US Treasury see stablecoins driving 'structural demand' for T-bills

Key Takeaways

• Stablecoin collateral now accounts for around $120 billion in US Treasury holdings.
• Potential risks remain due to the stablecoin sector's dependency on T-bills.

The US Treasury, in a presentation to the Treasury Borrowing Advisory Committee (TBAC), outlined how the growth of stablecoins could reshape demand for Treasury bills, potentially altering their proportion in future issuances.

An estimated $120 billion in stablecoin collateral is tied up in Treasuries, much of it through investments in T-bills and Treasury-backed repo transactions, signaling the rapid popularity and significant role that T-bills now hold in the crypto market.

The presentation, part of broader Treasury discussions on fiscal policy and financial stability, highlighted the rapid rise of stablecoins over the past decade.

Pegged to stable assets like the dollar, stablecoins have gained popularity as collateral in DeFi and for facilitating crypto transactions.

This, coupled with projected stablecoin growth, hints at a structural shift in demand for short-term US Treasuries.

However, the presentation also raised concerns about the risks linked to stablecoins’ reliance on T-bills, emphasizing historical lessons from the “Wild Cat” banking era and money market fund runs in 2008 and 2020, which underscore the need for robust collateral.

Despite improved collateral, stablecoins still face risks. Frequent runs and instances where stablecoins have lost their peg to the US dollar or collapsed highlight vulnerabilities.

A collapse of a major stablecoin like Tether could trigger a fire sale of its US Treasuries holdings, impacting the T-bills market.

Beyond stablecoins, the presentation also explored how the institutionalization of crypto, particularly Bitcoin, may increase demand for Treasuries.

As Bitcoin’s volatility prompts institutional investors to seek hedges, Treasuries could see sustained demand as a reliable hedging instrument.