Stablecoin Legislation Will Juice Demand for Treasurys — to a Point — WSJ
By Sam GoldfarbNew legislation regulating stablecoins — a type of digital currency pegged to the U.S. dollar — is widely expected to boost demand for Treasurys. But Wall Street isn't sure how much.The cryptocurrency industry scored a major win Tuesday when the Senate passed the legislation, which many expect to spur adoption by businesses ranging from payment providers like Mastercard and Visa to big merchants including Amazon.com and Walmart.And because stablecoin issuers back their currencies with short-term Treasurys, many expect them to buy more in coming years.That could help lower borrowing costs not only for the government, but also households and businesses. Yields on Treasurys serve as a benchmark for interest rates on mortgages and other loans."A thriving stablecoin ecosystem will drive demand from the private sector for US Treasuries, which back stablecoins," Treasury Secretary Scott Bessent said Tuesday in a social-media post. "This could lower government borrowing costs and help rein in the national debt."Many Wall Street analysts agree that the growth of stablecoins could boost demand for ultrashort-term U.S. Treasurys in particular. But, they say, the magnitude of that effect is highly uncertain.First, the future for stablecoins is still unclear. Second, money flowing to stablecoins could come from other sources, such as money-market funds or bank deposits, which already support demand for Treasurys.Stablecoins are primarily used by traders and investors to buy crypto on exchanges, although they could increasingly be used for other financial transactions, with banks and retailers among those exploring their own potential uses for the digital tokens.The dominant stablecoin issuers, Tether and Circle, keep the value of their currencies pegged to the dollar by holding short-dated Treasurys as collateral, along with other cashlike investments. Tether also holds some bitcoin, corporate bonds and precious metals as part of its reserves.A key feature of the Senate-passed legislation, known as the Genius Act, is that it would specify what stablecoin issuers can use as collateral — including Treasurys that mature in 93 days or less — and mandate that they hold $1 of reserves for every $1 of stablecoins.Right now, the size of the stablecoin market is around $240 billion. A recent Morgan Stanley report estimated that stablecoin issuers currently hold a little under $200 billion in Treasury bills — government debt that matures in a year or less.Analysts have wide-ranging views on what will happen next. Depending on the pace of stablecoin growth, those T-bill holdings could expand to around $400 billion, or more than $1.6 trillion, in two years, according to the Morgan Stanley report.Increased demand for short-term bills wouldn't directly bring down yields on longer-term Treasurys — the rates that matter most for setting other borrowing costs. But it could help by allowing the Treasury Department to borrow more in bills and less in longer-term bonds than investors are expecting. That would at least reduce the threat that supply of the bonds could overwhelm demand and drive interest rates higher.As of May 31, the volume of Treasury bills stood at around $6 trillion, or about 21% of all outstanding Treasurys. Some analysts believe that the share of T-bills could be allowed to rise to 25% or even higher, partly owing to demand from stablecoin issuers as well as strong demand from other sources, including money-market funds.That could be especially helpful since the government is expected to run annual budget deficits of around $2 trillion in the coming years, requiring it to keep issuing huge volumes of Treasurys.Some analysts are skeptical that stablecoin growth would bring significant amounts of new money into the bond market.Demand for T-bills from stablecoin issuers "could maybe move higher, but it would probably come from people moving from deposits or money-market funds," said Alejandra Vazquez Plata, an interest-rate strategist at Citigroup. "So, in that sense, it's like we're just shifting around demand, we're not creating or generating new demand."Write to Sam Goldfarb at [email protected]