Stablecoins Quietly Reshape U.S. Debt Markets With Digital Dollars

The U.S. Treasury market is witnessing increasing involvement from stablecoins and tokenization, reshaping traditional investor behavior and influencing debt financing dynamics. According to a recent report from Bank of America, stablecoins—cryptocurrencies pegged to assets like the U.S. dollar—are growing in their demand for short-term U.S. government debt, particularly Treasury bills. The bank projects that stablecoin allocations to T-bills could expand by $25 billion to $75 billion over the next year, marking a significant yet not disruptive force in the broader Treasury market landscape [1].

This trend is not just a market shift but could also represent a strategic financial tool for the U.S. government. The report notes that stablecoin demand, while not large enough to shift overall Treasury dynamics, poses a growing challenge to money market mutual funds (MMFs), which traditionally serve similar purposes. Stablecoins are currently at a disadvantage due to their inability to pay interest; however, this gap could narrow if regulatory or technological developments allow for interest-bearing stablecoins [1].

In parallel, the tokenization of money market fund shares is gaining traction among traditional financial institutions as a competitive response. In July 2025, BNY Mellon and Goldman Sachs launched blockchain-based technology to record the ownership of select MMF shares. This milestone aligns with the broader industry momentum fueled by the passage of the GENIUS Act, a federal framework for stablecoin regulation that aims to foster innovation while ensuring oversight [1]. Analysts suggest that tokenized MMF products may offer a temporary competitive edge by combining traditional yields with the efficiency of blockchain-based settlement, but this advantage may be short-lived if stablecoins evolve to offer yield features [1].

The growing significance of stablecoins extends beyond institutional behavior. The aggregate stablecoin market cap has surged from $13.4 billion less than five years ago to nearly $267 billion as of August 2025. Over 60% of this market is dominated by Tether’s USDT, which has a market cap of $164 billion and daily trading volume exceeding $116 billion. The rapid growth of stablecoins is attributed to their utility in enabling 24/7, permissionless transactions and serving as a digital representation of the U.S. dollar within the crypto ecosystem [2].

A key driver of this growth is the mechanism through which stablecoins function. Similar to money market funds, stablecoins maintain their value through the issuance and redemption process. For instance, Tether uses funds from USDT issuance to purchase U.S. Treasury bills, capturing the yield as revenue. This mechanism allows stablecoins to facilitate cross-border and peer-to-peer transactions without reliance on traditional banking systems [2]. The U.S. Treasury’s increasing demand for stablecoin-backed debt is also notable; as of June 2025, Tether holds over $105 billion in Treasury bills—comparable to holdings by major economies like South Korea and Mexico [2].

The strategic implications for the U.S. debt market are significant. With stablecoins projected to hold $1.2 trillion in Treasuries by 2030, they could become the largest single purchaser of U.S. debt, enhancing demand and potentially lowering yields. This dynamic provides the U.S. with a cost-effective mechanism to fund its deficit, leveraging digital innovation to reinforce the global dominance of the U.S. dollar [2]. The growing demand from stablecoins suggests a broader shift in the global financial architecture, where digital assets and traditional finance are increasingly intertwined, creating a new paradigm for debt issuance and currency stability.

Source:

[1] Bank of America Highlights Stablecoins and Tokenization as New Forces in U.S. Debt Markets (https://cryptodnes.bg/en/bank-of-america-highlights-stablecoins-and-tokenization-as-new-forces-in-u-s-debt-markets/)

[2] Crypto's Killer App: the US Dollar (https://www.wealthmanagement.com/crypto/crypto-s-killer-app-the-us-dollar)