Stablecoins Reshape Banking, Pose 2% T-Bill Market Risk

Stablecoins, a type of cryptocurrency designed to maintain a stable value, have been increasingly integrated into the mainstream banking system. This integration raises concerns about the potential risks they pose to traditional bank deposits. Stablecoins are not backed by federal deposit insurance or subject to share insurance by the National Credit Union Administration (NCUA). This lack of regulatory oversight means that consumers and businesses could be exposed to higher levels of risk, including credit risk and liquidity imbalances, which could lead to market volatility.

According to Morgan Stanley analysts, stablecoins are not yet a substitute for traditional bank deposits, but their utility in fast settlement and global dollar access could make them increasingly attractive—particularly to institutional users. Banks should not be complacent, as some are already responding by developing tokenized deposits. Stablecoins are already reshaping short-term funding markets, with Tether, the largest stablecoin, holding 66% of its reserves in U.S. Treasury bills as of March 2025, representing roughly 2% of the entire T-bill market. Continued growth could boost demand for short-term Treasuries and give the U.S. Treasury more flexibility in debt issuance.

Compared to money market funds, stablecoins are constrained by regulation under the Genius Act, which prohibits interest payments and treats holders as unsecured creditors. In contrast, money funds can offer yield and give investors equity-like ownership. Still, both instruments share similarities in function—providing stable, cash-like vehicles backed by high-quality liquid assets. They aim to maintain a stable value—money funds target a $1 net asset value (NAV), while stablecoins aim to maintain a 1:1 peg with fiat currency like the U.S. dollar. During times of market stress, both tend to attract inflows as investors seek safety.

The market cap of stablecoins, now at $263 billion, is currently driven by retail crypto usage, but further adoption is expected to come from institutions seeking faster transaction speeds and greater collateral mobility. Unlike traditional bank deposits, which are locked within a single institution, stablecoins can move freely across blockchain platforms, suggesting broader financial utility. While some liquidity could move from bank deposits to stablecoins, analysts suggest the shift may be temporary. As the U.S. Treasury deploys funds raised through debt issuance, a portion of that capital often returns to the banking system, potentially offsetting outflows.

The regulatory environment is also evolving. The Genius Act has cleared the Senate, while the Clarity Act is still under House debate. The final shape of these frameworks will significantly influence how stablecoins interact with the broader financial system. With a U.S.-issued CBDC appearing less likely, current legislation favors private-sector solutions, potentially accelerating stablecoin integration into mainstream finance.

The GENIUS Act, a proposed regulatory framework, aims to address these concerns by creating a regulatory perimeter for stablecoins. The act seeks to spur innovation while ensuring that stablecoins do not disintermediate traditional banking systems. Under the GENIUS Act, stablecoin reserves would be limited to cash, bank deposits, and short-term, low-risk securities such as U.S. Treasuries. This approach is designed to mitigate the risks associated with stablecoins, such as the potential for them to drift from their peg due to market factors.

However, the GENIUS Act has faced criticism from some quarters. Critics argue that the act does not go far enough in addressing the risks posed by stablecoins. They point out that stablecoins could still pose a threat to financial stability, particularly if they are widely adopted. Large-scale adoption of stablecoins could introduce new challenges for financial stability and regulatory oversight, as consumers and businesses may become more reliant on these digital assets.

Regulators outside the U.S. have also expressed concerns about stablecoins. Tokenized bank deposits are seen as a more stable and secure alternative to stablecoins, as they are backed by traditional banking systems and are subject to regulatory oversight. However, tokenized bank deposits also risk volatility and could undermine the "singleness of money," which is a key principle of modern banking systems.

In conclusion, while stablecoins offer potential benefits such as increased liquidity and ease of use, they also pose significant risks to traditional bank deposits. The GENIUS Act represents an important step towards addressing these risks, but more work is needed to ensure that stablecoins are integrated into the banking system in a safe and sustainable manner. As the use of stablecoins continues to grow, it will be important for regulators to remain vigilant and adapt their policies to address the evolving risks posed by these digital assets.