Long-Term Effect of Stablecoins Purchasing U.S. Treasuries

[Parsad]

Why do I think that this could create significant long-term outlier events that the GENIUS Act has not thought of.  What a crazy moniker for a bill!  Because if it goes wrong...yikes!  Cheers!

 

https://finance.yahoo.com/news/stablecoins-are-set-to-reshape-the-multitrillion-dollar-us-treasury-market-100041163.html

[charlieruane]

What kind of outliers are you thinking of? 

[Parsad]

No idea.  Usually stuff that we can't think of until it happens. 

 

If stablecoins use USD as the reserve, what is the difference between a digital US currency and a US treasury backed stablecoin?

 

I always imagined that stablecoins would use an asset other than fiat currency...like gold.  Cheers!  

[DooDiligence]

Renegotiation of US debt up to and including threats of default?

[Fly]

It will be interesting to see how this plays out. Stablecoin supply and Bitcoin price have a close correlation. Chick or the egg scenario, but the easiest way to increase Stablecoin demand would be to increase BTC price. Will we see even more friendly policies towards BTC? Or put another way, if stablecoin supply increases then BTC price should as well. 

Edited August 26, 2025 by Fly

[Parsad]

7 minutes ago, Fly said:

It will be interesting to see how this plays out. Stablecoin supply and Bitcoin price have a close correlation. Chick or the egg scenario, but the easiest way to increase Stablecoin demand would be to increase BTC price. Will we see even more friendly policies towards BTC? Or put another way, if stablecoin supply increases then BTC price should as well. 

 

I still don't understand what supports BTC's price...scarcity isn't a good enough answer.  Stablecoins make sense...BTC does not.  Cheers!

[Fly]

28 minutes ago, Parsad said:

 

I still don't understand what supports BTC's price...scarcity isn't a good enough answer.  Stablecoins make sense...BTC does not.  Cheers!

 

Some insights: 

 

https://www.cornellbitcoinclub.org/repository/week3

 

Quote

From our interviews and data, a few common threads emerged:

• Limited trust in traditional banking systems

• High inflation or currency instability

• Fewer accessible investment alternatives

• Grassroots financial education and peer-to-peer influence

In Poland, we learned that the country has one of Europe’s highest concentrations of Bitcoin ATMs. In South Africa, Pick n Pay—one of the nation’s largest retailers—has accepted Bitcoin payments in every store since 2023. When alternatives flourish, behavior shifts.

 

Edited August 26, 2025 by Fly

[nsx5200]

Those results smell funny as they are derived from respondents with unspecified method for selection, so there's already some self selecting bias.  Due to that, I'm not sure if those are really worthwhile 'insights'.

 

I don't see how stablecoin supply is tied to the price of another coin.  I guess I need to dig around to see how these stablecoins maintain their stability/supply through smart contracts.  Previous attempts at stable cryptocurrencies tied to other cryptocurrencies all failed in spectacular fashions.

 

No deep insight IMHO, but by latching stable coin supply to government debt/currency is that it'll add one more variable to whatever its attached to.  Depending on the size of that lever, it can change the price of the debt/currency.  We may see wild swings in government debt/currency, which has the more meaningful deeper implications.  If I were the fed, I would keep a real close eye on it, and really grok the smart contract mechanisms.  There may be some weird mechanism for somebody to exploit and lead to a systemic crash.

[Spekulatius]

Stablecoin are like Eurodollars. They are derivatives of the USD but not controlled by the Fed. Formerly,  Eurodollars were only available to institutions, now they are available for everyone. Since they are weakly regulated  (per Genius Act ), I also would expect some blowups here and there.

The fees are high though, because they offer no interest, which is captured by the issuers. So compared to money market funds, you lose 4% a year.

[Fly]

6 hours ago, nsx5200 said:

Those results smell funny as they are derived from respondents with unspecified method for selection, so there's already some self selecting bias.  Due to that, I'm not sure if those are really worthwhile 'insights'.

 

Put the selection methods and biases aside for a moment, the reasons at least make logical sense. Limited trust in banking systems, high inflation/currency instability, lack of access to investment markets, peer-to-peer influences. I can see a reason to hold bitcoin when these are concerns held by an individual. We (developed countries) take for granted our access to brokerage accounts, stable banking systems, stable local currencies, etc. This isn't the case everywhere in the world.  

