Stablecoin: On-chain Broad Money and Financial Reconstruction

Overview

Stablecoins are building an on-chain Broad Money system supported by U.S. Treasuries (M2). The current circulation of major stablecoins has reached 220 billion to 256 billion USD, accounting for about 1% of the U.S. M2. About 80% of the reserves are allocated to short-term U.S. Treasuries and repurchase agreements, making the issuing institutions important participants in the sovereign debt market.

This trend has had a wide-ranging impact:

1. The stablecoin issuers have become important buyers of short-term U.S. Treasuries, with holdings comparable to those of medium-sized countries.

2. On-chain transaction volume surged, reaching $27.6 trillion in 2024 and is expected to reach $33 trillion in 2025, surpassing the total of major credit card networks.

3. The newly proposed bill is expected to increase public debt by approximately $3.3 trillion, with stablecoins likely to absorb this portion of the new government bond supply.

4. The upcoming legislation will explicitly classify short-term government bonds as legal reserve assets, thereby institutionalizing the relationship between fiscal expansion and the supply of stablecoins.

The Mechanism of Stablecoin Expanding Broad Money

The issuance process of stablecoins is simple yet has significant macroeconomic impacts:

1. The user sends fiat currency US dollars to the issuer.

2. The issuer uses the funds received to purchase U.S. Treasury bonds and mints stablecoins of equivalent value.

3. Government bonds are retained on the issuer's balance sheet as collateral assets, while stablecoins circulate freely on-chain.

This process has created a kind of "currency replication" mechanism. Base money has been used to purchase government bonds, while stablecoins are used as payment tools similar to demand deposits. Therefore, Broad Money has actually expanded outside the banking system.

It is predicted that the total amount of stablecoins is expected to reach $2 trillion by 2028. If M2 remains unchanged, this scale will account for about 9% of M2, roughly equivalent to the size of current institutional-only money market funds.

By legislating the mandatory inclusion of short-term government bonds into compliant reserves, the United States has effectively made the expansion of stablecoins an automatic source of marginal demand for government bonds. This mechanism privatizes the portion of U.S. debt financing, turning stablecoin issuers into systemic fiscal supporters. At the same time, it also pushes the internationalization of the dollar to new heights through on-chain dollar transactions.

Impact on Portfolio

For digital asset portfolios, stablecoins form the foundational liquidity layer of the crypto market. They dominate trading pairs, serve as the primary collateral in lending markets, and act as the default unit of account. Their total supply can be seen as a real-time indicator of investor sentiment and risk appetite.

It is worth noting that the issuers of stablecoins can earn returns from short-term government bonds, but do not pay interest to the holders of the coins. This creates a structural arbitrage difference compared to government money market funds. The choice for investors between holding stablecoins and participating in traditional cash instruments is essentially a trade-off between all-weather liquidity and yield.

For traditional dollar asset allocators, stablecoins are becoming a continued source of demand for short-term government bonds. The current reserves of $150 billion to $200 billion can almost absorb a quarter of the Treasury's expected government bond issuance for the fiscal year 2025 under the new legislation. If stablecoin demand expands by another $1 trillion before 2028, the model predicts that the yield on 3-month government bonds will decline by 6 to 12 basis points, and the front-end yield curve will steepen, helping to reduce short-term financing costs for businesses.

The Impact of Stablecoins on the Macroeconomy

Stablecoins backed by U.S. Treasury bonds have introduced a channel for monetary expansion that bypasses traditional banking mechanisms. Each unit of stablecoin supported by Treasury bonds is equivalent to the introduction of disposable purchasing power, even if its underlying reserves have not yet been released.

In addition, the circulation speed of stablecoins far exceeds that of traditional deposit accounts—averaging about 150 times per year. In regions with high adoption rates, this may amplify inflationary pressures, even if Broad Money does not increase. Currently, the global preference for storing digital dollars has suppressed short-term inflation transmission, but it is also accumulating long-term external dollar liabilities for the United States.

The demand for stablecoins for 3-6 month US Treasury bonds has also created a stable, price-insensitive buying pressure on the front-end yield curve. This persistent demand has compressed short-term spreads and reduced the effectiveness of monetary policy tools. As the circulation of stablecoins increases, central banks may need to achieve the same tightening effect through more aggressive quantitative tightening or higher policy interest rates.

Structural Transformation of Financial Infrastructure

The scale of stablecoin infrastructure is now hard to ignore. In the past year, the total amount of on-chain transfers reached $33 trillion, surpassing the total of major credit card networks. Stablecoins offer near-instant settlement capabilities, programmability, and ultra-low-cost cross-border transactions, far superior to traditional remittance channels.

At the same time, stablecoins have become the preferred collateral asset for decentralized lending, supporting over 65% of protocol loans. On-chain tools tracking short-term government bonds are rapidly expanding, with an annual growth exceeding 400%. This trend is giving rise to a "dual dollar system": zero-interest coins for trading and interest-bearing tokens for holding, further blurring the boundaries between cash and securities.

Traditional banking systems are also starting to respond. Some banks have expressed a willingness to issue bank stablecoins once legally permitted, reflecting concerns over the migration of customer funds on-chain.

The greater systemic risk comes from the redemption mechanism. Unlike money market funds, stablecoins can be settled within minutes. In scenarios of stress such as decoupling, issuers may sell hundreds of billions of dollars in Treasury bonds on the same day. The U.S. Treasury bond market has not been tested under such real-time selling pressure, which poses challenges to its resilience and interconnectedness.

Strategic Focus and Subsequent Observations

1. Currency Cognition Reconstruction: Stablecoins should be regarded as a new generation of Euro and Dollar - a financial system that is detached from regulation, difficult to quantify, but has a strong influence on global dollar liquidity.

2. Interest Rates and Treasury Issuance: The short-end rates of U.S. Treasuries are increasingly influenced by the issuance pace of stablecoins. It is recommended to simultaneously track the net issuance of stablecoins and the primary auctions of Treasuries to identify anomalies in interest rates and pricing distortions.

3. Portfolio Allocation:

   • For crypto investors: Use zero-interest stablecoins for daily trading, and allocate idle funds to on-chain products that track short-term government bonds to earn returns.
   • For traditional investors: pay attention to the equity of stablecoin issuers and the structured notes related to the returns on reserve assets.

4. Systemic Risk Prevention: Large-scale redemption fluctuations may directly transmit to the sovereign debt and repurchase markets. The risk management department should simulate relevant scenarios, including a surge in government bond yields, collateral tightening, and intraday liquidity crises.

Stablecoins backed by U.S. Treasury bonds are no longer just convenient tools for crypto trading. They are rapidly evolving into "shadow currencies" with macroeconomic influence—financing fiscal deficits, reshaping interest rate structures, and reconstructing the circulation of the dollar globally. For multi-asset investors and macro strategists, understanding and responding to this trend is no longer optional, but an urgent necessity.