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

[changegonnacome]

22 minutes ago, KJP said:

then what?

 

Treasury’s TGA....but this is a temporary drain (mainly when issuers buy new bills) it does get spent back into bank deposits. The structural change is stock vs. flow....as more transaction balances migrate from bank deposits to fully-reserved stablecoins backed by T-bills/MMFs, banks’ cheap, sticky aggregate deposit base shrinks and they have to backfill with costlier wholesale funding, deposit rates reprice, liquidity constraints bite, and the classic loans→deposits loop is weakened.

 

Again I don't want to over-egg this.......stablecoins need to become massive for this to matter...and this is a 'what if' thread...they will not become massive IMO......it wont take long for customers to realize what value MA & V add when they use a stablecoin to pay for something and they realize they have no protection or ability to reverse the transaction.

[wabuffo]

Putting aside for a moment some foreign leakage, do those proceeds go back into the U.S. banking system as a deposit?   

 

Bingo - deposits come right back to the banking system (probably a custody bank at first like BNY Mellon).  The banking system doesn't leak deposits.

 

even if banks experiment with tokenized deposits).

 

Banks could set up tokenized deposits today if they wanted to.  They would be identical to how BaaS banks work.  For example, CASH's fintech partner has a single omnibus deposit account for all of its customer deposits in total, but CASH sets up a sub-ledger for each fintech customer's individual deposit account.  In the case of a tokenized deposit, the sub-ledger would be on-chain but otherwise identical to a BaaS bank deposit (fully-FDIC insured, pays interest, etc).  They know how to do this.

 

Stablecoins are not a threat, IMHO, to the banking system, despite all the hype.  Federally-chartered banks have an important monopoly in payment clearing at Fedwire.   

 

That is the secret sauce that keeps them competitively insulated from non-bank financial competitors and allows them to create deposits out of thin air.   Other financial institutions, like stablecoins, have to gather deposits.... and then pay platforms to take them.   

 

Generating an IOU liability isn't difficult, getting people to accept them as payment is the challenge.  And CRCL for example, has to pay almost two-thirds of its reserve income for crypto platforms to accept USDC.

 

Anyhoo - great discussion.  This will be interesting to watch.

 

Bill

Edited August 28, 2025 by wabuffo

[Cigarbutt]

In that respect, stablecoins are similar to money market fund 'units'.

A private entity creating a new deposit (liability) with 'money' received and used to buy a matching asset (US debt already existing) with the original 'money' going back as a plain vanilla deposit in the banking system. Simple balance sheet expansion of a private entity outside of the banking system.

See the following graph, the utility of which is to show that when money market funds 'expanded' their assets (and matching liabilites) such as around 2008 and 2020+, it had no visible negative impacts on commercial banks' deposits, ie 'money' deposits were not fleeing banks to MMF operators.

The only result of an 'exit' (demand for redemption) for stablecoins and MMFs would be the need to find buyers for the newly available but already existing us government debt securities; in such scenarios the 'demand' for such securities would possibly surpass the supply so...

[KJP]

43 minutes ago, changegonnacome said:

 

Treasury’s TGA....but this is a temporary drain (mainly when issuers buy new bills) it does get spent back into bank deposits. 

 

 

I don't think this reasoning holds up.  For one, it assumes the stablecoin issuer is buying in the primary as opposed to the secondary market.  More importantly, that money flow is true regardless of who the buyer is.  If stablecoin issuers aren't buying Treasuries, someone else is.  So, it is net Treasury issuance, not the existence of stablecoins, that is (temporarily) decreasing deposits.

 

As for your other suggestion about the decline of transaction accounts, @wabuffo has explained the argument that stablecoins do not really provide increased functionality, at least for U.S.-based deposit accounts.  But even if we assume that there will be a lower demand for transaction accounts, won't that lead to a higher demand for other types of accounts (because deposits ultimately don't leave the system), or looked at from the other way, an increase in supply looking for a home.  And in that case, wouldn't that drive down the yields that banks would need to pay on other types of accounts?  

