Forward guidance: Growth in stablecoins might reduce the demand for Treasuries

Bill Nelson <Bill.Nelson@BPI.com>

Sent: Thursday, July 31, 2025 7:33 AM

Subject: Forward guidance: Growth in stablecoins might reduce the demand for Treasuries

In late April, the Treasury Borrowing Advisory Council briefed Treasury officials on the state of markets and on two special topics, one of which was how growth in stablecoins would affect the demand for Treasury securities. Unfortunately, the briefing missed half the story. While the TBAC told Treasury that growth in stablecoins would increase the demand for Treasuries, they neglected to account for the reduction in demand for Treasuries caused by the shift out of bank deposits, money funds, and currency. While the TBAC reported that demand would increase by about $900 billion, the offsetting shifts would be considerable, possibly resulting in a net decline in demand of around $100 billion.

The TBAC is a group of market participants from primary dealers and hedge funds that meet with Treasury officials four times a year. The minutes of the April 29 meeting are available here. The TBAC presentation on the effect on the growth in stablecoins and the demand for Treasury securities is available here.

The TBAC member who briefed Treasury Fromofficials projected that the outstanding amount of stablecoins could increase 830 percent by 2028, rising by $1.71 trillion, from $234 billion to $1.94 trillion. The analysis further assumes that $120 billion in Treasury securities currently backing stablecoins would also grow by 830 percent, increasing demand for Treasuries by $876 billion.

However, the analysis does not factor in the outflows from sources that contribute to the growth in stablecoins. To fill that gap, this email presents a rough estimate of the effect of those outflows on the demand for Treasuries.

The outflows likely would come primarily from bank deposits, currency (the majority of which is held abroad), and money market mutual funds. These sources sum to $27.13 trillion, and an outflow of $1.71 trillion would be a 6.3 percent decline.  (Data are from the Federal Reserve Board, the [New York Fed | FFIEC], and the Investment Company Institute. The appendix provides more details on the calculation.)  The institutions funded by these liabilities hold $15.59 trillion in Treasury securities and Treasury reverse repos. A 6.3 percent decline in those holdings would result in a $983 billion decline in the demand for Treasury securities. This assumes the outflow are a pro rata share of each liability type, that the decline in currency is matched dollar-for-dollar by a decline in the Fed’s holdings of Treasuries, and that all bank assets and liabilities maintain their current proportions.

As a result, the net change in demand for Treasury securities from an eight-fold increase in stablecoins would be a decline of $107 billion. As noted in the TBAC presentation, these estimates assume that stablecoins do not pay interest. The presentation notes that the growth could be substantially higher if the stablecoins did pay interest. In that case, the net reduction in the demand for Treasuries could also be substantially higher.

While not the subject of the TBAC analysis, a 6 percent reduction in bank deposits would also cause a similarly sized decline in bank loans to businesses and households. That reduction in credit supply would drive up loan interest rates and reduce GDP. As with the demand for Treasuries, the reduction in credit supply would be greater if stablecoins paid interest.

The omission of half the story did not go unnoticed in the TBAC discussion with Treasury officials. The minutes of the meeting state that “[t]here was robust discussion concerning the potential implications of interest-bearing stablecoins versus non-interest-bearing stablecoins, and the extent to which growth in stablecoins would result in net new demand for Treasury securities rather than a reallocation of demand from banks and money market mutual funds.”

The TBAC continued to discuss the impact of growth in stablecoins on demand for Treasury securities at its July meeting.  Yesterday, in a letter to Secretary Bessent, the committee recognized that outflows from other instruments could offset the projected increase:

As discussed in detail at the previous TBAC meeting, increased stablecoin issuance could create a new source of demand for short-maturity Treasury securities. While this might be offset by a reduction in demand from traditional Treasury investors if stablecoins act as a substitute for deposits, money market funds, or other cash-like instruments, much of the Committee seemed more optimistic about this as a source of new demand for T-bills. Potential impact to bank deposits bears close monitoring.

Appendix: Calculations

This email presents a back-of-the-envelope estimate of the decline in holdings of Treasuries by banks, money funds, and the Federal Reserve that would result if stablecoins grew by $1.71 trillion. I assume that the increase in stablecoins results in a 6.3 percent pro rata decline in bank deposits, investments in taxable money funds, and currency.

Deposits

The data on bank deposits and bank ownership of Treasury securities are from the New York Fed’s “Quarterly Trends for Consolidated U.S. Banking Organizations” (available here). The New York Fed report provides data for 2024Q4 on deposits and Treasury securities held in trading and investment accounts (available-for-sale and held-to-maturity). According to the Federal Reserve Board’s H.8 statistical release (available here), commercial bank deposits and holdings of Treasury securities each grew by less than 1 percent between Dec. 2024 and Mar. 2025, so the year-end data are a reasonable proxy for the data as of the end of March. Total deposits were $17.87 trillion. I use total deposits rather than attempting to parse out how different types of deposits would behave. Treasury security holdings were $6.42 trillion. The data are at the consolidated holding company level and include Treasuries owned by affiliates as well as commercial banks.

I assume that because deposits decline by 6.3 percent, Treasury holdings also decline by 6.3 percent. Banks are largely defined by their deposit franchises; I am assuming all bank assets, liabilities, and capital adjust to maintain their current shares of bank balance sheets.

On the one hand, banks’ investments in Treasuries could decline by less. Deposits equaled 63 percent of bank assets, so if other bank liabilities and capital remained unchanged, bank assets would only decline by 4 percent.

On the other hand, banks’ investments in Treasuries could decline by more. Banks use their AFS investment account portfolios (along with wholesale funding) to manage changes in deposits that are not matched by changes in loans, so the outflow of deposits could affect Treasury holdings disproportionately. For example, most of the deposit inflows experienced during Covid were channeled into investment accounts.

Money market mutual funds

The data on money market mutual funds are from the Investment Company Institute report “Historical Report: Monthly Money Market Fund Portfolio Summary” available here. The data are for institutional and retail prime and government funds. I exclude non-taxable funds. As of March 31, 2025, there was $6.89 trillion invested in the funds, and the funds owned $4.43 trillion in Treasury securities and reverse repos backed by Treasury securities. I assume that the funds’ portfolios, and their investments in Treasuries and Treasury reverse repos, decline by 6.3 percent.

Federal Reserve

The data on currency in circulation are from the Federal Reserve’s H.6 statistical release for March 2025, not seasonally adjusted (available here). We assume that the Fed would reduce its portfolio of Treasury securities dollar-for-dollar to match a decline in currency. The Fed plans to hold primarily Treasury securities in the future, so a decline in currency that occurs over the next 3 years would be matched by a decline in Treasuries.

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Bill Nelson | Chief Economist and Head of Research| Bank Policy Institute | 1.703.340.4542