US Stablecoin Legislation: A Far-Reaching Transformation of the Financial System

On May 19, 2025, the U.S. Senate passed the procedural motion for the GENIUS stablecoin bill with a vote of 66-32. On the surface, this is a technical piece of legislation aimed at regulating digital assets and protecting consumer rights, but a deeper analysis of the political and economic logic behind it reveals that this could be the beginning of a more complex and far-reaching systemic change.

In the current context of significant pressure on U.S. debt and the divergence between the government and the central bank on monetary policy, the timing of advancing the stablecoin bill is worth pondering.

US Debt Crisis: The Driving Force Behind Stablecoin Policies

During the pandemic, the United States implemented an unprecedented monetary expansion policy. The Federal Reserve's M2 money supply surged from $15.5 trillion in February 2020 to the current $21.6 trillion, with a growth rate that once peaked at 26.9%, far exceeding the levels seen during the 2008 financial crisis and the high inflation periods of the 1970s and 1980s.

At the same time, the Federal Reserve's balance sheet has expanded to $7.1 trillion, with pandemic relief spending reaching $5.2 trillion, equivalent to 25% of GDP, exceeding the total spending of 13 major wars in American history.

In short, the United States has added about $7 trillion to its money supply over the past two years, laying the groundwork for potential inflation and a debt crisis.

The interest expenditure on the U.S. government's debt is reaching historical highs. As of April 2025, the total U.S. national debt has surpassed $36 trillion, and the total principal and interest that will need to be repaid in 2025 is approximately $9 trillion, of which about $7.2 trillion is the portion of the principal that is due.

In the next decade, the interest expenditure of the U.S. government is expected to reach 138,000 million dollars, and the proportion of interest expenditure on national debt to GDP is rising year by year. To repay the debt, the government may have to increase taxes or cut spending, both of which will have adverse effects on the economy.

Government and Central Bank: Interest Rate Cut Discrepancy

Government stance: Urgent need to cut interest rates

The government urgently needs the Federal Reserve to cut interest rates, and the reasons are obvious: high interest rates directly impact mortgages and consumption, posing a threat to the government's political prospects. More critically, the government has always regarded stock market performance as a key indicator of its achievements, and a high interest rate environment suppresses further rises in the stock market, which directly threatens the core data the government uses to showcase its accomplishments.

In addition, tariff policies have led to increased import costs, which in turn has driven up domestic price levels and increased inflationary pressure. Moderate interest rate cuts can to some extent offset the negative impact of tariff policies on economic growth, alleviate the trend of economic slowdown, and create a more favorable economic environment for re-election.

Central Bank Position: Uphold Independent Judgment

The Federal Reserve's dual mandate is to achieve maximum employment and maintain price stability. Unlike the government's decision-making based on political expectations and stock market performance, the Federal Reserve operates strictly according to a data-driven methodology, refraining from making predictive judgments about the economy. Instead, it assesses the execution of its dual mandate based on existing economic data and only introduces corresponding policies for remedial action when issues arise with inflation or employment targets.

The unemployment rate in the U.S. in April was 4.2%, and inflation is also basically in line with the long-term target of 2%. Under the influence of policies such as tariffs, any potential economic recession has not yet been reflected in the actual data, so the Federal Reserve will not take any action. The Federal Reserve believes that the government's tariff policy "is likely to at least temporarily push up inflation" and that "the inflation effect may also be more lasting." To hastily cut interest rates when inflation data has not fully returned to the 2% target could worsen the inflation situation.

Moreover, the independence of the Federal Reserve is a crucial principle in its decision-making process. The original intention of establishing the Federal Reserve was to ensure that monetary policy decisions could be based on economic fundamentals and professional analysis, ensuring that the formulation of monetary policy is made with consideration for the long-term interests of the national economy rather than catering to short-term political demands. In the face of government pressure, the Federal Reserve insists on defending its independence.

