A presentation last week to the US Treasury’s Borrowing Advisory Committee (TBAC) explored the impact of stablecoins on the demand for short term Treasuries. One topic was mentioned repeatedly – the potential for stablecoins to offer interest. The last iteration of the Senate’s stablecoin bill, the GENIUS Act, introduced a clause that banned the payment of stablecoin interest before receiving a positive vote by the Senate Banking Committee.
According to the minutes of the TBAC meeting, “There was robust discussion concerning the potential implications of interest bearing stablecoins versus non-interest bearing stablecoins, and the extent to which growth in stablecoins would result in net new demand for Treasury securities rather than a reallocation of demand from banks and money market mutual funds.”
The President’s Executive Order on digital assets made clear the intention to promote the use of US dollar stablecoins beyond US borders. White House AI and crypto czar David Sacks was very clear that the goal is to increase demand for US Treasuries, which helps to lower the cost of servicing the United States’ massive debt.
The TBAC stablecoin report
The TBAC report used a figure from Standard Chartered research that estimates that stablecoins will grow to $2 trillion by 2028 assuming stablecoins don’t pay interest. As an aside, Citi also recently published forecasts. The mid April capitalization of stablecoins was $234 billion, which accounts for approximately $120 billion investment in short-dated Treasuries. Combining that with Standard Chartered’s figure, the report estimates that stablecoin investment in Treasuries will expand to $1 trillion by 2028. If stablecoins were to offer interest, the figure could be quite a bit higher, although no forecast was provided. That would account for a significant slice of the short term Treasury Bill market, which currently has a $6.4 trillion issuance.
A key reason why most global stablecoin regulation has not supported the payment of interest is because there is a concern that bank deposits might shift to stablecoins, potentially affecting the economy with less credit available from banks, or credit might become more expensive. The TBAC report states that transactional demand deposits at banks that total $6.6 trillion are most “at risk” from stablecoins.
However, the presentation spent just as much time exploring potential opportunities for banks and financial institutions, including issuing stablecoins and managing reserves.
Apart from delving into the potential for stablecoins to offer interest, two other issues were floated – the potential to allow stablecoin issuers access to the Federal Reserve and / or deposit insurance. This would help reduce the impact of de-peg events.
Readers of the TBAC report might expect to see efforts to remove the interest ban from the GENIUS Act. However, after this TBAC meeting, several pro-crypto Democrats withdrew support for the latest version of the GENIUS Act despite it still including the yield ban. Backtracking on the yield clause could further delay the progress of the stablecoin bill.
