The Impact of Stablecoins and Digital Assets in the U.S.

Overview:

• Stablecoins, tokenized Treasury and money-market funds and central bank digital currencies are all gaining more traction in the modern financial system.
• Financial institutions are rethinking opportunities in their business models to incorporate these disruptive technologies.
• We explore these shifts, the debate between narrow and fractional banking models, and discuss the broader implications for banks.
• Stablecoins have already emerged as substantial buyers of short-term Treasury securities and cash lenders in the repo market, which should continue to influence Treasury's issuance strategy.
• As stablecoins grow, they will represent a new source of demand for risk-free assets with distinct structural characteristics.

Introduction to Digital Assets

Digital assets are quickly moving from the periphery of financial markets into the mainstream. Cryptocurrencies remain volatile and largely speculative, but other digital assets have found rapid institutionalization and are reshaping the liquidity, settlement and collateral landscape. These assets are increasingly designed to replicate money-like claims with added features that come with the blockchain rails (the underlying network that communicates the information about the transactions). The growth in these asset classes has made them an important participant in fixed income markets, most notably in the U.S. Treasury market.

The integration of digital assets into traditional markets has important implications for both the demand outlook for fixed income securities and policy design choices by officials. Banks are also exploring their own initiatives in response to the competitive pressures from digital assets that pose a challenge to their traditional payment and depository frameworks.

Digital assets are an extremely broad category, and new branches appear almost daily. For the purposes of this article, we will focus on Stablecoins, Tokenized Real-World Assets and Central Bank Digital Currencies – splitting the last into two broad categories, coins and tokens. The main distinction between the two is that coins (e.g., Bitcoin) are native to their own blockchain and function as a payment form within that system, while tokens (e.g., stablecoins) are created on top of an existing blockchain, usually via smart contracts.

Digital Asset Taxonomy of Coins and Tokens

What are Stablecoins?

Stablecoins are a type of virtual currency designed to maintain a stable peg against another asset or currency. The largest stablecoins are pegged against the U.S. Dollar and aim to keep their value at US$1.00 (fiat-pegged), but other stablecoins are slowly gaining popularity and are backed by commodities (e.g., Pax Gold (PAXG)) or other cryptocurrencies (e.g., Wrapped Bitcoin (WBTC) with Bitcoin (BTC)). There are several notable themes in stablecoin volumes and assets:

• Transaction volumes in stablecoins have grown: Total volumes were US$5 trillion in August 2025, but many of those transactions are due to automated bots and high-frequency trading. A large portion of automated trading arises due to the different blockchains that the stablecoins operate under, which can create arbitrage opportunities. Excluding these transactions, organic volumes fall to US$1 trillion but have more than doubled over the past year.

  Stablecoin Volume Have Grown but Organic Trading is Still a Small Portion

• Assets invested in stablecoins have also increased: Total stablecoin supply now sits at US$250 billion versus US$159 billion in August 2024. The majority of stablecoin supply is allocated between the two largest stablecoins — Tether (USDT) and Circle (USDC). Flows into stablecoins have historically been cyclical and highly correlated with trends in crypto markets. However, the industry is now much more mature, and growing real-world use cases are likely to create increased resilience in the asset base during volatile periods.

How Do Stablecoins Work?

There are several key mechanics involved in stablecoins:

• Issuance and Redemption: When a buyer deposits USD with the issuer of a stablecoin, a new token is minted and an equivalent amount of stablecoins is distributed on the blockchain. When the buyer wants to convert the stablecoin back to a fiat currency, the issuer of the stablecoin "burns" those tokens, sells the underlying reserves, and thus maintains the peg. This process is done automatically through smart contracts, which ease the use of stablecoins as collateral.
• Reserves: USD-backed stablecoins are collateralized 1:1 with cash or cash-like assets with very short maturities. Stablecoins are now regulated in the U.S. under the Guiding and Establishing National Innovation for U.S. Stablecoins Act (GENIUS Act), which requires issuers to hold reserves in the form of cash, demand deposits, qualifying repos or Treasuries and agency securities with maturities of up to 93 days.

Comparing Tether and Circle Stablecoins

Most of the assets that stablecoins control are in fiat-pegged coins, with two stablecoins controlling the majority share — Tether (USDT) and Circle (USDC). The most common blockchain for stablecoins is the Ethereum network (ERC-20 standard), but other networks are also used for lower fees and efficiency purposes.

• Tether (USDT): Tether is the oldest stablecoin with the largest market cap (US$168 billion). Tether publishes quarterly attestations about its reserves, with these attestations moving to a monthly basis once the stablecoin becomes compliant with the GENIUS Act. Tether supports various blockchains, but by far the most commonly used protocols are Ethereum (ERC-20) and Tron (TRC-20), split roughly equally.
• Circle (USDC): Circle is the second-largest stablecoin with US$70 billion in assets. Combined with Tether, they make up ~85% of the fiat-pegged stablecoin industry's assets. USDC is the largest onshore stablecoin since USDT is offshore. USDC is mainly operated as an Ethereum token (ERC-20 standard), but can be traded on various other chains, with Solana the second-largest protocol.

