US Treasury-backed stablecoins: The rise of on-chain Broad Money and the transformation of the financial system

Overview

Stablecoins backed by U.S. Treasury bonds are quietly building an on-chain Broad Money system. Currently, the circulation of mainstream stablecoins has reached $220 billion to $256 billion, accounting for about 1% of the U.S. M2. About 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 is having far-reaching effects:

1. The stablecoin issuers have become the main buyers of short-term U.S. Treasury bonds, with holdings comparable to those of medium-sized countries;

2. On-chain transaction volume surged, reaching $27.6 trillion in 2024, and is expected to reach $33 trillion in 2025, exceeding the total of major credit card networks.

3. The new fiscal policy is expected to significantly increase public debt, and stablecoins are expected to absorb part of the new government bond supply;

4. Upcoming regulations will clarify that government bonds are legal reserve assets, thereby institutionalizing fiscal expansion and stablecoin supply, creating a mechanism where the private sector absorbs public deficits and expands the global liquidity of the dollar.

How Stablecoins Expand Broad Money

The issuance process of stablecoins is simple but has significant macroeconomic impacts:

1. The user sends fiat currency US dollars to the issuer;
2. The issuer uses the funds received to purchase U.S. Treasury bonds and mints stablecoins in equivalent value;
3. Government bonds are held as collateral assets on the issuer's balance sheet, while stablecoins circulate freely.

This process has formed a kind of "currency replication" mechanism. The base currency has been used to purchase government bonds, while the stablecoin is used as a payment tool. Therefore, although the base currency has not changed, Broad Money has actually expanded outside the banking system.

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

By legislating to include government bonds in compliant reserves, the United States has effectively made the expansion of stablecoins an automatic source of demand for government bonds. This mechanism privatizes the portion of U.S. debt financing while also elevating the internationalization of the dollar to new heights, 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 form the foundational liquidity layer of the crypto market. They dominate trading pairs, serve as the primary collateral in DeFi lending markets, and are also the default unit of account. Their total supply can be seen as a real-time indicator of investor sentiment and risk appetite.

It is worth noting that the stablecoin issuer can earn government bond yields, but does not pay interest to the holders. This constitutes a structural arbitrage difference compared to government money market funds. The choice for investors between holding stablecoins and traditional cash instruments essentially involves a trade-off between all-weather liquidity and yield.

For traditional US dollar asset allocators, stablecoins are becoming a sustained source of demand for short-term Treasury bonds. Current reserves can almost absorb a quarter of the expected Treasury bond issuance for the fiscal year 2025 under the new policy context. If the demand for stablecoins expands by another $1 trillion before 2028, the yield on 3-month Treasury bonds is expected to decline by 6-12 basis points, with the front end of the yield curve becoming steeper, contributing to a reduction in 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 the introduction of disposable purchasing power, even if its underlying reserves have not yet been released.

In addition, 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 Broad Money does not grow. Currently, the global preference for storing digital dollars suppresses short-term inflation transmission, but also accumulates long-term external dollar liabilities for the U.S., as more and more on-chain assets ultimately turn 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 buying pressure on the front end of the yield curve. This persistent demand has compressed spreads and reduced the effectiveness of central bank policy tools. As the circulation of stablecoins increases, central banks may need to resort to more aggressive quantitative tightening or higher policy interest rates to achieve the same tightening effect.

Structural Transformation of Financial Infrastructure

The scale of stablecoin infrastructure is now impossible to ignore. In the past year, the total amount of on-chain transfers reached $33 trillion, surpassing the total amount of major credit card networks. Stablecoins possess near-instant settlement capabilities, programmability, and ultra-low-cost cross-border transactions, far superior to traditional remittance channels.

At the same time, stablecoin has become the preferred collateral asset for DeFi lending, supporting over 65% of protocol loans. Tokenized government bonds—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 "dual dollar system": zero-interest coins for trading and interest-bearing tokens for holding, further blurring the lines between cash and securities.

Traditional banking systems are also beginning to respond. Some bank CEOs have publicly expressed their willingness to issue bank stablecoins once legally permitted, demonstrating 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 pressure such as decoupling, issuers may sell 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 sell-off environments, which poses challenges to its resilience and interconnectedness.

Strategic Focus and Follow-up Observations

1. Currency Cognitive Reconstruction: Stablecoins should be viewed as a new generation of Euro and Dollar - a funding system that is detached from regulation, difficult to quantify, yet has a strong impact on global Dollar liquidity.

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

3. Portfolio Allocation:

   • For crypto investors: Use zero-interest stablecoins for daily trading and allocate idle funds to tokenized government bond products to earn returns;
   • For traditional investors: focus on the equity of stablecoin issuers and their structured notes related to the returns of reserve assets;

4. Systemic Risk Prevention: Large-scale redemption fluctuations may directly transmit to the sovereign debt and repo markets. The risk management department should simulate relevant scenarios, including surging government bond yields, collateral tightening, and intraday liquidity crises.

Stablecoins backed by U.S. Treasury bonds are no longer just convenient tools for crypto trading. They are rapidly evolving into macro-influential "shadow currencies"—financing fiscal deficits, reshaping interest rate structures, and globally reconstructing the circulation of the U.S. dollar. For multi-asset investors and macro strategists, understanding and addressing this trend is no longer optional, but a pressing necessity.