Stablecoin Regulation May Boost U.S. Treasury Bond Demand by 6.8 Trillion

U.S. Treasury Secretary Scott Bessent has expressed optimism regarding the potential for stablecoin regulation to bolster demand for U.S. Treasury bonds. This perspective comes as the Treasury Department faces significant challenges in managing the nation's debt and maintaining market stability. Bessent has highlighted that stablecoin legislation could serve as a pivotal event for the 2020s, referencing a Senate bill aimed at regulating the stablecoin industry.

The requirement for stablecoins to be fully collateralized with assets of equal or greater value is expected to drive increased demand for U.S. Treasury bonds. This regulatory framework would ensure that stablecoins are backed by secure and liquid assets, making them an attractive option for investors seeking stability and security. The collateralization requirement could lead to a surge in the purchase of Treasury bonds, as stablecoin issuers seek to meet regulatory standards.

Former BitMEX CEO Arthur Hayes has also weighed in on the potential impact of stablecoins on the U.S. debt market. Hayes suggests that the U.S. Treasury's growing reliance on debt markets may soon reach structural limits, necessitating new liquidity channels. He proposes that stablecoins and Bitcoin could play a crucial role in addressing this challenge. According to Hayes, the Treasury Secretary faces the daunting task of selling over $5 trillion in bonds this year to cover new deficits and refinance maturing debt, all while keeping the 10-year yield under 5%. The Federal Reserve, which traditionally buys bonds to keep rates low, is now focused on controlling inflation and cannot easily intervene in the bond market. This leaves the Treasury to find alternative buyers, with large U.S. banks and the stablecoin sector emerging as potential solutions.

Hayes envisions a scenario where bank deposits are converted into stablecoins, reducing costs through automated compliance and operations. This shift could potentially save banks $20 billion annually and recycle those deposits into Treasury bills. T-bills, which offer minimal interest rate risk and yields close to the Fed Funds rate, present an appealing return for banks. Hayes estimates that tokenized deposits could unlock $6.8 trillion in T-bill demand. Additionally, a Republican-led proposal to end the Fed’s interest payments on reserves could force banks to redeploy up to $3.3 trillion in idle funds into Treasuries.

Hayes views these developments as a form of stealth quantitative easing, where liquidity comes from the private banking sector issuing stablecoins and buying T-bills. This process would boost the dollar supply and suppress yields, supporting risk assets like Bitcoin, which tend to thrive in environments of rising liquidity and falling real yields. However, Hayes cautions that a brief pullback in liquidity could occur if the Treasury refills its cash account too quickly after a debt ceiling hike. Despite this potential short-term setback, Hayes remains bullish on the long-term prospects of stablecoins, seeing them as integral to a broader macro strategy that integrates banking, debt markets, and digital assets.