Selling Points of Stablecoin

We see a number of use cases for stablecoins:

• Instant payments: One of the biggest selling points of stablecoins is that settlements happen almost immediately after a transfer is initiated.
• Lower transfer fees: Sending money through the traditional banking system typically requires the use of the Society for Worldwide Interbank Financial Telecommunications (SWIFT), where the fees can be very high.
• Cross-border payments: Using the new system, a sender can purchase stablecoins using their local currency (e.g., through an online exchange), convert them to USD-denominated stablecoins and send them internationally. This is a crucial advantage for parts of the world with limited financial infrastructure.
• Collateral in Decentralized Finance (DeFi): Stablecoin issuers are not allowed to pay interest under the GENIUS Act, making them distinctly different from money market funds (MMFs). However, stablecoins can be used as collateral (or "currency") for DeFi projects that are yield-bearing, creating a way to monetize holdings.

Stablecoin Regulations Changing Rapidly

The global regulatory landscape for stablecoins is changing rapidly. The U.S. Congress recently passed the GENIUS Act — the first comprehensive regulatory framework for U.S. payment stablecoins. This was crucial legislation given that virtually all fiat-backed stablecoins are USD-denominated at this stage. The law mandates that stablecoins in the U.S. require the following:

• Reserve backing: Reserves have to be 1:1 backed with eligible assets
• Disclosures requirements: Stablecoins have to provide monthly public disclosures with appropriate audits.
• Compliance requirements: Issuers have to adhere to strict Anti-Money Laundering (AML) and sanctions compliance under the Bank Secrecy Act.
• Insolvency protection: Stablecoin holders are given priority during bankruptcy proceedings.
• Restricted issuance: Stablecoins can only be issued by "permitted payment stablecoin issuers" — a person in the U.S. approved by the federal or state regulator. Foreign issuers may offer stablecoins in the U.S. if the Treasury deems the jurisdiction as having a comparable regulatory framework.
• Licensing requirements: Oversight can be on a federal or state level.
• Prohibition of interest: Stablecoin issuers are not permitted to pay interest or yield to holders in any kind.

Addressing Risks to Stablecoins

The GENIUS Act in the U.S. addressed some of the key risks to stablecoins, including credit risk, liquidity risk, custody risk, governance risk and regulatory risk.

However, there are still outstanding issues that pose risks to stablecoin holders. Many of the benefits of stablecoins could also create risks associated with the asset class. Some of these risks include operation and cyber risk, varying payment rails, rapid outflows and consumer protection gaps.

The Role of Tokenized Treasuries and Money Market Funds

Tokenization is the process of transforming ownership of real world assets (RWAs) into stakes of digital tokens on a blockchain. The underlying can reference a wide range of assets — real estate, equities, commodities, and fixed income. Additionally, the underlying asset remains in the custody of the institution issuing the token while end-users acquire ownership of digital tokens that can be transferred efficiently.

Tokenized treasuries and money market funds are very similar to stablecoins in that the transactions are recorded on a digital ledger, they have similar minting/burning mechanics, and they can be traded on secondary markets like crypto exchanges. However, unlike stablecoins, tokenized assets provide the owner with a direct ownership stake in a specific asset (e.g., an exact CUSIP), provide an economic benefit (e.g., voting rights or yield), and are bound by different securities regulations.

Tokenized assets are not a new legal category of securities but are digital representations of traditional financial instruments. Therefore, the regulatory framework that applies to the underlying security also applies to the token.

State of the Market

The tokenized Treasury market is still modest relative to the US$29.4 trillion marketable Treasury debt outstanding. The size of the market was only US$7.3 billion as of September 2025. The most subscribed products right now are created by long-standing financial institutions. The three largest tokenized Treasury funds are claims in government money market funds with a Net Asset Value (NAV) of US$1.00.

Other models to tokenized Treasury ownership are ones that track Treasury ETFs and allow for floating NAV exposure. However, they have now shifted their exposure toward other on-chain tokenized Treasury funds, stablecoins, bank deposits, and other money market funds.

Tokenized repo is also a tiny portion of the market but is one that can lead to large efficiency gains. However, challenges remain with many of the tokenized funds operating on different blockchains. It is not yet clear how these assets can be integrated into established clearing rails, or how regulatory frameworks will be applied.

Benefits of Central Bank Digital Currencies

Central Bank Digital Currencies (CBDC) are a digital liability of a central bank where the coins would act as a nation's official currency alongside (or in lieu of) physical currency in circulation. Just like physical cash, CBDCs would be a liability on the central bank's balance sheet. The benefits of an efficiently implemented CBDC would have similarities to other digital assets used for payments (such as stablecoins). However, the backing of the central bank allows for further features such as:

• Fast and cheap payments, particularly for cross border transactions.
• Greater inclusion of un-banked people in the financial system.
• A risk-free payment system that has the explicit backing of the central bank.

