US Treasury-backed stablecoins: A new on-chain Broad Money system

Stablecoins are quietly building an on-chain Broad Money (M2) system supported by U.S. Treasury bonds. Currently, the circulating supply of mainstream stablecoins has reached between $220 billion and $256 billion, accounting for about 1% of the U.S. M2 ($21.8 trillion). Approximately 80% of the reserves of these stablecoins are allocated to short-term U.S. Treasury bonds and repurchase agreements, making the issuing institutions important participants in the sovereign debt market.

This trend has had a wide-ranging impact:

1. Stablecoin issuers have become the main buyers of short-term US Treasury bonds, holding a total of $150-200 billion, comparable in scale to that of a medium-sized country.

2. The on-chain transaction volume has surged, reaching $27.6 trillion in 2024, and is expected to reach $33 trillion in 2025, surpassing the total of Visa and Mastercard.

3. The new fiscal policy is expected to increase public debt by about $3.3 trillion, and stablecoins are likely to absorb this portion of the new government bond supply.

4. The upcoming regulations will clarify T-bills as a legal reserve asset, thereby institutionalizing the foundation of fiscal expansion and stablecoin supply, forming a feedback mechanism where the private sector absorbs public deficits and extends dollar liquidity globally.

How Stablecoins Expand Broad Money

The issuance process of stablecoins is simple, but it has significant macroeconomic implications:

1. Users send fiat currency USD to the stablecoin issuer.

2. The issuer uses the received funds to purchase U.S. Treasury bonds and mints stablecoins equivalent to that value.

3. Government bonds are retained on the issuer's balance sheet as collateral assets, while stablecoins circulate freely on-chain.

This process has formed a kind of "currency replication" mechanism. Base money has been used to purchase government bonds, while stablecoins are used as a payment tool similar to demand deposits. Therefore, although base money has not changed, Broad Money has actually expanded outside the banking system.

Currently, stablecoins account for 1% of M2, and each increase of 10 basis points will inject about $22 billion of "shadow liquidity" into the financial system. The total amount of stablecoins is expected to reach $2 trillion by 2028. If M2 remains unchanged, this scale will account for about 9% of M2, which is equivalent to the current size of institutional-only money market funds.

By legislating T-bills into compliant reserves, the U.S. has effectively made the expansion of stablecoins an automatic marginal demand source for government bonds. This mechanism privatizes the portion of U.S. debt financing, turning stablecoin issuers into systemic fiscal supporters. At the same time, it also elevates the internationalization of the dollar through on-chain dollar transactions, allowing global users to hold and trade dollars without needing access to the U.S. banking system.

Impact on Different Types of Portfolios

For digital asset portfolios, stablecoins constitute the foundational liquidity layer of the crypto market. They dominate trading pairs on exchanges, serve as the primary collateral in the DeFi lending market, and are also the default unit of account. Their total supply can act as a real-time indicator of investor sentiment and risk appetite.

It is worth noting that the stablecoin issuers can earn T-bill yields (currently between 4.0% and 4.5%), but do not pay interest to the holders. This creates a structural arbitrage difference compared to government money market funds. The choice for investors between holding stablecoins and participating in traditional cash instruments is essentially a trade-off between 24/7 liquidity and yield.

For traditional dollar asset allocators, stablecoins are becoming a persistent source of demand for short-term Treasury bonds. The current reserves of $150-200 billion can almost absorb a quarter of the Treasury's projected bond issuance for the fiscal year 2025. If the demand for stablecoins expands by $1 trillion before 2028, the yield on 3-month Treasury bonds is expected to decline by 6-12 basis points, steepening the front end of the yield curve, which will help reduce short-term financing costs for businesses.

The Impact of Stablecoins on the Macroeconomy

Stablecoins backed by U.S. Treasury bonds introduce a channel for monetary expansion that bypasses traditional banking mechanisms. Each unit of stablecoin supported by Treasury bonds is equivalent to introducing disposable purchasing power, even if its underlying reserves have not yet been released.

Moreover, the circulation speed of stablecoins far exceeds that of traditional deposit accounts—averaging about 150 times per year. In regions with high adoption rates, this could amplify inflationary pressures, even if the Broad Money has not increased. Currently, the global preference for digital dollar storage suppresses short-term inflation transmission but is also accumulating long-term external dollar liabilities for the United States, as an increasing number of on-chain assets ultimately convert into on-chain claims against U.S. sovereign assets.

The demand for stablecoins for 3-6 month U.S. Treasury bonds has also created a stable, price-insensitive bid in the front-end yield curve. This persistent demand has compressed the bill-OIS spread and reduced the effectiveness of the Federal Reserve's policy tools. As the circulation of stablecoins increases, the Fed may need to achieve the same tightening effect through more aggressive quantitative tightening or higher policy rates.

Structural Transformation of Financial Infrastructure

The scale of stablecoin infrastructure can no longer be ignored. In the past year, the total amount of on-chain transfers reached $33 trillion, exceeding that of major credit card companies. Stablecoins possess near-instant settlement capabilities, programmability, and ultra-low-cost cross-border transactions (as low as 0.05%), far superior to traditional remittance channels (6-14%).

At the same time, stablecoins have become the preferred collateral asset for DeFi lending, supporting over 65% of protocol loans. Tokenized T-bills—a yield-bearing, on-chain tool that tracks short-term government bonds—are rapidly expanding, with an annual growth rate exceeding 400%. This trend is giving rise to a "binary dollar system": zero-interest coins for trading and interest-bearing tokens for holding, further blurring the boundaries between cash and securities.

Traditional banking systems are also beginning to respond. Some bank CEOs have publicly stated that "they are willing to issue bank stablecoins after legal allowances," showing the banking system's concerns about the migration of customer funds on-chain.

The greater systemic risk comes from the redemption mechanism. Unlike money market funds, stablecoins can be settled within minutes. In situations of stress such as decoupling, issuers may sell off hundreds of billions of dollars in government bonds on the same day. The U.S. Treasury market has not yet undergone stress testing in such real-time selling pressure environments, which poses challenges to its resilience and interconnectedness.

Strategic Focus and Subsequent Observations

1. Cognitive Reconstruction of Currency: Stablecoins should be seen as the new generation of Euro and Dollar - a financial system that is outside of regulation, difficult to quantify, but has a strong impact on global Dollar liquidity.

2. Interest Rates and Treasury Issuance: Short-term rates on U.S. Treasuries are increasingly influenced by the pace of stablecoin issuance. It is recommended to simultaneously track the net issuance of stablecoins and primary auctions of Treasury bonds to identify anomalies in interest rates and pricing distortions.

3. Portfolio Allocation:

   • For cryptocurrency investors: Use zero-interest stablecoins for daily trading, and allocate idle funds to tokenized T-bill products for returns.

   • For traditional investors: Focus on the equity of stablecoin issuers and the structured notes related to the yields of reserve assets.

4. Systemic Risk Prevention: Large-scale redemption fluctuations may directly transmit to the sovereign debt and repurchase markets. The risk management department should simulate related scenarios, including soaring government bond interest rates, collateral tightness, and intraday liquidity crises.

Stablecoins backed by US Treasury bonds are no longer just convenient tools for cryptocurrency trading. They are rapidly evolving into "shadow currencies" with macroeconomic influence—financing fiscal deficits, reshaping interest rate structures, and globally reconstructing the circulation of the dollar. For multi-asset investors and macro strategists, understanding and responding to this trend is no longer optional, but an urgent necessity.