By Jeff Huther and Yikai Wang
ABA DataBank
The Genius Act and the related Stable Act pave the way for a regulatory framework for payment stablecoins. The Genius Act, which passed the Senate on June 17, 2025, mandates stablecoin issuers maintain reserves on at least a one-to-one basis, with U.S. Treasury debt explicitly allowed as reserve assets. Standard Chartered, a British bank, has projected the total stablecoin supply could reach $2 trillion by 2028, assuming the Genius Act is enacted. Echoing this outlook, Treasury Secretary Scott Bessent predicted that demand from stablecoins could create up to $2 trillion of Treasury debt demand in the next few years.
In this DataBank, we examine an overlooked tradeoff in the debate over payment stablecoins: that lower borrowing costs for the federal government could come at the expense of reduced credit availability for Main Street. Assuming this $2 trillion in stablecoin growth materializes, the influx of demand for U.S. Treasuries may modestly ease short-term Treasury yields and borrowing costs for the U.S. government. Following the money flows, we find that the expected shift in deposits from banks to stablecoin issuers would weaken a key source of low-cost funding for banks, which banks rely on to finance lending to households and small businesses. As banks replace lost deposits with higher-cost alternatives and worse, are forced to curtail their credit supply, the potential harm to economic activity in Main Street could negate any benefits in the form of modestly lower funding cost to the U.S. Treasury.
While reasonable observers will have differing opinions of whether stablecoin growth will be as fast as commentators have projected, for purposes of this analysis, we use the $2 trillion number as the base case. The goal is to illustrate how stablecoin growth may affect traditional markets and the potential magnitude of changes that could occur.
Current stablecoin holdings of Treasury debt
As of May 21, 2025, the total volume of U.S. dollar-pegged stablecoins totaled over $236 billion, an almost 40% increase since the beginning of November 2024. Stablecoin funding sources are unknown, although the dollars presumably originally came from bank accounts or money market funds. The majority of stablecoin inflows is invested, either directly or indirectly, in U.S. Treasury securities.
Figure 1 shows the total dollar-pegged stablecoin volume back to 2018. The 2024 U.S. elections coincided with an upturn in the growth of dollar-pegged stablecoins outstanding. Tether and Circle are the two largest stablecoin issuers, holding almost 90% of the sector’s assets ($152 billion and $60 billion respectively). USDT and USDC are the symbols for the stablecoins issued by Tether and Circle, respectively. USDe represents Ethena USD, a synthetic dollar stablecoin built by Ethena Labs; DAI is an algorithmic stablecoin issued by MakerDAO; and USDS represents a stablecoin introduced by Bitgo to reward its participants with operational earnings.
Based on Tether’s reserve report as of March 31, 2025, 79% of its reserve assets are invested directly or indirectly in U.S. Treasurys, with 69% in Treasury bills. The U.S.-based Circle holds 12% of its reserve asset in cash, 45% in Treasury bills and 43% in repurchase agreements (repos), based on its May 20 disclosure.
While neither of these two issuers pays any interest to stablecoin holders directly, some of the intermediaries like the crypto trading platforms do pay interest to customers who store their USDT and USDC holdings with the respective platforms. In the case of USDC for example, its issuer Circle pays out 60% of its earnings as distribution and transaction costs to trading platforms and potentially other intermediaries. Despite legislative attempts to restrict these new instruments to mainly serve as a medium of exchange, this option to earn a return from holding these instruments at certain intermediaries renders them as a store of value.
Treasury market effects from stablecoin growth forecasts
As of May 31, 2025, total outstanding U.S. Treasurys include $6 trillion in bills, $14.9 trillion in notes and $5 trillion in bonds. Primary market issuance of Treasury bills was over $400 billion a week in the first quarter of 2025.
Collectively, the two largest stablecoin issuers hold about $130 billion U.S. Treasury bills directly and indirectly (through MMFs), around 2% of the total outstanding. There is a growing view that an additional $2 trillion demand for U.S. Treasury debt would “juice up demand” and help lower interest rates and hence borrowing costs for the U.S. Treasury, all else equal. How much lower, however, would depend on the willingness of current investors to switch into closely related investments and the effectiveness of the interest rates on bank reserves and rates on the Fed’s reverse repo operations. The Fed’s borrowing programs are likely to limit the potential for stablecoin demand to significantly lower Treasury bill interest rates.