Just like currency in circulation, CBDC would be a liability of the nation's central bank. However, it would create a platform for the public to make digital payments, effectively mimicking a bank account. Unlike an account at a commercial bank, CBDCs are essentially risk-free as they are underwritten by the central bank and would not require deposit insurance.

Designing an effective CBDC has many challenges and involves creating substantial guardrails given the systemic importance of a project of such magnitude. We see four key issues that need to be addressed with CBDCs:

• Privacy: Physical cash is anonymous and transferring those transactions onto a digital ledger would strip that away.
• Cybersecurity: CBDCs would have to be resilient to cyberattacks and have extremely strong redundancies in place to protect consumers and businesses.
• Monetary policy implementation: CBDCs create a new liability on the central bank's balance sheet. End-users could rapidly shift away from their banks into digital currency, causing a drain of bank reserves in the financial system. This can interfere with the Fed's ability to effectively conduct monetary policy.
• Destabilizing the banking system: If the central bank directly operates CBDCs by providing digital wallets to users, there could be destabilizing impacts to the banking system.

Digital Assets and the Banking System

As digital assets advance in their life cycle, traditional financial institutions have accelerated their efforts to adopt them into both their established operations and within new business models.

Narrow vs Fractional Banking

One key feature of stablecoins is that their liabilities are 1:1 backed with reserves. This is antithetical to bank deposits, which are created on the basis of a fractional reserve system. Digital assets likely have a higher velocity arising from their technological efficiencies relative to traditional money, but the higher velocity is unlikely to offset the negative impact on the money multiplier created under fractional reserves. Flows into stablecoins are likely to come from either currency in circulation, bank deposits, or other non-bank financial institutions (such as money market funds).

Impact for Banks

Moving deposits that are created on the basis of a fractional reserve system towards a stablecoin system that is 1:1 backed with assets would have a deleveraging impact on the banking system and decrease credit intermediation in the economy as a whole. The exception would be if inflows into stablecoins come from physical currency, which would increase the size of the banking system on net.

Market Musings

To address this challenge banks have already attempted to adopt tokenized assets and stablecoins. Commercial banks would want to use those assets for:

• Retaining customers and gaining market share
• Lower cost deposits, which could lead to net interest margin expansion
• Streamline operations

Stablecoin Reserve Holdings and Treasuries

The growth in assets allocated to stablecoins will have an impact on the Treasury market — particularly on shorter-dated securities. If the inflows into digital assets continue at the current breakneck pace, the amount of money that those vehicles have to invest will soon be material even in the context of the Treasury market.

This may influence Treasury's debt management decisions, leading to a shorter weighted average maturity of issuance. Treasury is already paying close attention to this and has been asking primary dealers to comment on the topic.

Dollar-denominated stablecoins, which at this stage make up nearly the entire fiat-backed stablecoin universe, are forced to back their tokens 1:1 with assets. The GENIUS Act imposed stricter guidelines on what those reserves can look like, but the main allocations will likely be to Treasury bills and coupons with less than 3 months of maturity and overnight repo (a close substitute to bills).

Impact on Treasury Bills, Funding Markets and Treasury Issuance

The net inflows and net purchases of Treasuries by stablecoins will depend on the initial source of those dollars. The investments of stablecoins are concentrated in money market instruments and those allocations will only continue to grow. USDC and USDT owned approximately 2.25% of the Treasury bill market as of June 30, 2025, which corresponds to US$130 billion of holdings.

Stablecoins Own a Small but Growing Share of the T-Bill Market

Risk of Rapid Outflows

If stablecoins keep growing, they will be material investors in Treasury bill and repo markets. On the issuance side, Treasury is likely to take more comfort that there is a new source of demand for bills and increase its reliance on bills at the margin. On the repo side, market participants are likely to adjust their behavior to rely on this source of cash when intermediating financing needs.

This behavior resembles how we might think about inflows into regular 2a-7 money market funds. However, in addition to regulatory differences, the flows in and out of stablecoins are inherently much more volatile than into money market funds. For example, the total market capitalization of stablecoins contracted by about 30% after reaching a local peak in 2021 after underperformance in crypto markets, de-pegging of algorithmic stablecoins, and the collapse of the digital currency exchange, FTX.

The market capitalization of stablecoins isn't significant in the macro sense, a drawdown of a similar magnitude in future years could lead to large price shocks and funding issues as stablecoin issuers have to fire-sell inventories.

Additionally, Treasury is unlikely to rely on stablecoins when estimating the long-term demand for bills due to the risk of asset volatility. However, we believe the industry is much closer to maturity now and use cases have increased, allocators become more institutionalized, and regulations significantly increased transparency. Risks persist but are likely to continue diminishing in our view.