Now, there is an increasing voice that 'stablecoins are the future of crypto assets.'
Such as officials from the U.S. Treasury, and possibly even central bankers.
But what exactly are stablecoins? Why are they so important? What problems do they solve for investors and the U.S. Treasury?
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In plain language, stablecoins
In simple terms, stablecoins are digital assets (crypto assets) designed to maintain stable value.
How to achieve this?
By pegging their price to a reference asset, such as a fiat currency, gold, or even a basket of assets.
The goal of stablecoin issuers is to combine the trading advantages of cryptocurrencies — fast settlement, programmability, global accessibility — with the 'price stability' of fiat currencies.
Before we dive deeper, let's take a look at several types of stablecoins available in the market:
Fiat-pegged stablecoins: The goal is to maintain a 1:1 peg with a national currency (such as the U.S. dollar), commonly represented by USDT (Tether) and USDC (USD Coin).
Commodity-backed stablecoins: Pegged to physical assets, such as gold (e.g., PAXG, backed by physical gold reserves).
Crypto asset collateralized stablecoins: Backed by volatile cryptocurrencies as collateral and addressing price fluctuations through over-collateralization.
Algorithmic stablecoins: Maintain price pegs through supply and demand algorithms rather than actual physical reserves. (For example, TerraUSD (UST), which suffered a disastrous failure in 2022, is a typical case of an algorithmic stablecoin failure.)
Today, we will focus on dollar-pegged stablecoins and the initiatives surrounding them from the U.S. Treasury and federal regulators.
Dollar-pegged stablecoins are primarily used on crypto trading platforms and within the crypto ecosystem as digital cash. They play a crucial role in trading, lending, decentralized finance (DeFi) applications, and cross-border payments.
Stablecoins like USDT and USDC are used by traders to transfer funds between exchanges or temporarily hold assets during market uncertainty.
Unlike traditional banks, which are limited by operating hours, liquidity constraints, and regulatory challenges, dollar stablecoins offer real-time settlement, global accessibility, and integration with smart contracts.
This makes them virtually indispensable in the 24/7 open cryptocurrency market.
But how reliable are they?
This raises the issue of auditing, which is used to verify the underlying assets of stablecoins.
Circle publicly disclosed proof documents confirming that each USDC token is backed 1:1 by liquid dollar assets, including cash and short-term U.S. Treasury bonds. USDC is audited monthly by Grant Thornton LLP, making its transparency in the stablecoin space the gold standard.
Tether (USDT) has faced criticism for its lack of transparency and contradictory information in the past. Although it now publishes quarterly proofs and promises comprehensive audits, its reserves include less liquid assets, such as commercial paper. In 2021, Tether was fined $41 million by the Commodity Futures Trading Commission (CFTC) for falsely representing its reserves. Nevertheless, USDT remains the largest stablecoin by trading volume globally, but its reputation risk is slightly higher.
So, what happens when investors become concerned about the underlying assets and stability of stablecoins?
Stablecoins can 'de-peg', meaning they can deviate from the value of the currency to which they are pegged.
For example, when Silicon Valley Bank collapsed, USDC dropped from $1 (pegged to the dollar) to $0.87 as investors worried about USDC's exposure at that bank.
USDC and the collapse of Silicon Valley Bank:
As of early March 2023, Circle had approximately $40 billion in USDC reserves.
Of which $3.3 billion (approximately 8.25%) was held in cash deposits at Silicon Valley Bank.
When Silicon Valley Bank collapsed and was taken over by the Federal Deposit Insurance Corporation (FDIC), the market worried that Circle might not be able to access those funds immediately or fully.
This panic caused USDC to temporarily de-peg, falling to $0.87 on some exchanges, until the U.S. government intervened to guarantee Silicon Valley Bank deposits, after which it returned to $1.
For holders, this meant that if you held $100,000 in USDC, its value dipped to just $87,000 until the government intervened to guarantee deposits, and the peg was restored to $1.
Since then, the stablecoin market has continued to thrive, with its importance and scale growing, and the total market cap of USDT and USDC has reached $214 billion.
This has not gone unnoticed. With this growth, the U.S. Treasury now views dollar stablecoins as a strategic extension of U.S. influence.
In short, the Treasury needs stablecoins.
02
Why does the U.S. Treasury need stablecoins?
Simply put, stablecoins can facilitate the global use of the dollar, thereby driving demand for U.S. Treasuries.
Dollar-pegged stablecoins (like USDC and USDT) act as digital versions of the dollar, usable globally with just a smartphone and internet connection.
This extends the dollar's influence into regions without sound banking systems.
In fact, stablecoins serve as permissionless on-chain dollars that enable global users to store value, conduct cross-border transactions, and hedge local currency risk.
This broad demand reinforces the dollar's status as the world's reserve currency.
Circle CEO Jeremy Allaire has stated, 'USDC does a better job than many banks in handling dollars overseas.'
This is good, as it helps the dollar be used globally, even benefiting populations in remote areas without bank accounts.
But how does this help the U.S. Treasury?
The answer is simple.
To maintain a 1:1 peg, stablecoins must be backed by high-quality liquid assets. For most major issuers, this means primarily holding one specific type of security.
That's right, U.S. Treasuries.
