US Treasury sees stable coin driving ‘structural demand’ for TBs.

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Stablecoin collateral now accounts for around $120 billion in US Treasury holdings. Potential risks remain due to the stablecoin sector's reliance on T-bills.

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In a presentation to the Treasury Borrowing Advisory Committee (TBAC), the US Treasury explained how the growth of stablecoins could adjust demand for Treasury bills, which could change their rates in future issues.

An estimated $120 billion of stablecoin collateral is tied up in Treasuries, much of it invested in T-bills and Treasury-backed repo transactions, reflecting the rapid popularity and significant role T-bills now play in the crypto market.

The presentation, part of the Treasury's broader discussions on fiscal policy and financial stability, highlighted the stable coin's rapid rise over the past decade.

Pegged to stable assets like the dollar, stablecoins have gained popularity in DeFi as collateral and to facilitate crypto transactions.

This, combined with the projected steady growth of the coin, hints at a structural change in demand for short-term US Treasuries.

However, the approach raised concerns about stablecoins' reliance on T-Bills, emphasizing the importance of strong collateral, emphasizing historical lessons from the “wildcat” era of banking and money market funds in 2008 and 2020.

Despite the improved security, stablecoins still face risks. Repeated runs and instances where Stalkcoins lose their peg against the US dollar or fall indicate vulnerabilities.

A collapse of a major stablecoin like Tether could trigger a fire sale of US Treasury holdings, impacting the T-bill market.

Beyond stablecoins, the presentation explored how the institutionalization of crypto, specifically Bitcoin, could fuel interest in treasuries.

As Bitcoin's volatility prompts institutional investors to seek hedging, Treasuries can look to sustainable demand as a reliable hedging tool.

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