GENIUS Act: A New Financing Channel for US Debt

Market data fully demonstrates the significant impact of stablecoins on the U.S. Treasury market. The largest stablecoin issuer net purchased $33.1 billion in U.S. Treasury bonds in 2024, becoming the seventh largest buyer of U.S. Treasuries globally, with a total holding of $113 billion. The second largest stablecoin issuer has a market capitalization of approximately $60 billion, which is also fully backed by cash and short-term government bonds.

The GENIUS Act requires that stablecoin issuance must maintain reserves at a ratio of at least 1:1, with reserve assets including short-term U.S. Treasury securities and other U.S. dollar assets. The current stablecoin market size has reached $243 billion, and if fully incorporated into the GENIUS Act framework, it will generate hundreds of billions of dollars in Treasury purchase demand.

Positive impact of the bill

1. The effect of direct financing is evident: for every 1 dollar stablecoin issued, theoretically, 1 dollar of short-term U.S. Treasury bonds or equivalent assets needs to be purchased, which directly provides a new source of funding for government financing.

2. Cost advantage: Compared to traditional government bond auctions, the demand for stablecoin reserves is more stable and predictable, reducing the uncertainty of government financing.

3. Scale effect: After the implementation of the bill, more stablecoin issuers will be forced to purchase U.S. Treasury bonds, creating a scaled institutional demand.

4. Regulatory premium: The government controls the issuance standards of stablecoins through legislation, effectively gaining the power to influence the allocation of this massive pool of funds. This "regulatory arbitrage" allows the government to leverage innovation to promote traditional debt financing goals while circumventing the political and institutional constraints faced by traditional monetary policy.

The potential risks of the bill

1. The risk of monetary policy being hijacked by politics: The large-scale issuance of USD stablecoins effectively gives the government a "printing press" that bypasses the Federal Reserve, allowing it to indirectly achieve the goal of stimulating the economy through interest rate cuts. When monetary policy is no longer constrained by the professional judgment and independent decision-making of central banks, it can easily become a tool to serve the short-term interests of politicians.

2. Hidden Inflation Risk: When users spend 1 dollar to buy a stablecoin, on the surface it seems that there is no additional money, but in reality, the 1 dollar in cash is split into two parts: the 1 dollar stablecoin in the user's hands + the 1 dollar short-term government bond purchased by the issuer. These government bonds also have quasi-currency functions in the financial system—high liquidity, can be used as collateral, and banks use them to manage liquidity. This means that the original currency function of 1 dollar has now transformed into two parts, effectively increasing the liquidity in the entire financial system, which drives up asset prices and consumption demand, inevitably putting upward pressure on inflation.

3. Historical Lessons: In 1971, the U.S. government unilaterally announced the decoupling of the dollar from gold in the face of insufficient gold reserves and economic pressure, fundamentally changing the international monetary system. Similarly, when the U.S. government faces a worsening debt crisis and a heavy interest burden, there may be political incentives to decouple stablecoins from U.S. Treasury bonds, ultimately making the market bear the cost.

DeFi: Risk Amplifier

Stablecoins are likely to flow into the DeFi ecosystem after issuance—liquidity mining, lending and collateral, various farming, etc. Through a series of operations such as DeFi lending, staking and re-staking, investing in tokenized government bonds, the risks are magnified layer by layer.

The restaking mechanism is a typical example, where assets are leveraged repeatedly across different protocols. Each additional layer adds more risk, and if the value of the restaked assets plummets, it could trigger a chain liquidation, leading to panic selling in the market.

Although the reserves of these stablecoins are still US Treasuries, after multiple layers of DeFi nesting, market behavior has become completely different from that of traditional US Treasury holders, and this risk is completely outside the traditional regulatory system.

Conclusion

The US dollar stablecoin involves monetary policy, financial regulation, technological innovation, and political gamesmanship. Any single perspective analysis is insufficiently comprehensive. The ultimate direction of stablecoins depends on how regulations are formulated, how technology evolves, how market participants engage, and the changes in the macroeconomic environment. Only through continuous observation and rational analysis can we truly understand the profound impact of US dollar stablecoins on the global financial system.

However, one thing is certain: in this financial game, ordinary investors are likely to be the ultimate payers. Therefore, when participating in related investments, it is necessary to remain highly vigilant and fully recognize the risks involved.