Increase in market influence of stablecoins measured by BIS, revealing their potential impact on Treasury rates
In a recent study, the Bank for International Settlements (BIS) has explored the potential influence of stablecoins on short-term Treasury rates. The research suggests that as stablecoins grow, they are likely to create a significant new demand for short-term Treasuries, potentially lowering short-term yields in the near term and steepening the Treasury yield curve.
The focus of the BIS research is primarily on the impact of stablecoins on short-term Treasury rates, not all Treasuries. Academic research finds that large inflows into stablecoins reduce three-month T-bill yields by about 2 basis points within 10 days, indicating increased demand for these instruments. With the global growth of stablecoins, especially dollar-pegged ones, this demand could lead to "trillions" of dollars in new demand focused on short-term government debt.
One key factor contributing to this demand is the regulatory framework. The GENIUS Act, enacted in July 2025, requires stablecoin issuers to back their tokens 1:1 with reserves comprising cash, deposits, repurchase agreements, or Treasuries with 93 days or less maturity. This mandate institutionalizes stablecoins as a structural new source of demand for short-term Treasury securities.
The increased demand for short-term Treasuries influences central bank monetary policies by affecting the supply and demand dynamics of government debt, bank deposits, and short-term interest rates. Central banks may respond by adjusting monetary policy levers to address changes in liquidity preferences and funding costs in the financial system driven by stablecoin adoption and regulatory frameworks.
However, the BIS study notes that the impact of stablecoins significantly overstates the impact on short-term Treasury yields. For instance, sales of $3.5 billion of Treasuries by stablecoin issuers cause an increase in Treasury bill yields of six to eight basis points (0.06% - 0.08%).
Despite the overstatement, the evolving stablecoin ecosystem demands vigilance about financial stability risks and potential shifts in depositor behavior. With stablecoins potentially competing with bank deposits and money market funds, there is concern about disintermediation of traditional bank funding sources. Banks might need to increase deposit interest rates or seek wholesale funding to retain customers, which can influence overall monetary transmission.
Moreover, central banks and regulators are monitoring systemic risk due to stablecoins' susceptibility to runs, similar to bank runs, which might cause sudden volatile redemptions impacting Treasury markets. As stablecoins grow, reaching an estimated $2 trillion by 2028, their demand for cash-equivalent, yield-bearing instruments such as short-term Treasuries could reshape the demand curve significantly, potentially lowering short-term interest rates directly and prompting central banks to adjust policy rates or engage in liquidity operations to maintain desired monetary conditions.
Investing in longer-term government bonds by stablecoin issuers increases liquidity, interest rate, and run risks for stablecoins. The draft UK rules support greater investment in longer-term government bonds by stablecoin issuers, potentially aiming to reduce longer-term rates. However, this could reduce the effectiveness of the tools available to central banks.
The BIS research does not specifically address the implications of stablecoin policy on the independence of central banks from Treasury or Finance departments. This is a separate policy issue, but one that is of concern as stablecoins could impact the Federal Reserve's ability to influence interest rates, similar to the "Greenspan Conundrum" during the early 2000s.
In conclusion, the growth of stablecoins is likely to create a significant new demand for short-term Treasuries, exerting downward pressure on short-term rates and steepening the yield curve. Central banks may respond by adjusting monetary policy levers to address changes in liquidity preferences and funding costs in the financial system driven by stablecoin adoption and regulatory frameworks. The evolving stablecoin ecosystem also demands vigilance about financial stability risks and potential shifts in depositor behavior.
References:
- Academic research on stablecoins and Treasury yields: [Link]
- The GENIUS Act: [Link]
- Regulatory framework and stablecoins: [Link]
- Market and monetary policy implications: [Link]
- Longer-term effects on Treasury rates and monetary policy: [Link]
- The BIS study highlights the significant influence of stablecoins on government debt, asserting that their growing demand for short-term Treasuries could lead to trillions of dollars in new demand for these securities, largely due to the regulatory framework.
- As stablecoins compete with bank deposits and money market funds, there is rising concern about potential disintermediation of traditional bank funding sources, prompting banks to possibly increase deposit interest rates or seek wholesale funding.
- By examining the demand for cash-equivalent, yield-bearing instruments such as short-term Treasuries, stablecoin issuers could potentially reshape the demand curve, leading to lowered short-term interest rates and compelling central banks to adjust policy rates or engage in liquidity operations to maintain desired monetary conditions.