According to Tether's May 1 press release: 'Tether... has reached a historic high in total exposure to U.S. Treasury bonds, nearing $120 billion, including indirect exposure through money market funds and reverse repurchase agreements.'
This puts Tether among the holders of U.S. Treasuries:
In fact, Tether holds more Treasury bonds than Germany and the UAE. How did they reach this scale so quickly?
Last year, Tether was one of the top ten buyers of U.S. Treasuries, increasing its holdings by $33.1 billion, becoming the seventh largest net buyer, just behind the UK and ahead of Canada.
Don't forget USDC. While its market cap is smaller, USDC reports that over 75% of its reserves are invested in U.S. government debt with maturities of three months or less (short-term Treasuries), with the remainder held in cash at major banks.
The combined demand of these issuers is now comparable to that of some mid-sized sovereign nations.
In a world of rising deficits and increased Treasury issuance, this demand is a welcome 'lifeline' for Washington.
This new demand for Treasury bonds from non-sovereign entities is reshaping the traditional debt market:
Stablecoin reserves act as yield-seeking balance sheets, tending to invest in safe assets like short-term Treasuries.
Unlike traditional banks, these issuers are not bound by Basel capital requirements or deposit insurance rules, which limit the scale of their balance sheets.
For example, Tether reported a net profit of over $13 billion in 2024, primarily from interest on its Treasury bond portfolio (while the company has only about 100 employees).
While this demand is critical for the U.S. Treasury, which sells large amounts of debt, it also brings concentrated risks and raises questions about transparency, redemption processes, and systemic risks.
We have seen this in the USDC and Silicon Valley Bank incidents, where the peg quickly recovered after federal intervention, but the event showed that confidence can evaporate rapidly.
If a redemption run occurs for USDT or USDC, it could force hundreds of billions of dollars in Treasuries to be liquidated quickly. This would ripple through the global repo market and short-term financing instruments.
Therefore, regulators — from the Treasury to the Financial Stability Oversight Council — view stablecoins not just as technological and financial innovations but as emerging systemically important institutions.
By anchoring to U.S. Treasuries, stablecoins have become buyers and amplifiers of the dollar's dominance. In the process, they... uh, bind the full power of U.S. fiscal and regulatory authority.
This brings us to the (GENIUS Act).
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(GENIUS Act) Washington joins the discussion
Recognizing that stablecoins are no longer a fringe crypto concept but a major player in global liquidity and debt markets, policymakers have intervened with what they call 'responsible innovation.'
This is the (GENIUS Act).
The full name of the bill is the 'Guiding and Ensuring National Innovation for US Stablecoins Act,' proposed by Senators Bill Hagerty (Republican-Tennessee) and Kirsten Gillibrand (Democrat-New York), as a bipartisan legislative proposal.
Some key provisions of the bill:
Federal licensing: Issuers with circulating volumes over $10 billion must obtain federal licenses and be regulated.
Full reserve backing: Stablecoins must be backed 1:1 by high-quality liquid assets (such as U.S. Treasury bonds and cash).
Mandatory auditing: Issuers must undergo independent audits regularly and disclose reserve data (Tether, you need to pay attention).
Dual-track regulation: Smaller issuers with volumes under $10 billion can operate under state-level regulation, maintaining openness in the ecosystem for startups.
CBDC alternative: The bill explicitly supports private sector dollar stablecoins as an alternative to central bank digital currencies (CBDCs).
What is the current legislative progress of the bill?
(GENIUS Act) passed the U.S. Senate last week (May 19) with a bipartisan vote of 66 to 32. But of course, not everyone is supportive.
Senator Elizabeth Warren has become one of the bill's most vocal and strident critics, warning that the (GENIUS Act) may lack sufficient consumer protections and could overly benefit private crypto interests.
Warren has long argued that if the U.S. is to issue a digital dollar, it should be issued and controlled by the public sector, possibly in the form of a central bank digital currency (CBDC), in order to better ensure consumer protections, financial stability, and minimize environmental impact.
However, CBDCs give governments and banks absolute monitoring and control over every penny of yours, down to every transaction.
They even have the ability to refuse any or all transactions and freeze or seize all your funds.
In any case, I believe that CBDCs are unlikely to be created and used in the U.S. in the short term.
Back to the (GENIUS Act).
The bill will next be submitted to the House for consideration, and while it received strong bipartisan support in the Senate, its path in the House appears more complex.
Some House Republicans proposed competing versions of stablecoin legislation, with key disagreements over state regulatory authority, the role of the Federal Reserve, and the allocation of control between federal and state agencies.
Meanwhile, some House Democrats agree with Senator Warren that the bill may favor crypto insiders and lacks the consumer protections needed to prevent abuse or systemic risks.
Thus, although the (GENIUS Act) momentum is strong, it is far from a done deal. More debate, negotiation, and possible amendments are expected before it reaches the president's desk.
Washington is essentially saying: Well, stablecoins have established themselves — we urgently need them to support future unlimited U.S. Treasury issuance — but we will ensure they are safe, sound, and structured.
04
Summary
In any case, I also believe that stablecoins will exist in the long term, and the (GENIUS Act) will eventually be signed into law, providing structure for stablecoins — which will further solidify their position among U.S. Treasury holders.
I expect that soon, USDT and/or USDC will top that list. The largest holders of U.S. Treasuries in the world.