 

6 hours ago, nsx5200 said:

 

I don't see how stablecoin supply is tied to the price of another coin.  I guess I need to dig around to see how these stablecoins maintain their stability/supply through smart contracts.  Previous attempts at stable cryptocurrencies tied to other cryptocurrencies all failed in spectacular fashions.

 

No deep insight IMHO, but by latching stable coin supply to government debt/currency is that it'll add one more variable to whatever its attached to.  Depending on the size of that lever, it can change the price of the debt/currency.  We may see wild swings in government debt/currency, which has the more meaningful deeper implications.  If I were the fed, I would keep a real close eye on it, and really grok the smart contract mechanisms.  There may be some weird mechanism for somebody to exploit and lead to a systemic crash.

 

Supply is controlled by the issuer. An individual holder of a stablecoin generally cannot redeem for actual currency. Only those blessed by the stablecoin issuer will have authority to redeem stablecoins. These are usually institutional players and large exchanges. Smart contracts for supply are not in use widely (we had a period of algorithmically controlled stablecoin supply, it did not go well). Really the only players in the space worth a damn are Tether and Circle. Everyone else is an also-ran. 

 

The largest market for stablecoins is bitcoin, hence the large correlation between supply and price. Maybe in the future Amazon will accept USDT/USDC and that will be where the stablecoins flow to. 

 

I do agree this could have large negative consequences for govt debt and wild price swings if we see a sudden drastic drop in stablecoin supply. 

[Spooky]

1 hour ago, Fly said:

high inflation/currency instability

 

There is no evidence that Bitcoin protects from inflation - during the inflationary period after 2021 Bitcoin price suffered like most everything else. 

[TwoCitiesCapital]

15 hours ago, Parsad said:

 

I still don't understand what supports BTC's price...scarcity isn't a good enough answer.  Stablecoins make sense...BTC does not.  Cheers!

 

 

It's value prop is in having all of the requirements of a hard money system while being superior to gold in most ways - including scarcity. Scarcity unto itself isn't valuable - but it is a requirement for something to be valuable in a monetary use-case. 

 

The eventual market cap of Bitcoin will likely be the same regardless of whether or not there were 21 million coins or 21 billion - what is important is that it is verifiably finite with no new issuance beyond that number (or somewhat predictable and low issuance as is the case with gold). But given that the total market cap is being spread across all units, have fewer BTC (or fewer ounces of gold) means each one is worth more to fulfill that market cap. 

 

[wabuffo]

It's value prop is in having all of the requirements of a hard money system while being superior to gold in most ways - including scarcity. Scarcity unto itself isn't valuable - but it is a requirement for something to be valuable in a monetary use-case. 

 

The only issue I see is that crypto has no alternate uses (which I think of as a requirement for currency).   Gold has alternate uses in jewelry and industrial applications even if it no longer has a monetary use.    Paper (fi-ut! lolz) money has an alternate use as it is the only thing a sovereign will accept in payment of tax obligations, judgements and fees the sovereign imposes on its citizens/residents.

 

This alternate use requirement is important as it sets a floor.   Scarcity, alone, is not a use case by itself.

 

Crypto has no alternate use cases, so in theory, it has no floor.  The floor is zero.   No one even pretends anymore that it is digital money to be used in transactions.  Instead it has devolved into a gambling game that is profitable (and fun) - but the vast majority of holders do not pretend its a currency any more (except for maybe a few crypto romantics who still believe this).   

 

Bill

 

Edited August 26, 2025 by wabuffo

[Fly]

9 hours ago, Spooky said:

 

There is no evidence that Bitcoin protects from inflation - during the inflationary period after 2021 Bitcoin price suffered like most everything else. 

 

Would you rather have held the Turkish Lira or BTC? "High inflation" meaning failing central bank type of inflation, not anything we are experiencing in typical developed countries.

 

Edited August 27, 2025 by Fly

[Fly]

A piece just came out from Arthur Hayes regarding stablecoin implications, specifically relating to the Eurodollar

 

https://cryptohayes.substack.com/p/buffalo-bill

 

You can stop reading at the "Stablecoin to DeFi Flow" section, it gets into fantasy land BS there

Edited August 27, 2025 by Fly

[Spooky]

14 hours ago, Fly said:

 

Would you rather have held the Turkish Lira or BTC? "High inflation" meaning failing central bank type of inflation, not anything we are experiencing in typical developed countries.

