Stablecoins – digital and programmable representations of money that can cheaply settle payments in seconds – have gained significant traction in markets across the world, growing from $2 billion outstanding in 2019 to over $230 billion by the first quarter of 2025. By executive order, the Trump administration has singled out stablecoins as a critical lever by which to enlarge U.S. dollar dominance and to counter challenges from currency competitors like the eurozone or China.
A new paper from Yesha Yadav and Brendan Malone draws much needed attention to the engine anchoring this growth: the U.S. Treasury Market. “The Treasury market is home to a cash-like safe asset that has emerged as essential for protecting stablecoins issuers from default,” they write in their new article Stablecoins and the US Treasury Market. As stablecoins have expanded, their issuers have ramped up purchases of U.S. Treasuries. Tether, the largest U.S. dollar stablecoin issuer, became the seventh largest purchaser of Treasuries in 2024, reporting an overall exposure of $113 billion. Tether and its peers have become “heavyweights” in the Treasury market, boasting holdings comparable to South Korea, Germany, and Saudi Arabia.
This interconnection between stablecoins and the U.S. Treasury Market comes with benefits and risks, which Yadav and Malone investigate. Two key points emerge in their article:
Stablecoins and the U.S. Treasury market will benefit from growing interdependence…
The authors point out that each market needs the other, “especially where both continue to expand in size.” Stablecoins need U.S. Treasuries to ensure consumer confidence and grow their user base. Moreover, Treasuries provide issuers with interest payments that are less risky and more liquid than highly rated corporate bonds or equity. “It offers a positive incentive to those looking to issue stablecoins, encouraging the creation of a payment asset whose capacity to produce profit for an issuer is rooted in a safe investment environment,” the authors explain.
On the other end, the Treasury market benefits from new, large-scale buyers of U.S. debt, at a time when some major nation states – including China and Japan – have reduced their Treasury holdings, or threatened to change their positions in the wake of tariff-related negotiations with the U.S. “Within a more economically fractious geopolitical environment, stablecoin issuers have, at least for the present, stepped into the breach to represent a net purchaser whose own need for ultra safe assets has come to align nicely with the US fiscal demand for financing rising public debt levels,” the authors write.
…while also exposing both Treasuries and Stablecoins to risks.
Disruptions within the U.S. Treasury market can negatively impact the “moneyness” (liquidity and safety) of stablecoins. Trading in U.S. Treasuries, the authors note, has suffered from bouts of illiquidity and does not generally enjoy ample liquidity throughout the day. “For example, secondary trading in US Treasuries is typically less liquid when markets in New York are closed, and where the major open forums for trading are in farther-off financial centers such as Japan or London,” they write. When large orders to buy or sell transmit into a less liquid market, it can destabilize prices. If a stablecoin experiences a mass redemption request while the U.S. Treasury market is malfunctioning or insufficiently liquid, issuers may have to tap other sources of funding. “Ultimately, this kind of outcome can spell doom for the stablecoin industry, where faith in stablecoins as a credible form of money ends up (systematically) eroded,” the authors note.
Massive liquidity demand from stablecoin issuance could have negative consequences for the U.S. Treasury market as well. Should an issuer have to sell its Treasury holdings en masse, the market may be depleted in its ability to function. While the Treasury market is designed and expected to weather any such emergency scenarios, reliance by the stablecoin ecosystem on the Treasury market sets up Treasuries to “be implicated in any crisis affecting the stablecoin industry.”
The article concludes by outlining the structural implications of this deepening connection between stablecoins and the U.S. Treasury market. The authors discuss the effects on the U.S. dollar, how the U.S. Treasury will issue debt going forward, and more. “Looking forward… maintaining the health of the US Treasury market and that of the stablecoin industry must increasingly be seen as a closely connected and combined monetary project,” they write.
Stablecoins and the US Treasury Market is available for download on SSRN. Yesha Yadav is the Milton R. Underwood Chair of Law and Associate Dean of Culture & Community at Vanderbilt Law School. Brendan Malone is a member of the Bretton Woods Committee; he worked for several years at the Board of Governors of the Federal Reserve System.