[KJP]

3 minutes ago, Cigarbutt said:

The only result of an 'exit' (demand for redemption) for stablecoins and MMFs would be the need to find buyers for the newly available but already existing us government debt securities; in such scenarios the 'demand' for such securities would possibly surpass the supply so...

 

 

And aren't the buyers the same people who are redeeming their stablecoins (either directly or indirectly via a bank deposit and bank purchase of Treasury)?  E.g., wouldn't the redemption result in some type of transfer credited to the redeemer's bank account?  If that's not the case, where do the USD-denominated proceeds go upon the redemption of a USD stablecoin?

[Cigarbutt]

1 hour ago, gfp said:

...

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.

Historical note which may no longer be relevant as this time is different?

Paul Warburg was one of the main architects behind the 1913 Federal Reserve Act. He had correctly diagnosed the money inelasticity issue that had resulted (or at least greatly contributed to) in the significant global 1907 bank panic. Insitutionnaly-derived elastic money supply during tough times was a key ingredient to heal.

Mr. Walburg however expressed that money expansion had to be cyclically tempered by money contraction to avoid infaltion and easy-money excesses. He obviously suffered by missing out the roaring years that followed and i wonder what he would say today (from the perspective of the fundamental balance between money and the real economy which no longer applies since the GFC):

[Cigarbutt]

30 minutes ago, KJP said:

 

And aren't the buyers the same people who are redeeming their stablecoins (either directly or indirectly via a bank deposit and bank purchase of Treasury)?  E.g., wouldn't the redemption result in some type of transfer credited to the redeemer's bank account?  If that's not the case, where do the USD-denominated proceeds go upon the redemption of a USD stablecoin?

You are correct. Once 'money' is created (through debt issued by banks), it has to go somewhere. Money will disappear only if bank debt is retired...

A fascinating aspect is that (opinion) part of the interest in crypto or stablecoin or else is related to the excessive (excessive in the historical sense decribed in above post) amount of 'money' that has been created which is looking to expand balance sheets somehow (commercial banks are flush with cash, reserves, us debt securities because of SLR ratio limitations so there is some resistance to balance sheet expansion there) and this 'money' (flow concept) may be a driving force behind crypto units formation, something which the crypto believers have described as a fundamental factor behind crypto "value". In other words, in a semi-poetic self-fulfilling prohecy way, because of a financial plumbing issue (too much money in the existing pipes), one of the fiat-failure underpinnings of the crypto world may be (at least temporarily) vaildated. 

[Fly]

4 hours ago, wabuffo said:

 

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

 

Can you expand on this? How does a foreign government stop USD stablecoins from being used in their country? Particularly for P2P transactions?

[changegonnacome]

1 hour ago, KJP said:

But even if we assume that there will be a lower demand for transaction accounts, won't that lead to a higher demand for other types of accounts (because deposits ultimately don't leave the system), or looked at from the other way, an increase in supply looking for a home.  And in that case, wouldn't that drive down the yields that banks would need to pay on other types of accounts?  

 

The real change is a stock of balances migrating from bank deposits to fully-reserved stablecoins (backed by T-bills/MMFs/ON RRP) these sit outside banks so the liability distribution shifts away from banks. So yes deposits don’t vanish, but banks must (in a bluesky high penetration stablecoin world) pay up more to borrow them back or raise deposit rates — this theoretically pushes up marginal funding costs, compressing NIM, and softening the loans-create-deposits loop (especially if/when stablecoins scale).

 

You push up funding costs, compress NIM's and bank RoE's shrink....well the WACC for banks goes up, valuations go down, they become less attractive businesses.....which you fix by pushing up the cost to borrow for .....I agree with @wabuffo the core constraint on credit creation in the banking sector is fundamentally equity against RWA/CET1 regs.......but low cost, sticky deposit funding is a key cost input to manufacture loans.....without it aggregate availability and the underlying cost of credit goes up....which is what I believe banking lobby argued re:Genuis act

[changegonnacome]

1 hour ago, Cigarbutt said:

Money will disappear only if bank debt is retired

 

Yes but what stablecoins do is re-order the holders of money....away from bank deposits...to other forms (MMF/t-bils/ON RRP).... those funds return later as market rate funding for those extending loans -repo, CDs, FHLB, term deposits- but at much higher rates than they would have otherwise if they had remained as retail deposits...which affects the pricing, volume and availability of credit in a negative way......only at the extreme end of stablecoin adoption.

