An economic bulletin released Friday (Aug. 8) by the Federal Reserve Bank of Kansas City delves into the push-pull dynamic that might take shape over the next few years. The framework for stablecoins in the United States, codified in the GENIUS Act signed into law July 18, will increase demand for U.S. Treasurys, the world’s deepest and most liquid market.
“The effect of U.S. dollar stablecoins on the Treasury market will depend on the stablecoin market’s size and future growth,” the bulletin said.
The stablecoin market today is “too small to have a large effect on Treasury demand,” the bulletin said. However, “the market is expected to grow substantially over the next several years.”
This growth could lead to a redistribution of funds within the financial system.
Treasurys would be part of the backing of the stablecoins themselves. At the same time, the demand for stablecoins would be funded by the deposits held by banking customers. In short, the pool of capital available for lending would be diminished — to the tune of billions of dollars.
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In quantifying the possible impact, the bulletin estimated:
- U.S. banks currently allocate about 50 cents of every dollar in their assets to direct loans to the economy, totaling approximately $13 trillion.
- A hypothetical $1 shift of funds from a bank deposit to a stablecoin issuer is projected to decrease bank lending by around 50 cents, while simultaneously increasing total Treasury holdings by 30 cents, assuming current asset mixes hold for both banks and issuers.
- Should the stablecoin market expand as projected from its current $250 billion to $900 billion — a growth scenario considered within independent projections — this $650 billion shift could lead to a 1% decrease in both total bank assets and bank lending, translating into an estimated $325 billion reduction in available bank loans to the economy.
The net effect on Treasury demand could vary depending on the source of funds for stablecoin purchases. If households sell Treasurys directly to buy stablecoins, for instance, overall Treasury demand might decline. Ultimately, any increased demand for Treasurys driven by stablecoins inherently diverts funding from other prior uses, including loans to the broader economy.
As a result, the greenfield opportunity looms for platform and alternative lenders — the Upstarts and SoFis of the world that either have their own banks or use a mix of funding channels, including institutional investors, to capture at least some of that share of demand.
The PYMNTS Intelligence report “The Embedded Lending Opportunity: Global State of Play,” commissioned by Visa, found that embedded lending is gaining adherents and desire from would-be applicants. Around 4 in 10 consumers and small businesses indicated strong interest in switching to merchants and other providers that offer embedded lending options.
