No one’s sure whether the now government-blessed “stablecoin” boom will boost or destabilize the economy.
When Congress passed the so-called GENIUS Act on stablecoin legislation last month with bipartisan support, it sparked another wave of speculation about just how much havoc these dollar-pegged crypto tokens might wreak — ranging from fears of fraud and tax evasion to broader instability.
Those pushing back on the crypto Cassandras offer a far more benign view, arguing that stablecoins — given their limited retail use — will remain confined to the esoteric corners of finance, dampening any potential negative impact on the wider economy.
But these instruments are tied to arguably the most important part of the financial system: the U.S. Treasury market.
A key feature of the new legislation is the requirement that stablecoins, so far mostly used by crypto traders to move funds between tokens, must be fully backed by liquid assets such as cash or short-term Treasury bills. Issuers must also disclose the composition of those reserves monthly.
With a market cap exceeding $250 billion, and projections it could surge to $2 trillion within three years, stablecoins have the potential to pack a serious systemic punch.
A potential boost for treasuries
Ironically, their link to Treasuries offers one of the more positive spins on the stablecoin phenomenon.
Some proponents argue that stablecoin growth will fuel demand for U.S. Treasury bills, allowing the government to more easily front-load rising debt issuance and shorten its maturity profile. This could keep long-term debt yields relatively stable, even as deficits expand.
Currently, bills outstanding total about $6 trillion, just over a fifth of total Treasury debt and still below historic averages.
The GENIUS Act is unlikely to unleash a 1970s-style credit boom
If both stablecoin demand and bill issuance grew by $1 trillion over the next three years, the bill share of the Treasury market would simply return to levels seen about 20 years ago, an outcome that seems unremarkable.
However, much of the cash flowing into stablecoins may simply be redirected from existing holdings like bank deposits or money market funds, which already underpin Treasury debt. That means the effect on the Treasury market could be far smaller than early forecasts suggest.
‘Shadow banks’ without credit
The bigger unknown is how mushrooming stablecoins might affect overall market liquidity.
As analysts at Cross Border Capital note, creating a token that can be spent instantly like a banknote —but backed by securities with average maturities of several months or more — could, in theory, have a significant impact on liquidity. In effect, the stablecoin turns a basket of Treasury bills and notes into an instant, zero-duration asset.
Two important caveats apply:
1. Limited retail use means the impact on real-world liquidity or consumer prices may be minimal, with any liquidity boost largely contained within financial markets — especially crypto — and spilling over only marginally into asset prices. Dangerous bubbles could form, but at least participants are there voluntarily.
2. No credit creation: Unlike banks, stablecoins don’t expand the money supply through lending. If funds move from bank deposits into stablecoins, this could actually reduce credit expansion and slow the velocity of money in the broader economy.
“The GENIUS Act is unlikely to unleash a 1970s-style credit boom,” Cross Border Capital concluded, “but it does signal a shift in who controls the supply of money — from banks to a more explicit public-private hybrid system. Most action will be in financial markets, not on Main Street.”
Critics fear this could morph into a government-sanctioned return to privately issued money, potentially prone to corruption, fraud, panics, and instability — just as in the 19th century.
Perhaps most importantly, bypassing the traditional banking system could eventually undermine the Federal Reserve’s ability to regulate liquidity and the money supply in the wider economy.
For now, though, as long as stablecoins remain largely in the financial sector’s domain, those concerns remain theoretical. The greater risk lies not in their size, but in how deeply they become integrated with the real economy.
Written by Mike Dolan. The opinions expressed here are those of the author, a
columnist for Reuters.
