Stablecoins could become big buyers of Treasuries

The Senate has passed the Guiding Electronic National Innovation and Uniform Standards (GENIUS) Act, giving dollar-backed stablecoins a formal federal regulatory framework for the first time. The bill matters well beyond crypto. It requires stablecoin issuers to back their tokens with short-term US Treasury bills, which turns them into a new force in the government debt market.

What the Senate passed

The vote on 17 June was comfortably bipartisan, a rare thing for crypto legislation, after a false start in May when Democrats blocked the bill over concerns about conflicts of interest and consumer protection. The bill sets up a licensing regime for payment stablecoins, puts the largest issuers under federal supervision while letting smaller ones choose state oversight, requires monthly public disclosure of reserves and gives token holders priority over other creditors if an issuer fails. It bars issuers from paying interest to holders. The House has its own version and must still act, and the administration wants a law on the president's desk within weeks.

A new buyer of bills

Dollar-backed stablecoins now have a combined market value of more than $200 billion, and it is growing at double-digit annual rates. Their issuers have already become sizeable buyers of Treasury bills. The GENIUS Act writes strict reserve rules into law, requiring 100 per cent backing in cash and Treasury bills maturing within 93 days. Federal short-term debt thus gains a steady buyer that does not much care about price.

The market is highly concentrated. Tether and Circle's USDC account for the great majority of it, and Tether says it already holds more Treasury bills than many national governments do. Circle listed its shares in New York this month, and the enthusiasm with which investors bought them shows how much value the market places on a business that takes in dollars, pays nothing on them and invests them in bills yielding more than 4 per cent.

How a dollar becomes a bill

The mechanism is simple. A user sends a dollar to an issuer and receives a token. The issuer keeps the dollar as reserves, and under the new rules most of it will sit in cash, short-term Treasury bills or overnight repurchase agreements backed by Treasuries. Every net dollar of new tokens therefore becomes close to a dollar of demand for the shortest end of the government's debt. The Treasury secretary, Scott Bessent, has openly championed stablecoins as a new source of demand for government debt, which helps explain the administration's enthusiasm.

The demand is concentrated where the Treasury has been leaning hardest. It has financed much of its recent borrowing with bills, and it is likely to lean on them again once the debt ceiling is raised and it needs to rebuild its cash balance. A buyer that must hold bills whatever the yield lowers the rate the government pays on them at the margin, though stablecoins remain small next to money-market funds, which own far more.

Banks lose deposits

Banks will pay for this. As corporate treasurers and retail users move their transaction balances into stablecoins that earn a yield, commercial banks will see deposits leave faster.

The law's ban on interest does not settle that question. It stops issuers from paying holders directly, but exchanges and other intermediaries already offer rewards on stablecoin balances, funded out of the income on reserves, and banking lobbyists are pressing to close that route. If rewards survive, a token will compete with a bank current account on both convenience and return. Regional banks, which rely more heavily on cheap retail and small-business deposits than the largest banks do, have the most to lose.

Money funds did this before

The precedent is the 1970s. When inflation pushed market interest rates far above the ceilings that Regulation Q imposed on bank deposits, money-market mutual funds offered savers a market return and a cheque-like way to spend it. Deposits drained from banks and savings institutions, and the pressure helped push Congress to phase out the ceilings in the early 1980s. The savings and loan industry, which had lent long and funded itself short, never recovered its footing. A new instrument that paid savers more than banks could pay reshaped the funding of American finance within a decade.

Where the argument is weakest

The strongest counterargument is that deposits do not vanish from the banking system when they move into stablecoins. The issuer keeps part of its reserves in bank deposits, and when it buys a Treasury bill, the seller receives a deposit somewhere. What changes is the type of deposit and the bank that holds it: sticky retail balances at a community bank become wholesale balances at a large bank or a money fund. That is a real shift in cost and stability for smaller lenders, even if the total is unchanged.

There is also a risk the other way. Circle had billions of dollars of reserves at Silicon Valley Bank when it failed in March 2023, and USDC briefly lost its peg to the dollar. A run on a large stablecoin would force the issuer to sell bills in a hurry, which is why the short-maturity rule matters. The new law makes such a run less likely without ruling it out.

Signals to watch

The indicators are the House vote and any changes to the interest ban, the monthly reserve disclosures of the biggest issuers, the growth in stablecoin supply, and deposit trends at regional banks in the Fed's weekly data. Once the GENIUS Act is law, stablecoin issuers will in effect become a funding arm of the Treasury, buying more bills with every dollar of growth, while regional banks lose the cheap deposits they rely on. The shift will be gradual at first, but if the supply of tokens keeps growing at recent rates, smaller banks will be paying noticeably more for their funding within a few years.