Article by Ryan Weeks, Bloomberg
Compiled by Saoirse, Foresight News
Just as the U.S. Treasury market most needs external buying support, growth in the stablecoin industry has stalled.
U.S. Treasury Secretary Scott Bessent once envisioned that stablecoin companies could grow into trillion-dollar buyers of U.S. Treasury bonds. However, industry growth has now stalled, just when the market most needs this force to provide support.
The decline in cryptocurrency trading activity has reduced demand for stablecoins, thereby suppressing a potential source of demand for government bonds. Stablecoins are pegged to the value of the U.S. dollar and hold short-term Treasury securities and other highly liquid assets as reserves, primarily serving as a place for traders to hold funds during portfolio adjustments.
USDT, issued by Tether, the world’s largest stablecoin issuer, saw its market size shrink by nearly $3 billion in the first half of this year, dropping to approximately $184 billion, potentially marking its first contraction since the 2022 crypto industry collapse. Circle’s main competitor, USDC, also experienced a similar decline, with its market size falling to around $72 billion, according to company data.
After rapid expansion, the total supply of stablecoins has plateaued.
Note: Monthly supply data for top stablecoins
This situation has at least temporarily undermined the current administration’s view that embracing the crypto industry could expand the demand market for U.S. Treasuries and benefit U.S. fiscal policy.
Bessen earlier stated that by the end of this decade, the stablecoin market could expand tenfold to $3 trillion, creating significant new demand for the current $7 trillion outstanding short-term Treasury securities. The vast majority of stablecoins in circulation are issued by Tether and Circle, both of which have disclosed holding $134 billion and $63 billion in U.S. Treasuries and Treasury-backed repurchase agreements, respectively.
Tether's holdings of U.S. Treasury bills have decreased this year, and its bond portfolio size has placed it among the top twenty holders of U.S. debt.
Note: The weighted average remaining maturity of the treasury bills is less than 90 days.
Recent trends indicate that stablecoin issuers will struggle to alleviate pressure in the U.S. Treasury market in the short term. Persistent inflation and the ongoing expansion of government debt have led investors to demand higher yields as compensation for risk.
Bessenet attempted to curb the rise in long-term interest rates by increasing bond buybacks and relying more heavily on the issuance of short-term Treasury bills—the very instruments primarily purchased by stablecoin issuers. Last Friday, after the previous month’s employment data significantly exceeded expectations, the market became even more confident that the Federal Reserve is likely to initiate a rate hike at its September 16 policy meeting, causing some U.S. Treasury yields to rise further.
Samuel Earl, a strategist at Barclays who tracks the short-term bond market, said investors are not optimistic that stablecoins will become a major market force in the near term. "I never believed stablecoins would achieve the explosive growth that many have claimed they would."
The stagnation in stablecoin growth may be only temporary. Stablecoin activity is closely tied to the fluctuations in cryptocurrency trading, which has significantly declined since the price crash at the end of last year. Although Bitcoin has recently rebounded, it remains far below its October peak last year; other tokens such as Ethereum have also experienced substantial declines.
Carlos Guzman, a research analyst at crypto market maker GSR, believes that the crypto market downturn is the primary driver behind the contraction in stablecoin supply. “We’ve observed a decline in USDT balances on exchanges and outflows of on-chain funds related to the Ethereum ecosystem.”
Stablecoins are seen as a potential growth path when applied to payments, cross-border remittances, and other scenarios. Tether stated that the company is accelerating the deployment of such use cases to offset the impact of sluggish crypto trading. In its follow-up response, the institution said: “The current stagnation in stablecoin growth should not be interpreted as demand for its treasury reaching its peak.”
A Circle spokesperson declined to comment, and the U.S. Department of the Treasury did not respond to requests for comment.
Paymentscan data shows that in July, stablecoin-enabled debit card payments launched by institutions such as RedotPay and EtherFi surpassed $1 billion in transaction volume for the first time. A McKinsey study earlier this year estimated the annual total volume of stablecoin payments at approximately $390 billion, the vast majority of which consists of business-to-business transactions.
However, the booming stablecoin payment business does not necessarily increase the total supply of stablecoins in the short term. Chris Maurice, CEO of stablecoin payment provider Yellow Card, explains that the same token can be reused repeatedly in transactions without the issuer needing to mint new tokens.
"The industry is shifting from speculative uses to payment scenarios," Morris said. "The U.S. government should proactively and strongly support this type of stablecoin payment business."