The Genius Act requires stablecoin issuers’ holdings of U.S. Treasuries to be with a remaining maturity of 93 days or less. Hence the new demand for U.S. Treasuries from payment stablecoins would be for shorter-dated maturities, and more likely to compress the yield on 4-week, 6-week, 8-week and 13-week Treasury bills. Recent yields on 4-week and 8-week Treasury bills have been near the Federal Reserve’s overnight reverse repo rate. If bill rates fall relative to the Fed’s target range, MMFs and other investors may shift holdings (including the stablecoin asset managers) from the short-term Treasury bills to the repo market. This shift would offset some of the increased demand from stablecoin growth.
Effects on banks’ cost of funds
As stablecoins emerge as a new medium of exchange and as a store of value, retail and wholesale investors may naturally rebalance their portfolios depending on the emerging use cases and their assessment of stablecoins’ risk and return relative to traditional assets. This relocation could lead to a meaningful shift of funds out of the banking system and into payment stablecoins, and hence the expectation of an exponential growth from the current $236 billion to $ 2 trillion. This disintermediation on traditional banks hinges on:
- Customer behavior: will inflows primarily come from dollar deposits, MMF holdings or other assets into stablecoins?
- Stablecoin reserve composition: where do stablecoin issuers allocate their reserve assets; more specifically, how much is held in bank deposits?
The size and source of inflows into payment stablecoins will be determined by customer behavior in response to payment use cases and potential returns offered by various intermediaries. There could be differences in returns offered by MMFs and stablecoin intermediaries and hence outflows from MMFs to stablecoins. But for the purposes of this exercise and simplicity, we assume that the primary source of inflows will be bank deposits.
The latest version of the Genius Act does not mandate stablecoin issuers to hold at least a certain percentage of reserves in bank deposits, although bank deposits are eligible reserve assets. In addition, among the rulemakings mandated by the Genius Act is one on reserve asset diversification that may require a minimum portion of reserves be held in bank deposits. As a reference, under EU’s Markets in Crypto-Assets, or MiCA, regulation, at least 30% of reserves must be held in deposits with depository institutions and 60% for significant issuers. Currently, Tether only has 0.04% of its reserve asset in cash and bank deposits, while Circle has 12% of its reserves held in cash and bank deposits. The two largest stablecoin issuers hold around $7.2 billion in cash and bank deposits, equivalent to 3.4% of their total issuance.
Based on Q1 2025 data, U.S. banks’ average cost of funds is 2.03%. Core deposits, including non-interest-bearing checking accounts, savings accounts and money market accounts, are a low-cost and stable source of funding for banks, comprising about 70% of U.S. commercial banks’ total funding. Assuming an average cost of 1% for core deposits, this implies that the average funding cost for other sources is approximately 4.3%.
If investors migrate to stablecoins, core deposits would be the most vulnerable funding source for banks to lose, forcing banks to higher-cost alternatives, including brokered deposits, FHLB advances, repo, overnight interbank lending or issuance of long-term debt.
If 10% of core deposits were to shift into stablecoins and be replaced by funding from other sources, their average funding cost would rise to 2.27%, with everything else equal. This represents a 24 basis point increase.
A $2 trillion move into stablecoin issuers’ reserve accounts, based on current stablecoin asset allocations, would mean that only $68 billion returns to banks as stablecoin issuers’ deposits, with a net loss of $1.932 trillion of deposits. As of the end of March 2025, U.S. banks had $19.21 trillion in deposits. So roughly 10% of bank deposits could be expected to flow into payment stablecoins.
While extreme, such a scenario underscores the risk that banks face. Under this assumption, banks’ average cost of funds is estimated to increase by 20 to 30 basis points (see the sidebar above for details on the calculation). A 10% loss of bank deposits would directly reduce credit extension by the banking industry. As banks would be forced to source funding from more expensive sources, this in turn would raise their lending rate, which in turn would hurt all their borrowers, households and businesses around the country.
As widely recognized in policy discussion, stablecoin-driven demand for Treasuries may lower the federal government’s borrowing costs. But this comes with a critical trade-off: reduced access to credit for households and businesses as banks lose low-cost deposits and therefore face rising funding costs. Over time, this could slow economic activity and weaken smaller banks that anchor local communities. As stablecoin regulation advances, policymakers must weigh short-term fiscal gains against the long-term health of the real economy.
Jeff Huther is an economist. He recently retired as VP for banking and economic research in ABA’s Office of the Chief Economist. Yikai Wang is a VP for banking and economic research in ABA’s Office of the Chief Economist. For additional research and analysis from the Office of the Chief Economist, please see the OCE website.