[Parsad]

17 hours ago, TwoCitiesCapital said:

 

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. 

 

Yes, I agree with this.  Problem is we have to take the hits to learn from our mistakes, and historically, they've been bad hits!  Cheers!

[Parsad]

4 hours ago, wabuffo said:

Putting aside for a moment some foreign leakage, do those proceeds go back into the U.S. banking system as a deposit?   

 

Bingo - deposits come right back to the banking system (probably a custody bank at first like BNY Mellon).  The banking system doesn't leak deposits.

 

even if banks experiment with tokenized deposits).

 

Banks could set up tokenized deposits today if they wanted to.  They would be identical to how BaaS banks work.  For example, CASH's fintech partner has a single omnibus deposit account for all of its customer deposits in total, but CASH sets up a sub-ledger for each fintech customer's individual deposit account.  In the case of a tokenized deposit, the sub-ledger would be on-chain but otherwise identical to a BaaS bank deposit (fully-FDIC insured, pays interest, etc).  They know how to do this.

 

Stablecoins are not a threat, IMHO, to the banking system, despite all the hype.  Federally-chartered banks have an important monopoly in payment clearing at Fedwire.   

 

That is the secret sauce that keeps them competitively insulated from non-bank financial competitors and allows them to create deposits out of thin air.   Other financial institutions, like stablecoins, have to gather deposits.... and then pay platforms to take them.   

 

Generating an IOU liability isn't difficult, getting people to accept them as payment is the challenge.  And CRCL for example, has to pay almost two-thirds of its reserve income for crypto platforms to accept USDC.

 

Anyhoo - great discussion.  This will be interesting to watch.

 

Bill

 

Hi Bill,

 

It's not the stablecoin itself that I worry about.  It's usually the underlying loan portfolio built on the back of these assets.  So if you have a massive drop in value, those with huge exposure get killed and it starts a domino effect. 

 

Naturally, because stable coins are backed by USD, it's less likely.  But because of that fact, there may be too much comfort and loose policies around institutions and their holdings, and lending practices that become too concentrated. 

 

Especially with this administration now loosening the reins in a big way on crypto and banking both at the same time!  Any thoughts?

 

Cheers! 

[wabuffo]

Naturally, because stable coins are backed by USD, it's less likely.  But because of that fact, there may be too much comfort and loose policies around institutions and their holdings, and lending practices that become too concentrated. 

 

Especially with this administration now loosening the reins in a big way on crypto and banking both at the same time!  Any thoughts?

 

Its not an issue with stablecoins, but crypto has a lot of implied leverage.   People on some of the platforms like Coinbase talk about getting paid interest, but crypto produces no income, so this has to be based on "number go up" leverage collateralized by crypto.

 

You're right that this administration is pushing crypto - so we'll see how much bigger it gets.  But BTC is around $3.4T in total asset value, IIRC, of which maybe 50% is held by US holders.  But total US household financial assets (per the Fed's latest Z1 report) is around $128.8T.  So its a little more than 1% which won't cause much financial damage if it unravels.  Maybe it will be concentrated on a small segment but that's about it, I think.  By comparison, primary residence is a $49T asset.  No wonder the GFC caused so much pain.

 

Bill

 

[Parsad]

29 minutes ago, wabuffo said:

Naturally, because stable coins are backed by USD, it's less likely.  But because of that fact, there may be too much comfort and loose policies around institutions and their holdings, and lending practices that become too concentrated. 

 

Especially with this administration now loosening the reins in a big way on crypto and banking both at the same time!  Any thoughts?

