Stablecoin: A New Force in Building an On-Chain Broad Money System

In recent years, stablecoins backed by U.S. Treasury bonds have been quietly constructing an on-chain Broad Money system. Currently, the circulation of major stablecoins has reached between 220 billion to 256 billion USD, accounting for about 1% of U.S. M2. Among the reserve assets of these stablecoins, approximately 80% are allocated to short-term U.S. Treasury bonds and repurchase agreements, making the issuing institutions important participants in the sovereign debt market.

This trend is having a widespread impact:

1. The issuers of stablecoins have become the main buyers of short-term US Treasury bonds, holding a total of 150 to 200 billion USD, a scale comparable to that of medium-sized countries;

2. On-chain transaction volume is rapidly increasing, reaching $27.6 trillion in 2024, and is expected to reach $33 trillion in 2025, surpassing the total of major credit card companies;

3. The new fiscal policy is expected to increase public debt by about $3.3 trillion, and stablecoins are expected to become an important channel for absorbing this additional supply of government bonds.

4. The upcoming regulations will clarify that short-term government bonds are legitimate reserve assets, which will institutionalize the connection between fiscal expansion and stablecoin supply, creating a feedback mechanism where the private sector absorbs public deficits and extends dollar liquidity globally.

How Stablecoins Expand Broad Money

The issuance process of stablecoins is simple, but it has significant macroeconomic implications:

1. Users send fiat currency USD to the stablecoin issuer;

2. The issuer uses the received funds to purchase U.S. Treasury bonds and mints stablecoins equivalent to the value.

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

This process has created a kind of "currency replication" mechanism. The base money has been used to purchase government bonds, while the stablecoin is used as a payment tool similar to a demand deposit. Therefore, although the base money has not changed, the Broad Money has effectively expanded outside the banking system.

According to forecasts, the total amount of stablecoins is expected to reach 2 trillion USD by 2028. If M2 remains unchanged, this scale will account for about 9% of M2, roughly equivalent to the current size of institutional-only money market funds.

By legislating to hard-wire short-term treasury bonds into compliance reserves, it effectively makes the expansion of stablecoins an automatic source of marginal demand for treasury bonds. This mechanism privatizes the portion of U.S. debt financing, transforming stablecoin issuers into systemic fiscal supporters. At the same time, it also elevates the internationalization of the dollar through on-chain dollar transactions, allowing global users to hold and trade dollars without accessing the U.S. banking system.

The Impact on Different Types of Investment Portfolios

For digital asset portfolios, stablecoins constitute the foundational liquidity layer of the crypto market. They dominate trading pairs on centralized exchanges, serve as the main collateral in decentralized finance lending markets, and are also the default unit of account. Their total supply can act as a real-time indicator of investor sentiment and risk appetite.

It is worth noting that stablecoin issuers can earn short-term government bond yields (currently between 4.0% and 4.5%), but they do not pay interest to coin holders. This constitutes a structural arbitrage difference between government money market funds. The choice for investors between holding mainstream stablecoins and participating in traditional cash instruments is essentially a trade-off between 24/7 liquidity and yield.

For traditional dollar asset allocators, stablecoins are becoming a continuous source of demand for short-term Treasury bonds. The current reserves of $150-200 billion can almost absorb a quarter of the expected Treasury issuance in the fiscal year 2025 under the new policy context. If stablecoin demand expands by another $1 trillion before 2028, the model predicts that the yield on 3-month Treasury bills will decline by 6-12 basis points, and the front end of the yield curve will steepen, helping to reduce corporate short-term financing costs.

The Impact of Stablecoins on the Macroeconomy

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

Moreover, the circulation speed of stablecoins far exceeds that of traditional deposit accounts—averaging about 150 times a year. In regions with high adoption rates, this may amplify inflationary pressures, even if the Broad Money has not increased. Currently, the global preference for storing digital dollars suppresses short-term inflation transmission, but it is also accumulating long-term external dollar liabilities for the United States, as more and more on-chain assets ultimately become on-chain claims against U.S. sovereign assets.

The demand for stablecoins for 3-6 month U.S. Treasury bonds has also created a stable and price-insensitive buying interest in the front end of the yield curve. This persistent demand has compressed short-term spreads and reduced the effectiveness of the Federal Reserve's policy tools. As the circulation of stablecoins increases, the Fed may need to resort to more aggressive quantitative tightening or higher policy interest rates to achieve the same tightening effect.

Structural Transformation of Financial Infrastructure

The scale of stablecoin infrastructure is now hard to ignore. In the past year, the total amount of on-chain transfers reached $33 trillion, surpassing the total of major credit card companies. Stablecoins offer almost instantaneous settlement capabilities, programmability, and ultra-low-cost cross-border transactions (as low as 0.05%), far superior to traditional remittance channels (6-14%).

At the same time, stablecoins have become the preferred collateral asset for decentralized finance lending, supporting over 65% of protocol loans. Tokenized short-term government bonds - an income-generating, on-chain tool that tracks short-term government bonds - are rapidly expanding, with an annual growth rate exceeding 400%. This trend is giving rise to a "dual dollar system": zero-interest coins for trading and interest-bearing tokens for holding, further blurring the lines between cash and securities.

Traditional banking systems are also starting to respond. Some CEOs of large banks have publicly stated that "they are willing to issue bank stablecoins once legally permitted," showing the banking system's concerns about the migration of customer funds on-chain.

The greater systemic risk comes from the redemption mechanism. Unlike money market funds, stablecoins can settle in minutes. In situations of pressure such as decoupling, issuers may sell hundreds of billions of dollars in government bonds on the same day. The U.S. Treasury market has not yet undergone stress testing in such real-time sell-off environments, which poses challenges to its resilience and interconnectedness.

Strategic Focus and Subsequent Observation

1. Currency Cognition Reconstruction: Stablecoins should be viewed as a new generation of Euro and Dollar – a monetary system that is detached from regulation, difficult to quantify, but has a powerful impact on global dollar liquidity;

2. Interest Rates and Treasury Issuance: Short-term rates on U.S. Treasuries are increasingly influenced by the issuance pace of stablecoins. It is recommended to simultaneously track the net issuance of major stablecoins and the primary auction of Treasuries to identify interest rate anomalies and pricing distortions;

3. Portfolio Allocation:

   • For cryptocurrency investors: Use zero-interest stablecoins for daily trading, and allocate idle funds to tokenized short-term government bond 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 directly transmit to the sovereign debt and repurchase markets. The risk management department should simulate relevant scenarios, including surging government bond rates, collateral tightening, and intraday liquidity crises.

Stablecoins backed by U.S. Treasury securities are no longer just convenient tools for crypto trading. They are rapidly evolving into "shadow currencies" with macroeconomic influence—financing fiscal deficits, reshaping interest rate structures, and globally reconstructing the circulation of the dollar. For multi-asset investors and macro strategists, understanding and responding to this trend is no longer optional, but an urgent necessity.