US Treasury-backed stablecoins: The rise of on-chain Broad Money systems

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

This trend is having a profound impact:

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

2. On-chain transaction volume surges, reaching $27.6 trillion in 2024, and expected to reach $33 trillion in 2025, surpassing the total of Visa and Mastercard;

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

4. The upcoming regulations will explicitly classify short-term government bonds as legal reserve assets, thereby institutionalizing fiscal expansion and the stablecoin supply, creating a feedback mechanism for the private sector to absorb public deficits and extend dollar liquidity globally.

The Expansion Effect of Stablecoins on Broad Money

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

1. Users send fiat currency US dollars to the stablecoin issuer;
2. The issuer uses the funds received to purchase U.S. Treasury bonds and mints stablecoins at an equivalent value;
3. Government bonds are retained as collateral assets on the issuer's balance sheet, while stablecoins circulate freely on-chain.

This process creates a kind of "currency replication" mechanism. Base money is used to purchase government bonds, while the stablecoin itself is used as a payment tool similar to a demand deposit. Therefore, although the base money remains unchanged, Broad Money actually expands 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. Forecasts indicate that 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, roughly equivalent to the size of the current institutional-only money market funds.

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

Impact on Portfolio

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 decentralized finance lending markets, 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 noteworthy that the issuer of stablecoins can earn short-term government bond yields (currently between 4.0% and 4.5%), but does not pay interest to the holders of the coins. This constitutes a structural arbitrage difference between government money market funds. The choice for investors between holding stablecoins and participating in traditional cash instruments essentially involves a trade-off between all-weather liquidity and yield.

For traditional USD asset allocators, stablecoins are becoming a sustained source of demand for short-term government bonds. The current reserves of $150-200 billion can almost absorb a quarter of the Treasury's expected bond issuance of the fiscal year 2025 under the new bill. If stablecoin demand expands by another $1 trillion before 2028, the model predicts that the 3-month Treasury yield will decline by 6-12 basis points, with the front-end yield curve steepening, helping to reduce corporate short-term financing costs.

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 a 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 storing digital dollars suppresses short-term inflation transmission, but it is also accumulating long-term external dollar liabilities for the United States, as more and more on-chain assets ultimately transform into on-chain claims against US sovereign assets.

The demand for stablecoins for 3-6 month US Treasury bonds has also created a stable and price-insensitive buying interest in the front end of the yield curve. This persistent demand has compressed short-term spreads and reduced the effectiveness of monetary policy tools. As the circulation of stablecoins increases, central banks may need to achieve the same tightening effect through more aggressive quantitative tightening or higher policy interest rates.

Structural Transformation of Financial Infrastructure

The scale of stablecoin infrastructure is now undeniable. In the past year, the total on-chain transfer amount reached $33 trillion, surpassing the total amount of major credit card networks. Stablecoins offer 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 decentralized finance lending, supporting over 65% of protocol loans. On-chain short-term government bond instruments are rapidly expanding, with an annual growth of over 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 boundaries between cash and securities.

Traditional banking systems are also beginning to respond. Some large banks have expressed their willingness to issue bank stablecoins once legally permitted, showing concern over the migration of customer funds on-chain.

The larger systemic risk comes from the redemption mechanism. Unlike money market funds, stablecoins can be settled within minutes. In the event of pressure situations like 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 selling pressure environments, which poses challenges to its resilience and interconnectedness.

Strategic Focus and Subsequent Observations

1. Currency Cognition Reconstruction: Stablecoins should be regarded as the new generation of Euro and Dollar – a financial system that operates outside of regulation, is difficult to quantify, but has a strong influence on global Dollar liquidity;

2. Interest Rates and Government Bond Issuance: Short-term rates on U.S. Treasury bonds 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 government bonds to identify abnormal interest rates and pricing distortions;

3. Portfolio Allocation:

   • For cryptocurrency investors: Use zero-interest stablecoins for daily trading, and allocate idle funds to on-chain 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 repurchase markets. The risk management department should simulate relevant scenarios, including soaring treasury 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 dollar. For multi-asset investors and macro strategists, understanding and responding to this trend is no longer optional, but a pressing necessity.