 

Its not an issue with stablecoins, but crypto has a lot of implied leverage.   People on some of the platforms like Coinbase talk about getting paid interest, but crypto produces no income, so this has to be based on "number go up" leverage collateralized by crypto.

 

You're right that this administration is pushing crypto - so we'll see how much bigger it gets.  But BTC is around $3.4T in total asset value, IIRC, of which maybe 50% is held by US holders.  But total US household financial assets (per the Fed's latest Z1 report) is around $128.8T.  So its a little more than 1% which won't cause much financial damage if it unravels.  Maybe it will be concentrated on a small segment but that's about it, I think.  By comparison, primary residence is a $49T asset.  No wonder the GFC caused so much pain.

 

Bill

 

 

Yeah, I agree.  But look at the damage done on a relatively small basis by the failures of the regional banks due to loan and equity losses on crypto companies which created the run on them and other banks.  The domino effect was starting to look like the GFC again, but on a smaller scale, and if the Fed didn't intervene with liquidity, who knows what would have happened.

 

Anyways, this stuff is too complicated for my tiny pea-sized brain to handle!  I'll go back to eating shrubs and vegetation!  At some point, humanity will go the way of the dinosaur.  Cheers!

 

 

 

[TwoCitiesCapital]

1 hour ago, Parsad said:

 

Yeah, I agree.  But look at the damage done on a relatively small basis by the failures of the regional banks due to loan and equity losses on crypto companies which created the run on them and other banks.  The domino effect was starting to look like the GFC again, but on a smaller scale, and if the Fed didn't intervene with liquidity, who knows what would have happened.

 

Anyways, this stuff is too complicated for my tiny pea-sized brain to handle!  I'll go back to eating shrubs and vegetation!  At some point, humanity will go the way of the dinosaur.  Cheers!

 

 

 

 

IIRC - Silvergate was the only one that went under for crypto related purposes and I believe it was largely due to a combination of 1) their involvement in FTX and being named in suits and 2) the duration on their Treasury/mortgage portfolio combined  with losing a huge chunk of deposits in FTX. It wasn't credit or crypto losses that killed them. 

 

The others like Silicon Valley and First Republic were entirely due to illiquidity issues due to runs resulting from loss of confidence given the paper losses on treasury and mortgage portfolios. 

 

Not saying something similar couldnt happen with banks onboarding crypto clients/crypto risks, but NONE of the bankruptcies we've seen were really related to crypto itself or it's volatility 

 

 

Edited August 28, 2025 by TwoCitiesCapital

[Parsad]

19 minutes ago, TwoCitiesCapital said:

 

IIRC - Silvergate was the only one that went under for crypto related purposes and I believe it was largely due to a combination of 1) their involvement in FTX and being named in suits and 2) the duration on their Treasury/mortgage portfolio combined  with losing a huge chunk of deposits in FTX. It wasn't credit or crypto losses that killed them. 

 

The others like Silicon Valley and First Republic were entirely due to illiquidity issues due to runs resulting from loss of confidence given the paper losses on treasury and mortgage portfolios. 

 

Not saying something similar couldnt happen with banks onboarding crypto clients/crypto risks, but NONE of the bankruptcies we've seen were really related to crypto itself or it's volatility 

 

 

 

Not saying crypto itself caused the failures, but the combination of spiking interest rates, collapse of FTX and a lack of liquidity led to it.  A lack of liquidity is almost always 100% the reason why banks collapse and confidence erodes in the banking system.  

 

What if you had a loss of confidence in a fiat currency that was used to peg a stablecoin...then you have a failure not only in the fiat currency but all assets backed by the stablecoin.  Now imagine Blackstone or some other "Too Big to Fail" leveraging the hell out of this stuff with derivatives in one of their funds or financial institutions taking deposits in both the fiat currency and the stablecoin...I'm not smart enough to tell you what might happen...but I don't think it would be pretty or super simple to deal with.  Cheers!