 

 

You could have held many other assets other than Bitcoin instead of the Turkish Lira. Gold, for instance, actually has a track record with respect to inflation (although not perfect).

 

The reality is that Bitcoin is a speculative asset which is very correlated to the NASDAQ.

Edited August 27, 2025 by Spooky

[Fly]

1 hour ago, Spooky said:

 

You could have held many other assets other than Bitcoin instead of the Turkish Lira. Gold, for instance, actually has a track record with respect to inflation (although not perfect).

 

The reality is that Bitcoin is a speculative asset which is very correlated to the NASDAQ.

 

Average Joe in Turkey doesn't have access to the Nasdaq. Holding physical gold is fine, but has its downsides as well when it comes to self custody. 

[Spekulatius]

Average Joe in Turkey could buy property or stocks which also more then held their value in USD.

[Parsad]

On 8/26/2025 at 9:21 AM, wabuffo said:

It's value prop is in having all of the requirements of a hard money system while being superior to gold in most ways - including scarcity. Scarcity unto itself isn't valuable - but it is a requirement for something to be valuable in a monetary use-case. 

 

The only issue I see is that crypto has no alternate uses (which I think of as a requirement for currency).   Gold has alternate uses in jewelry and industrial applications even if it no longer has a monetary use.    Paper (fi-ut! lolz) money has an alternate use as it is the only thing a sovereign will accept in payment of tax obligations, judgements and fees the sovereign imposes on its citizens/residents.

 

This alternate use requirement is important as it sets a floor.   Scarcity, alone, is not a use case by itself.

 

Crypto has no alternate use cases, so in theory, it has no floor.  The floor is zero.   No one even pretends anymore that it is digital money to be used in transactions.  Instead it has devolved into a gambling game that is profitable (and fun) - but the vast majority of holders do not pretend its a currency any more (except for maybe a few crypto romantics who still believe this).   

 

Bill

 

 

100% this!  We saw the repercussions to regional banks and the banking system from just a small outlier event two years ago.  I just get very nervous every time the "next" new thing in banking/investing arrives.  Cheers!

[TwoCitiesCapital]

On 8/26/2025 at 11:21 AM, wabuffo said:

It's value prop is in having all of the requirements of a hard money system while being superior to gold in most ways - including scarcity. Scarcity unto itself isn't valuable - but it is a requirement for something to be valuable in a monetary use-case. 

 

The only issue I see is that crypto has no alternate uses (which I think of as a requirement for currency).   Gold has alternate uses in jewelry and industrial applications even if it no longer has a monetary use.    Paper (fi-ut! lolz) money has an alternate use as it is the only thing a sovereign will accept in payment of tax obligations, judgements and fees the sovereign imposes on its citizens/residents.

 

The value of being good money is, unto itself, a use case and the only one I require. I'm not sure most inflation-fearing gold bugs would be happy to for gold to find its floor price when valued for industrial applications. The 'floor' to the monetary value is much higher, but less tangible. And that is a good thing - we don't want other use cases competing with it which further distort the supply/demand for money. If successful in becoming a monetary asset, the monetary premium will price it out of most other uses cases anyhow - as has happened with gold in most industrial applications. The value of jewelry is just as intangible as the 'value of money' and doesn't provide any specific floor price - it only provides another source of demand. 

 

Bitcoin has other metrics that can provide a floor price - things like the cost of production - which isn't dissimilar to other commodities and requires no other use case or demand function that is orders of magnitude lower in value than its use case as a monetary asset. 

 

On 8/26/2025 at 11:21 AM, wabuffo said:

The floor is zero. 

 

 

The floor is only zero if you assume it doesn't accomplish its use case as money. Because as long as that narrative is alive, someone is buying it meaning some positive price along the supply and demand curve. It has survived multiple 80+% drawdowns in 15 years bottoming higher every time and setting new all time highs afterwards everytime. Is going to take something more than just a little price volatility to scare people off. $0 requires EVERYONE to lose faith in it altogether which will not happen as long as it continues to function in its purpose as the hardest currency available. 

 

36 minutes ago, Parsad said:

 

100% this!  We saw the repercussions to regional banks and the banking system from just a small outlier event two years ago.  I just get very nervous every time the "next" new thing in banking/investing arrives.  Cheers!

 

I don't disagree about risks to banking sector (and perhaps these corporate treasury companies) as a result of the price volatility. But the same happened with the $ and it wasn't the fault of the USD - it was the fault of risk management practices.

