Stablecoins Could Be the Next Domino to Fall—And Take US Treasuries With Them

Forget meme coins and NFT apes—the real crypto time bomb might be hiding in plain sight. The $160B stablecoin market has become the shadow banking system Wall Street won’t admit it needs. And those ‘risk-free’ Treasury bonds backing them? Not so bulletproof when redemption requests hit.

How Stablecoins Became the Fed’s Unwanted Stepchild

Tether and friends now hold more Treasuries than most sovereign wealth funds. Every algorithmic ‘peg defender’ is just a liquidity crisis waiting to happen—as if 2008 taught us nothing. The SEC’s been too busy chasing celebrity crypto endorsements to notice the systemic risk brewing in their own backyard.

The Coming Liquidity Squeeze

When stablecoin redemptions spike (not if), the Treasury market will learn what crypto natives already know: ‘liquidity’ disappears faster than a Sam Bankman-Fried alibi. Pension funds might want to check if their ‘safe’ bonds are being used as collateral for 100x leverage on some offshore exchange.

Bonus jab: Nothing says ‘financial innovation’ like recreating the 19th century free banking era—but with more Twitter trolls and less gold.

Market and regulatory conditions are setting up for stablecoins

According to Messari’s report, Tether currently has the most asset networks as well as the highest number of spot markets, followed by Circle’s USDC, then USDS.

Of course, the stablecoin market is not frictionless and inefficiencies still come up. However, even with those issues, cross-border payment volume is expected to surpass $320 trillion by 2032, which means that any improvements in terms of reducing costs by even a single basis point could be a multi-billion-dollar opportunity.

The report also touched on how stablecoins affect the payments landscape, where they are said to have a large total addressable market (TAM). For example, they can replace services of card networks and eliminate the need for inefficient mediums like cash and legacy ACH.

Already, e-commerce platforms like Shopify have simplified access to stablecoins for merchants, thanks to partnerships with Coinbase and Stripe, which allow merchants to receive USDC as payment from global customers on Base.

If more businesses take the approach, they stand to benefit from faster settlement times. According to PYMNTS, ¾ of small firms say a mere two-day lag in settlement times can visibly disrupt operations and cash flow, but stablecoins eliminate the issue.

Aside from the use case stablecoins have demonstrated in the e-commerce sector, Messari highlighted in its report another reason stablecoins are becoming more popular: they give people from countries enduring high inflation or conflict access to the dollar as a hedge.

The stablecoin market may pose a risk to US Treasuries

As stablecoins continue their advance toward mainstream adoption, some commentators have expressed concern for segments of the US Treasury markets. Notably, they say securities with short-term maturities could be vulnerable to volatility as they become more closely tied to the cryptocurrency world.

Some worry that a larger footprint for a relatively new and more volatile industry could trigger volatility in the US bills market.

Cristiano Ventricelli, vice president and senior analyst of digital assets at Moody’s Ratings, said: “In the event of a sudden loss of confidence, regulatory pressure, or market rumors, this could trigger large-scale liquidations, potentially depressing Treasury prices and disrupting fixed-income markets.”

The Treasury Borrowing Advisory Committee shares a similar sentiment and said in a study from April that growth of the stablecoin market at the expense of bank deposits could reduce banks’ demand for US Treasuries, as well as impact credit growth.

For now, the existing issues with stablecoins are not large enough to cause systemic problems. In the meantime, they are significant enough to be disrupting the payment markets already, with further near-term improvements expected, spurred by widespread adoption and regulation.

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