A $300 Billion Crypto Market Is Propping Up US Government Debt 

According to a report by The New York Times, stablecoins have surged from $20 billion in market value in 2020 to $300 billion today. The Federal Reserve projects they could reach $3 trillion within five years. To maintain their dollar peg, stablecoin issuers back their coins with U.S. Treasury debt, making them among the largest holders of that debt in the world. Companies like Circle and Tether now hold more Treasury bonds than major U.S. creditors including Saudi Arabia and South Korea.

Stablecoins’ utility has fueled their growth and drawn serious interest from mainstream financial institutions. Not everyone sees that mainstream embrace as reassuring. Brent Donnelly, a veteran trader and president of Spectra Markets, told the Times that new regulations may make the stablecoin space “less Wild West,” but cautioned that the asset class still poses real dangers.

“It is an existential risk at the margins,” he said. “It’s not economically attractive, but it’s convenient if you’re a crypto person.”

The core concern is what happens during a market panic. Stablecoin issuers hold short-term Treasury bills as collateral for the coins they issue. If a future crypto crash triggers a wave of redemptions issuers could be forced to sell those Treasuries quickly and all at once. That kind of fire sale could ripple through the broader credit markets that businesses and banks depend on.

A New York Fed staff report published last month warned that stablecoins could soon “transmit liquidity stress to the banking system.” This is not a hypothetical. During a 2022 and 2023 market meltdown, Circle’s USD Coin briefly fell to 87 cents on the dollar, and Tether’s USDT dropped below 94 cents.

Read more: Bank Regulators Clarify That Crypto Qualifies as Collateral Under Capital Reserves Rule

The policy response is now taking shape. The GENIUS Act, signed last year by President Trump, created a formal legal framework for stablecoins in the U.S. financial system. Trump has publicly championed the law and urged banks not to work against it. Treasury Secretary Scott Bessent has been direct about the administration’s goal. “We are going to keep the U.S. the dominant reserve currency in the world, and we will use stablecoins to do that,” he said.

Regulators are still filling in the details. The critical open questions include which assets can serve as valid collateral, which financial institutions will be allowed to issue stablecoins, and how anti-money-laundering rules will apply in practice. Fed Governor Michael Barr has raised concerns about certain proposed collateral types, including uninsured bank deposits, calling them a “key risk factor” during the March 2023 banking stress. Other experts are wary of allowing short-term corporate debt as collateral, warning it tends to seize up precisely when markets are most stressed.

For general counsel at banks and payments companies, the stakes are concrete. Final rules under the GENIUS Act will set the boundaries for who can issue stablecoins, what backs them, and what legal obligations come with redemption. Some experts quoted in the Times remain concerned that the rules are moving fast. Nellie Liang, a senior fellow at the Brookings Institution who worked on stablecoin policy in the Biden administration, said she worried about stablecoins “being used too quickly without good rules in place.”

The rules, when finalized, will determine whether the stablecoin boom becomes a durable part of the financial system, or a new source of systemic fragility.