Stablecoins' mainstream move could shake up US Treasuries

As stablecoins take a step toward becoming mainstream, some segments of the US Treasury market, notably securities with short-term maturities, could be vulnerable to volatility as they become more closely tied to the world of cryptocurrency.

- HANNAH LANG DAVIDE BARBUSCIA

Congress is poised to pass legislation establishing a regulatory framework for stablecoins, expected to help legitimise the dollar-pegged cryptocurrencies that are commonly used by crypto traders to move funds between tokens.

Proponents of the bill argue that clear rules will spur further stablecoin activity, and support a growing sector of buyers of short-term US government debt, or T-bills, that are typically considered cash-equivalent securities. But others worry a larger footprint for a relatively new and more volatile industry could in turn spur volatility in the bills market.

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

"A problem in the stablecoin sector could spill over into broader financial markets, affecting institutions holding similar assets or (that) rely on stablecoin liquidity," he added.

If signed into law, the stablecoin bill would require tokens to be backed by liquid assets — like US dollars and short-term Treasury bills — and monthly disclosures from issuers on the composition of their reserves. That means if stablecoins are expected to grow, issuers will have to purchase more T-bills to back their assets.