[changegonnacome]

6 minutes ago, TwoCitiesCapital said:

IIRC - Silvergate was the only one that went under for crypto related purposes

 

Yes but @Parsad is kinda directionally right....and I made this point at the time.......Silvergate caused folks to go hunting for institutions that had enjoyed large influxes of deposits in 2020-22 and had unwisely taken duration risk with them getting upside down in the process with their balance sheets as rates started to rise......Silvergate started a 'who's next' treasure hunt.....the crypto/FTX butterfly flap took down Silvergate....IMO because VC and crypto communities had become quite intertwined in this 2020-2022 period the fear 'contagion' had a comms network to work its way from crypto land to silicon valley VC land.....put another way silicon valley VC's had 1st and 2nd business contacts caught up in the Silvergate 'run' and subsequent collapse.......Silvergate announced its voluntary liquidation on the morning of March 8th...and SVB admitted their own b/s issues, cap raise on the afternoon of Mar 8th...........the issue is their VC depositors via VC/crypto contacts we're already hyper-contagion sensitized by Silvergates issues and collapse that morning and so they started their own mammoth run on SVB fearing it to be Silvergate 2.0....their fear became prophecy.

 

Not to beat up on crypto....but again seemingly insignificant financial backwaters....like crypto....can have some outsized affects....one can argue that cryptos financial backing of Trump so fullsomsley in 2024 could have 'tipped' him to the win......and Trump (like him or not) will be highly consequential President (in a good or a bad way).

 

[Spekulatius]

My biggest worry is meshing the fiat based banking system with crypto. Once banks can lend against crypto collateral , the systemic risks are going through the roof.

[changegonnacome]

On 8/30/2025 at 2:08 AM, Spekulatius said:

Once banks can lend against crypto collateral , the systemic risks are going through the roof.

 

I assume if that ever happened the risk weights attached to that would be so absolutely massive that most banks wouldn't bother and so you'd probably get Silvergate-esque speciality banks that would lend against it. 

 

I'm with you though.....conceptually......the leverage out in crypto land is quite spectacular because for all the implied market cap I've yet to touch or pay for in my day to day life products or services underpinned by utility tokens, staking, mining or blockchains. A lot of ink has been spilled and a lot of hot air ejected (and admittedly a lot of fortunes made) for something that is yet to be a meaningful product or underlying enabling technology out in the real world.

[charlieruane]

On 8/26/2025 at 12:21 PM, wabuffo said:

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 is a sneaky, deep point that tickles the brain... why does the USD have intrinsic value? Because it's the only way to pay taxes to the US government, the avoidance of which can land you in prison by violent means! 

Edited September 2, 2025 by charlieruane

[Dave86ch]

Paolo Ardoino, who backed research on the RGB protocol, has just announced Tether on Bitcoin via RGB, compatible with Lightning.

Bitcoin remains the long-term play—a base-layer ledger where contracts are settled.

[Paarslaars]

6 hours ago, charlieruane said:

 

This is a sneaky, deep point that tickles the brain... why does the USD have intrinsic value? Because it's the only way to pay taxes to the US government, the avoidance of which can land you in prison by violent means! 

Exactly, there was a time when you could settle your taxes in gold and there will come a time when you can settle them in BTC.

[TwoCitiesCapital]

8 hours ago, Paarslaars said:

Exactly, there was a time when you could settle your taxes in gold and there will come a time when you can settle them in BTC

 

 

The tax base just gives the USD some non-zero value when taxes are due. It doesn't support a much higher floor than that as demonstrated by every currency that has ever failed has also has taxes denominated in it...

 

Taxes are due in Brazilian real too - that hasn't stopped the utter and dramatic depreciation over the last decade. 

Edited September 2, 2025 by TwoCitiesCapital

[wabuffo]

there will come a time when you can settle them in BTC.

 

BTC has already failed as a medium of payment.  Only the crypto-romantics still believe it is digital e-money.

 

lolz

Edited September 2, 2025 by wabuffo

[Paarslaars]

Feel free to elaborate on that one, considering the first BTC payment was done >10 years ago and BTC payments are still occurring daily...