US Treasury Supported Stablecoins: Building an On-Chain Broad Money System

Recently, stablecoins backed by U.S. Treasury bonds are quietly building an on-chain Broad Money (M2) system. The circulation of mainstream stablecoins has reached 220 to 256 billion USD, accounting for about 1% of the U.S. M2 (21.8 trillion USD). Approximately 80% of the reserves of these stablecoins are allocated to short-term U.S. Treasury bonds and repurchase agreements, making the issuing institutions important participants in the sovereign debt market.

This trend is having a wide-ranging impact:

1. The issuers of stablecoins have become significant buyers of short-term U.S. Treasury bonds, holding a total of $150-200 billion, a scale comparable to that 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 mainstream credit card networks.

3. The newly proposed fiscal policy is expected to increase public debt by approximately $3.3 trillion, and stablecoins are expected to absorb this portion of the new national debt supply.

4. Upcoming regulations will explicitly list short-term government bonds as legal reserve assets, thereby institutionalizing the foundation of fiscal expansion and stablecoin supply, creating a feedback mechanism in which the private sector absorbs public deficits and extends U.S. dollar liquidity globally.

The Mechanism of Stablecoin Expansion of Broad Money

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

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

2. The issuer uses the funds received to purchase U.S. Treasury bonds and mints stablecoins at an 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 formed a kind of "currency replication" mechanism. The base currency has been used to purchase government bonds, while the stablecoin itself is used as a payment tool similar to a demand deposit. Therefore, although the base currency has not changed, Broad Money has actually expanded outside the banking system.

Currently, stablecoins account for 1% of M2, and each increase of 10 basis points will inject approximately $22 billion of "shadow liquidity" into the financial 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 current size of institutional-only money market funds.

By legislating to mandatorily include short-term government bonds into compliant reserves, it effectively makes the expansion of stablecoins an automatic source of marginal demand for government bonds. This mechanism privatizes the debt financing part, turning stablecoin issuers into systemic fiscal supporters. At the same time, it also promotes the internationalization of the dollar to new heights through on-chain dollar transactions, allowing global users to hold and trade dollars without needing to access the traditional banking system.

Impact on Portfolio

For digital asset portfolios, stablecoins constitute the foundational liquidity layer of the crypto market. They dominate trading pairs on centralized exchanges, serve as the primary collateral in decentralized finance lending markets, and are also 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 short-term government bond yields (currently between 4.0% and 4.5%), but do not pay interest to coin holders. This creates a structural arbitrage difference between government money market funds. The choice for investors between holding stablecoins and participating in traditional cash instruments is essentially a trade-off between 24/7 liquidity and yield.

For traditional US dollar asset allocators, stablecoins are becoming a sustained source of demand for short-term government bonds. The current reserves of $150-200 billion can almost absorb a quarter of the Treasury's expected issuance of government bonds for the fiscal year 2025 under the new fiscal policy context. If the demand for stablecoins expands by another $1 trillion before 2028, the yield on 3-month Treasury bills is expected to decline by 6-12 basis points, and the front-end yield curve will steepen, which will help reduce short-term financing costs for corporations.

The Impact of Stablecoins on the Macroeconomy

Stablecoins backed by U.S. Treasury bonds introduce a channel for monetary expansion that bypasses traditional banking mechanisms. Each unit of stablecoin supported by Treasury bonds is equivalent to introducing 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 a year. In regions with high adoption rates, this may amplify inflationary pressure, even if the Broad Money has not increased. Currently, the global preference for storing digital dollars suppresses short-term inflation transmission, but it is also accumulating long-term external dollar liabilities, as more and more on-chain assets ultimately become on-chain claims to sovereign assets.

The demand for stablecoins for 3-6 month US Treasury bonds has also created a stable, price-insensitive bid in the front-end yield curve. This persistent demand has compressed the spread between short-term government bonds and overnight index swaps, reducing the effectiveness of central bank policy tools. As the circulation of stablecoins increases, central banks may need to implement more aggressive quantitative tightening or higher policy interest rates to achieve the same tightening effect.

Structural Transformation of Financial Infrastructure

The scale of stablecoin infrastructure is now impossible to ignore. In the past year, the total amount of on-chain transfers reached $33 trillion, surpassing the total of mainstream credit card networks. Stablecoins offer near-instant settlement capabilities, programmability, and ultra-low-cost cross-border transactions (as low as 0.05%), far superior to traditional remittance channels (6-14%).

At the same time, stablecoins have become the preferred collateral asset for decentralized finance lending, supporting over 65% of protocol loans. On-chain short-term treasury bond tokens—a yield-bearing, on-chain tool that tracks short-term treasury bonds—are rapidly expanding, with an annual growth of over 400%. This trend is giving rise to a "dual dollar system": zero-interest coins for transactions and interest-bearing tokens for holding, further blurring the lines between cash and securities.

The traditional banking system is also beginning to react. The CEO of a large bank has publicly stated that "they are willing to issue bank stablecoins once legally permitted," showing the banking system's concerns about 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 pressure scenarios such as decoupling, issuers may sell hundreds of billions of dollars in government bonds on the same day. The U.S. Treasury market has not yet undergone stress testing in such real-time selling pressure environments, which poses challenges to its resilience and interconnectedness.

Strategic Focus and Subsequent Observations

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

2. Interest Rates and Government Bond Issuance: Short-term interest rates on U.S. Treasuries are increasingly influenced by the issuance pace of stablecoins. It is recommended to simultaneously track the net issuance of mainstream stablecoins and the primary auctions of government bonds 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 government bond token products to earn returns;
   • For traditional investors: Focus on the equity of stablecoin issuers and the structured notes related to the returns of reserve assets;

4. Systemic Risk Prevention: Large-scale redemption fluctuations may directly transmit to the sovereign debt and repurchase market. The risk management department should simulate relevant scenarios, including surging government bond interest rates, collateral tightness, 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 a "shadow currency" 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 has become an urgent necessity rather than an option.