Stablecoins to the rescue? The GENIUS Act’s Treasury Impact

Signed in July, the Opens in a new tabGuiding and Establishing National Innovation for US Stablecoins (GENIUS) Act, is a significant piece of legislation.

By requiring stablecoin issuers to hold dollars or short-term Treasuries for every stablecoin issued, it could fortify the dollar’s position as the payment currency of the world and its status as the world’s reserve currency. It could also increase inflows into the US Treasury markets by creating more demand for short-term paper.

Why? Because global demand for stablecoins, a payment mechanism that enables fast, efficient and free settlement, is growing fast. If the US maintains its current leadership in stablecoin regulation and infrastructure, worldwide stablecoin transactions will continue to happen in dollars. But there would need to be a vast increase in the number of stablecoins issued to have a material impact on either the dollar or the Treasury market. Treasury secretary Scott Bessent predicts that Opens in a new tabstablecoin will become a $3.7 trillion market by 2030, up from approximately $250 bllion today, but is that realistic?

The central tenet of the GENIUS prohibits interest payments to stable coins holders, so essentially stablecoins used as a payment method, not as an investment. When interest-bearing stable coins are regulated, you could create a marketplace that pulled cash away from bank deposits, in a similar in fashion to the money market today. But since interest-bearing stable coins aren’t regulated, why would I take my insured deposits and buy those instead?

To increase stablecoin volumes in the way Bessent is predicting, you need buy-in from investors, particularly mom and pop investors, and for that to happen, the regulatory framework needs to evolve further. That is likely, but there’s lots of work to be done. Opens in a new tabThe Clarity Act should create firmer customer protections for these digital coins. Beyond that, we need a broader framework for all tokenized assets, including interest-bearing stablecoins.

The most realistic outcome in the meantime is that the market grows organically as institutional buyers look for more efficient payment structures. That could create around $1 trillion in issuance.

If you had $1 trillion stablecoins out there, issuers would definitely need to hold short-term treasuries as collateral, but stablecoin-related inflows into short-term treasuries would still be less than inflows into money market funds today.

But if interest-bearing stablecoins were regulated and we moved from $1 trillion to, say, $6 trillion of issuance, you would have a material impact on the demand for Treasuries. That would help the US economy, for sure, because it would bring down interest rates – more supply than demand for T-bills pushing the natural rate lower. This, in turn, would lower the government’s borrowing costs, improve the country’s fiscal situation, and help the government to tackle the deficit.

However, T-bills would need to significantly lower interest rates to cut the deficit materially, because interest rate payments account for around one third of the total deficit amount. If we see any more deterioration in the deficit, that’s also likely to dull the impact of any inflows into Treasuries from stablecoins and keep the long end of the curve elevated.

There are countervailing forces at play in the dollar market too. The GENIUS Act could definitely help to support the dollar’s position as the world’s reserve currency, but dollar inflows arriving by way of stablecoin issuance are unlikely to make the dollar stronger. In fact, the forward rate of the EUR/USD curve suggests that we will have a weaker dollar than where we are today because of the interest rate differential. ING analysts think weakness will be far more pronounced and that by 2027, EUR/USD is likely to hit 1.25.

For me, the fundamental story of the dollar is around this rate differential. If capital flight out of the US into other parts of the world continues, with the belief that returns will be the same or above that of the US, that will lessen the impact of stablecoin-based dollar buying.

There are also hurdles beyond the regulatory and market challenges, because the jury is still out about how fast blockchain technology will be adopted for payments or for assets. It might come in two years or five years. I certainly don't see widespread adoption around the corner, because you need a framework of decentralized payment platforms to make these types of cross-payments work.

A lot is being done in this space. At ING, we are a large investor, alongside many other European and US banks, in a platform called Opens in a new tabFnality, a global, multi-currency settlement platform that uses distributed ledger technology. The infrastructure still needs to evolve in order to make these payment systems more fluid and integrated into banking platforms, which would increase demand.

Banks and corporates also need to prepare for all the complications associated with instantaneous settlements, which requires a complete change in their own infrastructure. I think that’s why it's taken us many years to get where we are today, even though this digital ledger technology has existed for quite some time. Do I expect to happen? Absolutely, but it can't happen overnight, because it could destabilize the banking system.

The GENIUS Act is great first set step towards establishing a framework for stablecoin, but many more steps are required to grow the market from less than half a billion all the way to Scott Bessent’s $3.7 trillion prediction. It will be an interesting story to watch for the months and years.