Stablecoins backed by US debt: On-chain replication of broad money and reconstruction of the financial system

Overview

Stablecoins backed by U.S. Treasuries are quietly building an on-chain broad money (M2) system. Stablecoins like USDT and USDC currently have a circulation of $220–256 billion, accounting for about 1% of the U.S. M2 ($21.8 trillion). About 80% of the reserves are allocated to short-term U.S. Treasuries and repurchase agreements, making the issuer an important participant in the sovereign debt market.

This trend is having a wide-ranging impact:

1. Stablecoin issuers have become significant buyers of short-term U.S. Treasuries, holding a total of $150–200 billion, comparable to the holdings of medium-sized sovereign states;

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

3. The “big, beautiful bill” proposed by the Trump administration is expected to increase public debt by about $3.3 trillion, and stablecoins are expected to absorb this additional supply of national debt;

4. Upcoming legislation would explicitly list T-bills as a legal reserve asset, thereby institutionalizing fiscal expansion and the foundation for stablecoin supply, creating a feedback mechanism whereby the private sector absorbs public deficits and extends dollar liquidity around the world.

How stablecoins expand broad money

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

1. The user sends fiat USD to the stablecoin issuer;

2. The issuer uses the funds received to purchase U.S. Treasury bonds and mint stablecoins at the same value;

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

This process forms a kind of "currency replication" mechanism. The base currency (wire transfer funds) has been used to purchase government bonds, while the stablecoin itself is used as a payment tool like a demand deposit. Therefore, although the base currency has not changed, the broad money has actually expanded outside the banking system.

Currently, stablecoins account for 1% of M2, and every 10 basis point increase will inject about $22 billion of "shadow liquidity" into the financial system. According to Standard Chartered Bank and the U.S. Treasury Borrowing Advisory Committee (TBAC), 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 roughly equivalent to the size of current institutional exclusive money market funds.

By legislating to include T-bills in compliant reserves, the United States has actually made the expansion of stablecoins an automatic source of marginal demand for national debt. This mechanism has partially privatized U.S. debt financing, and the issuers of stablecoins have become systemic financial supporters. At the same time, it has also pushed the internationalization of the U.S. dollar to a new level through on-chain dollar transactions, allowing global users to hold and trade dollars without access to the U.S. banking system.

Impact on different types of portfolios

Stablecoins form the fundamental liquidity layer of the crypto market for digital asset portfolios . They dominate trading pairs on centralized exchanges, are the main collateral in the DeFi lending market, and are the default unit of account. Their total supply can be used as a real-time indicator of investor sentiment and risk appetite.

It is worth noting that stablecoin issuers can obtain T-bill returns (currently 4.0% to 4.5%), but do not pay interest to holders. This constitutes a structural arbitrage difference with government money market funds. Investors' choice between holding USDT/USDC and participating in traditional cash instruments is essentially a trade-off between 24/7 liquidity and returns.

For traditional dollar asset allocators , stablecoins are becoming a source of continued demand for short-term Treasury bonds. The current $150-200 billion in reserves can absorb almost a quarter of the Treasury's expected Treasury issuance in fiscal 2025 under the "Big Beautiful Bill". If stablecoin demand expands by another $1 trillion before 2028, the model predicts that the 3-month Treasury yield will fall by 6-12 basis points, and the front-end yield curve will become steeper, which will help reduce the short-term financing costs of enterprises.

Trading topics worth watching

The impact of stablecoins on the macroeconomy

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

In addition, stablecoins circulate much faster than traditional deposit accounts—about 150 times per year. In regions with high adoption, this could amplify inflationary pressures even if the base currency does not grow. Currently, the global preference for digital dollars for storage suppresses short-term inflation transmission, but is also accumulating long-term external dollar liabilities for the United States, as more and more on-chain assets eventually become on-chain claims on U.S. sovereign assets.

The demand for stablecoins on 3–6 month Treasuries also creates a stable, price-insensitive bid on the front-end yield curve. This sustained demand compresses the bill-OIS spread and reduces the effectiveness of the Fed’s policy tools (such as IOER and RRP). As the circulation of stablecoins grows, the Fed may need to achieve the same tightening effect through more aggressive quantitative tightening or higher policy rates.

Structural changes in 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, exceeding the total of Visa and Mastercard. Stablecoins have almost instant settlement capabilities, programmability, and ultra-low-cost cross-border transactions (as low as 0.05%), far superior to traditional remittance channels (6–14%).

Meanwhile, stablecoins have become the preferred collateral asset for DeFi lending, supporting more than 65% of protocol loans. Tokenized T-bills — a yield-based, on-chain tool that tracks short-term Treasury bonds — are expanding rapidly, growing more than 400% year over year. This trend is giving rise to a “dual dollar system”: zero-interest coins for trading and interest-bearing tokens for holding, further blurring the line between cash and securities.

The traditional banking system has also begun to respond. The CEO of Bank of America has publicly stated that he is "willing to issue bank stablecoins after legal permission", showing the banking system's concerns about the migration of customer funds on the chain.

The greater systemic risk comes from the redemption mechanism. Unlike money market funds, stablecoins can be liquidated within minutes. In a stress scenario such as decoupling, the issuer may sell tens of billions of dollars of Treasury bonds on the same day. The U.S. Treasury market has not been stress-tested in such a real-time selling environment, which challenges its resilience and linkage.

Strategic Priorities and Follow-up Observations

1. Reconstruction of currency cognition : Stablecoins should be seen as a new generation of Eurodollars - a funding system that is outside of regulation, difficult to count, but has a strong influence on global dollar liquidity;

2. Interest rates and Treasury issuance : US short-term interest rates are increasingly affected by the pace of stablecoin issuance. It is recommended to track both the net issuance of USDT/USDC and the primary auction of Treasury bonds to identify interest rate anomalies and pricing distortions;

3. Portfolio Allocation :

   • For crypto investors: Use zero-interest stablecoins for daily transactions and allocate idle funds to tokenized T-bill 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 be directly transmitted to the sovereign bond and repo markets. Risk management departments should simulate relevant scenarios, including sharp increases in government bond interest rates, tight collateral and intraday liquidity crises.

Stablecoins backed by U.S. Treasuries are no longer just a convenient tool for crypto trading. They are rapidly evolving into a “shadow currency” with macro influence—financing fiscal deficits, reshaping interest rate structures, and restructuring the way the dollar circulates around the world. For multi-asset investors and macro strategists, understanding and responding to this trend is no longer an option, but a priority.