Every New Stablecoin Dollar Brings Only Sixty Cents of Treasury Demand
Stablecoins are not a new currency but another return of private money; they bring net new demand for the dollar and for Treasuries, but each stablecoin dollar corresponds to only about sixty cents of Treasury demand, because the money may simply have moved out of a money market fund.
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GENIUS is more important than its own promoters expected
Nellie Liang says the GENIUS Act is ‘possibly more important than I realized at the time’, even though she had argued for legislation for years. In November 2021, when she released the first Treasury report on stablecoins, stablecoins were only $25 billion to $30 billion in size; today they are $250 billion to $275 billion. The act does not just give stablecoin issuers clarity, it also got banks seriously considering bringing digital assets and distributed ledger technology into their own systems. She says the degree of innovation the act ignited is ‘quite remarkable’, but the outcome is still unknown.
— Nellie LiangThe features that make stablecoins useful also make them good for money laundering
This is the core tension of the paper: stablecoins are like cash, a bearer instrument, and after initial issuance the issuer has neither insight into nor records of transactions. So the very features that make them faster and cheaper for payments also make them highly attractive for illicit finance. The challenge is that stablecoins were originally designed for trading crypto assets, and regulators now have to refit them for the mainstream payments world while still controlling illicit finance risk. She says this is also why no one really knows how big stablecoins can get, with forecasts ranging from $500 billion to $5 trillion.
— Nellie LiangStablecoins could weaken America's sanctions leverage
The dollar's global role gives the US two benefits: one, it lowers US borrowing costs; two, it enforces sanctions and AML/CFT rules through the correspondent banking network — because the dollar is so widely used, the threat of cutting an institution off from US correspondent banks has teeth. If stablecoins bypass those correspondent relationships and compress settlement onto the blockchain, they weaken the effectiveness of that tool. Liang says the economic benefits will persist, but there is tension on the national security side, and it is the same kind of tension as ‘the more efficient the payment, the better suited to illicit finance’.
— Nellie LiangEach stablecoin dollar brings only sixty cents of Treasury demand
Of the reserve assets of the two largest stablecoins, 79% is Treasuries or Treasury repos, so each dollar of stablecoins creates roughly 80 cents of T-bill demand. But to see net new demand you have to look at where the money comes from: banks, money market funds, currency in circulation, and overseas demand, four categories. Money market funds themselves hold at least 80% of assets in T-bills, so if the new demand all comes from money market funds, it is a net wash, zero new. Overseas demand and banks are net new, and banks actually do not hold much in Treasuries. Under three scenarios, low, medium and high ($0.9 trillion, $1.9 trillion, $4 trillion), a first-round estimate puts each new stablecoin dollar at about 60 cents of Treasury demand.
— Nellie LiangMost of the new Treasury demand comes from deposits banks lose
This calculation puts the trade-off on the table: to get more T-bill demand, you have to let banks lose deposits, or rely on overseas demand, and those two are the main sources of net new. Liang acknowledges that if the deposits lost are at small community banks, and those banks serve small businesses' credit needs, there could be disruption. But she judges this to be more of a transitional disturbance than a permanent replacement of credit — capital markets have not yet fully reached down to small businesses, but will adjust over time.
— Nellie LiangPaying no interest on deposits is not legally banned, just habit
David mentions theoretical papers arguing that CBDC or stablecoins would force banks to pay interest on deposits and stop enjoying permanently cheap funding. Liang says she sympathizes with the argument: Reg Q did not allow banks to pay interest on deposits, which spawned money market funds; after Reg Q was repealed, interest was allowed on some accounts, but still not on transaction accounts, until Dodd-Frank finally killed it. But long periods of low rates meant depositors simply did not expect interest on transaction accounts. She says paying interest is in fact allowed now, it is just uncommon or extremely low, and competition and a higher-rate environment could change that.
— Nellie LiangNo risk weights on reserve assets is the biggest regulatory gap
GENIUS allows reserve assets to be cash, Treasuries, and also uninsured bank deposits, but it sets no risk weights on different reserve assets. Liang believes uninsured deposits are riskier than Treasuries and should be treated differently, to give issuers an incentive to hold low-risk assets. She notes that under Europe's MiCA, stablecoin issuers have a 2% capital requirement and more asset restrictions; she does not advocate copying the 2%, but believes differentiation is necessary. The second gap is illicit finance rules: for corporate cash management desks to use stablecoins, they need operational certainty, a set of standards everyone must follow.
— Nellie LiangIn their own words · checked verbatim
So I think genius is very significant. Um maybe more significant than I had appreciated although I was you know very much advocating for legislation in this space for many years.
Nellie Liang5:07
I really we wanted to emphasize all those benefits that you can do ma that are there for payments also make it very attractive for illicit finance transactions.
Nellie Liang17:25
like cash is pretty anonymous so are stable coins but stable coins can move a lot more fat a lot more cash
Nellie Liang18:29
the economic benefits of continued use of the dollar through lower rates for the United States will continue But there is some tension of reduced national security.
Nellie Liang31:41
if all of the new stable coin demand came from money market funds, then stable coins would invest in T bills, money market funds would sell those T bills and there would be a net wash and no new demand.
Nellie Liang39:52
it is not where it used to be prohibited from paying interest you can. It's now allowed. It's just not common practice or it's very low.
Nellie Liang44:57
in my mind the risk of an uninsured deposit is higher than the risk of a T bill and there should be some risk waiting for that
Nellie Liang48:58
Figures
| Share of Treasuries and Treasury repos in the two largest stablecoins' reserves | 79% | 36:47 |
| T-bill demand per dollar of stablecoins | about 80 cents | 36:47 |
| Share of Treasuries in money market fund assets | at least 80% | 39:52 |
| Capital requirement for stablecoin issuers under MiCA | 2% | 48:58 |
| Remittance cost (World Bank data) | 10%-15% | 16:25 |
Glossary
- GENIUS Act
- A US law establishing a federal regulatory framework for stablecoin issuers.
- tokenized deposits
- Bank deposits put on-chain, usually open only to the bank's own depositors, unlike stablecoins.
- OpenUSD
- A stablecoin a coalition of about 140 companies plans to launch, still on paper.
- MiCA
- The EU's crypto asset market regulation framework, with capital and asset restrictions on stablecoin issuers.
- Reg Q
- The old US rule that banned banks from paying interest on deposits; its repeal spawned money market funds.
How to listen
Founders, investors and financial regulators focused on stablecoins, payments and Treasury demand, especially those working on cross-border payments or corporate cash management.
The bio introduction at the start, 0:02-4:06, can be skipped; go straight to the GENIUS Act section starting at 5:07.