablecoin issuers use these Treasury bills as collateral, they leave the Treasury market itself potentially more exposed to swings in crypto.
Leading stablecoin issuers have been caught up in that volatility. Tether and Circle saw their coins “de-peg” from their $1 value in 2022 and 2023 when customers rushed en masse to withdraw their holdings during a collapse of crypto coins and platforms. It began with a run most prominently on the FTX exchange, after accusations of fraud by its founder, Sam Bankman-Fried, emerged. Investors lost billions.
Circle’s coin, USD Coin, fell below 87 cents on the dollar, and Tether’s USDT, the largest stablecoin, fell below 94 cents, though in the end Circle and Tether both met redemption requests.
The general fear now is that a future crypto crash could incite a chaotic fire sale of Treasury debt as stablecoin issuers rush to pay back customers in cash.
In November, the credit ratings agency S&P Global downgraded its rating of Tether to “weak” from “constrained.” S&P analysts cited an increase in the firm’s stablecoin collateral reserves, which were viewed as higher risk than Treasuries and cash — including Bitcoin, gold and corporate bonds. It also recognized, however, “a notable level of price stability” in Tether’s dollar peg over the past year, despite crypto’s latest downturn.
For all their notoriety from crypto trading, stablecoins do have emerging uses that are relevant to the Treasury market beyond collateral. Foreigners, for example, hold these digital dollars to hedge against unreliable currencies at home, and those working in the United States can use stablecoin transfers to avoid remittance fees, or currency conversion fees, when sending money back home.
Monica Guerra, an investment strategist at Morgan Stanley, believes that greater foreign and domestic demand for stablecoins would create greater demand for Treasury debt and dollars. In turn, stablecoin market growth “could potentially push down yields” on government debt, lowering interest rates for the government, businesses and households as well.
Christopher J. Waller, a Fed governor, has echoed this possibility, arguing that if regulators “allow” stablecoin expansion, “this will only strengthen the dollar as a reserve currency.”
Treasury Secretary Scott Bessent has declared that this is the Trump administration’s plan. “We are going to keep the U.S. the dominant reserve currency in the world, and we will use stablecoins to do that,” he said last year.
Other high-ranking economic figures have sided with experts who remain uneasy about the details of what will count as valid stablecoin collateral.
The Fed governor Michael S. Barr suggested in a speech last year that it was problematic that “permissible reserve assets” under the new crypto laws included “uninsured deposits, which were a key risk factor during the March 2023 banking stress.”
A staff report from the New York Fed released last month warned that stablecoins could soon “transmit liquidity stress to the banking system,” a way of saying their continued rise could complicate the extent to which banks can safely lend, or make it more expensive to do so.
Other experts are wary of listing certain types of short-term corporate debt as valid collateral. In times of calm, these corporate refunding vehicles are stable, but in times of panic, like 2008 and 2020, these credit markets have seized.
For the time being, several leaders at established institutions remain upbeat about their ability to manage these potential points of distress and are going full-bore into the stablecoins business.
“We have a pretty rigorous client review and vetting process before we engage,” said Stephanie Pierce, the deputy head of BNY Investments, one of the executives responsible for managing the firm’s presence in short-term debt markets and, now, stablecoins.
BNY, one of Wall Street’s oldest firms, entered a stablecoin partnership in recent months with the multibillion-dollar asset manager Wisdom Tree, which works with the stablecoin issuers Circle and PayPal. Ms. Pierce calmly argued she was fully aware of the weight, and hazard mitigation, that getting into stablecoins carried.
“We do feel like with the regulations put in place, and then the discipline that we have in who we work with, that we are mitigating both the risk to our organization,” she said. “And, as best we can, any other risks.”