During February’s first public speech as White House Crypto czar, David Sacks said that stablecoins could increase demand for Treasuries and lower interest rates. Now new research from the Bank for International Settlements (BIS), often called the central bank of central banks, supports this theory, except that the primary impact is on short versus long term rates, given that stablecoins invest in short term Treasuries.
The BIS report reveals striking statistics about stablecoin market influence. While stablecoin issuers have been noted as major holders of short term Treasuries, surpassing the holdings of countries such as China, the BIS highlights that during 2024, they were the third largest purchasers of Treasuries bills*. That figure is based on the net increase in stablecoin reserves.
Stablecoin impact on Treasury rates
Regarding the impact on Treasury rates, the BIS study notes that a naive analysis of a $3.5 billion change in stablecoin holdings of Treasury bills implies a 25 basis point (0.25%) change in short term Treasury yields. However, it says this significantly overstates the impact, because many factors will simultaneously influence both stablecoin demand and Treasury rates.
To try to isolate the impact of stablecoins, it explored major crypto events unrelated to movements in interest rates. Based on its research, the BIS concludes that the impact of sales of $3.5 billion of Treasuries by stablecoin issuers causes an increase in Treasury bill yields of six to eight basis points (0.06% – 0.08%). This is a much bigger effect than purchases, because sales are frequently more urgent given they may involve a mini crisis. A similarly sized purchase of Treasuries would result in a decline in Treasury rates of three basis points (-0.03%).
The paper also noted that stablecoins are still comparatively small and the research is based on current volume levels. As stablecoins grow, the relative impact will increase. This will also create financial stability risks because of their effect on Treasury rates if there’s a run on a stablecoin.
Stablecoin policy effects
Additionally, with larger volumes of stablecoins, it will reduce the ability of the Federal Reserve to influence interest rates. During the early 2000s, the Federal Reserve’s monetary policy was not able to affect Treasury rates in the manner expected, the “Greenspan Conundrum”. This was attributed to significant offshore holdings of Treasuries. Stablecoins will have a similar impact.
While the US dollar research showed the biggest impact on short term rates, we’d observe that draft UK rules support greater investment in longer term government bonds, perhaps deliberately looking to reduce longer term rates. This comes at a cost of increasing liquidity, interest rate and run risks for stablecoins.
There’s also a separate policy issue not mentioned in the paper. Ideally central banks are independent of Treasury or Finance departments, separating responsibility for fiscal and monetary policy. With many governments around the world experiencing ballooning debt levels, they want to lower interest rates on their debt, but independent central banks control the levers. By enacting stablecoin legislation that encourages stablecoin issuers to invest in government debt, the Treasury departments are reducing the effectiveness of the tools available to central banks. Some might see that as a positive thing. Others worry about financial stability risks, especially when combined with geopolitical instability.
* Note that this is Treasury bills – ie. only for short term Treasuries, not all Treasuries.