 

Banks will eventually learn the appropriate risk management practices for a hard currency. Not being short the hardest currency in the world will probably be step #1 which by definition means there will be no fractional reserving - that is massively risk reducing unto itself through the elimination of leverage. 

Edited August 28, 2025 by TwoCitiesCapital

[changegonnacome]

Thought experiment you could play around with if these become huge.

 

The bigger they get the more the issuers start to look like the oft discussed narrow banks.....deposit taking, non-interest paying but also non-lending financial institutions.

 

You can see the attraction for the federal government that desperately needs more and more holders of its ballooning debt.....but what about consumers who want loans or help with their ballooning debt????......banks at the end of the day are intermediaries for turning inert cash on deposit into consumer credit instruments......if these stablecoin folks get huge* they could potentially start draining the banking system of a source of funds or push up the funding cost of attracting those deposits back into the banking system.

 

* i dont see them getting huge to be clear

[wabuffo]

banks at the end of the day are intermediaries for turning inert cash on deposit into consumer credit instruments

 

Wrong - the US banking system doesn't gather deposits first in order to lend.  The act of extending a loan creates a deposit.  In effect, banks monetize your IOU into a spendable deposit.   

 

I don't think stablecoins are a threat to the banking sector.  In fact, banks can/will create tokenized deposits that will provide the benefit of both FDIC insurance and interest income (both of which aren't offered by stablecoins).

 

Stablecoins are basically are used for crypto.  They don't have much value anywhere else.   And the idea that they will dollarize foreign countries won't happen, because foreign governments won't allow it to happen if it becomes a threat.

 

Bill

[changegonnacome]

5 minutes ago, wabuffo said:

Wrong - the US banking system doesn't gather deposits first in order to lend.  The act of extending a loan creates a deposit.  In effect, banks monetize your IOU into a spendable deposit.   

 

Agreed - US banking system doesn't gather deposits first in order to lend them. But lending still requires running your b/s with preferably cheap, sticky funding after the payment clears and your borrower goes and spends that money somewhere else.....that somewhere else now includes moving this deposit into a stablecoin. GENIUS-compliant stablecoins are fully-reserved, 24/7 payment money that pull spendable balances out of bank deposits. That at margins raises banks funding costs and weakens the loans>deposits feedback loop your rightly pointed out (even if banks experiment with tokenized deposits).

 

Again as I said this thought experiment is one where stablecoins are a runaway success. They are too outrageously small to matter now but if the stablecoin issuers dreams come true it could matter start to matter.

 

But I'm with you - right now stablecoins are functional equivalent of turning your cash into Casino chips so you can play in the crypto casino

[KJP]

15 minutes ago, changegonnacome said:

 

Agreed - US banking system doesn't gather deposits first in order to lend them. But lending still requires running your b/s with preferably cheap, sticky funding after the payment clears and your borrower goes and spends that money somewhere else.....that somewhere else now includes moving this deposit into a stablecoin.

 

 

If the flow is deposit outflow  --> stablecoin purchase --> stablecoin issuer buys U.S. Treasury --> then what?  What does the seller of the US Treasury to the stablecoin issuer do with the proceeds of the sale?  Putting aside for a moment some foreign leakage, do those proceeds go back into the U.S. banking system as a deposit?   

[gfp]

On 8/26/2025 at 8:19 PM, Fly said:

A piece just came out from Arthur Hayes regarding stablecoin implications, specifically relating to the Eurodollar

 

https://cryptohayes.substack.com/p/buffalo-bill

 

You can stop reading at the "Stablecoin to DeFi Flow" section, it gets into fantasy land BS there

 

I didn't get all the way through the article but I'm not sure the author understands what the "eurodollar system" actually is.  He seems to think these are actual dollar deposits that just happen to sit overseas.  They are not.  They are overseas bank creations that just happen to be denominated in US Dollars, like one might use the metric system as a unit of account in other fields.  Bank money.  And post-GFC there is a ton of collateralization required to transform what you got into what you need so I don't think this offshore "dollar" money system is somehow leaving Bessent's treasury market out.  Pre-GFC it was much less collateralized and much more relationship based.  Counterparty trust evaporated quickly.  The eurodollar system's chief utility seems to be its extreme elasticity.  People like to dream of hard money replacing our current system but elasticity is a really important feature.

Edited August 28, 2025 by gfp