Author: Rashad Ahmed and Iñaki Aldasoro
Translated by: Institute of Financial Technology, Renmin University of China
Introduction
Dollar-backed stablecoins have experienced significant growth and are expected to reshape financial markets. As of March 2025, the total assets under management of cryptocurrencies backed by commitments to exchange at par with the dollar and backed by dollar-denominated assets exceeded $200 billion, surpassing the short-term U.S. securities held by major foreign investors such as China (Figure 1, left). Stablecoin issuers, particularly Tether (USDT) and Circle (USDC), primarily support their tokens through U.S. Treasury bills (T-bills) and money market instruments, making them important participants in the short-term debt market. In fact, in 2024, dollar-backed stablecoins purchased nearly $40 billion in U.S. short-term Treasury bills, comparable in scale to the largest government money market funds in the U.S., and exceeding the purchases of most foreign investors (Figure 1, right). While previous research has mainly focused on the role of stablecoins in cryptocurrency volatility (Griffin and Shams, 2020), their impact on the commercial paper market (Barthelemy et al., 2023), or their systemic risks (Bullmann et al., 2019), their interaction with traditional safe asset markets has not been fully explored.
This paper investigates whether stablecoin flows exert measurable demand pressure on U.S. Treasury yields. We document two key findings. First, stablecoin flows depress short-term Treasury yields, with effects comparable to those of small-scale quantitative easing on long-term yields. In our most stringent specification, we overcome endogeneity issues by using a series of crypto shocks that affect stablecoin flows but do not directly impact Treasury yields. We find that a $3.5 billion inflow of stablecoins (i.e., 2 standard deviations) leads to a decline of approximately 2-2.5 basis points (bps) in the 3-month Treasury yield within 10 days. Second, we decompose the yield impact into issuer-specific contributions, finding that USDT contributes the most to the yield depression, followed by USDC. We discuss the policy implications of these findings for monetary policy transmission, stablecoin reserve transparency, and financial stability.
Our empirical analysis is based on daily data from January 2021 to March 2025. To construct a measure of stablecoin flows, we collected market capitalization data for the six largest dollar-backed stablecoins and aggregated them into a single figure. We then used the 5-day change in total stablecoin market capitalization as a proxy for stablecoin inflows. We collected data on the U.S. Treasury yield curve and cryptocurrency prices (Bitcoin and Ethereum). We chose the 3-month Treasury yield as our outcome variable of interest, as the largest stablecoins have disclosed or publicly stated that this maturity is their preferred investment horizon.
A simple univariate local projection linking changes in the 3-month Treasury yield to 5-day stablecoin flows may be severely affected by endogeneity bias. In fact, estimates from this "naive" specification suggest that a $3.5 billion inflow of stablecoins is associated with a decline of up to 25 basis points in the 3-month Treasury yield within 30 days. This magnitude of effect is incredible, as it suggests that a 2 standard deviation inflow of stablecoins has an impact on short-term rates similar to that of a Federal Reserve policy rate cut. We believe these large estimates can be explained by the presence of endogeneity, which biases the estimates downward (i.e., larger negative estimates relative to the true effect) due to omitted variable bias (as potential confounding factors are not controlled for) and simultaneity bias (as Treasury yields may influence stablecoin flows).
To overcome endogeneity issues, we first extend the local projection specification to control for the U.S. Treasury yield curve and cryptocurrency prices. These control variables are divided into two groups. The first group includes forward changes in Treasury yields for maturities other than the 3-month yield (from t to t+h). We control for the evolution of the forward yield curve to isolate the conditional impact of stablecoin flows on the 3-month yield based on changes in nearby maturity yields within the same local projection horizon. The second group of control variables includes the 5-day changes (from t-5 to t) in Treasury yields and cryptocurrency prices to control for various financial and macroeconomic conditions that may be related to stablecoin flows. After introducing these control variables, local projection estimates indicate that a $3.5 billion inflow of stablecoins leads to a decline in Treasury yields of 2.5 to 5 basis points. These estimates are statistically significant but nearly an order of magnitude smaller than the "naive" estimates. The attenuation of the estimates is consistent with our expectations regarding the sign of endogeneity bias.
In a third specification, we further strengthen identification through an instrumental variable (IV) strategy. Following the approach of Aldasoro et al. (2025), we instrument the 5-day stablecoin flows with a series of crypto shocks based on the unpredictable components of the Bloomberg Galaxy Crypto Index. We use the cumulative sum of the crypto shock series as an instrumental variable to capture the specific but persistent nature of crypto market booms and busts. The first-stage regression of 5-day stablecoin flows on the cumulative crypto shocks satisfies the relevance condition and shows that stablecoins tend to experience significant inflows during crypto market booms. We believe the exclusion restriction is satisfied, as the specific crypto boom is sufficiently isolated and does not have a meaningful impact on Treasury market pricing—unless issuers use the inflows to purchase Treasuries.
Our IV estimates indicate that a $3.5 billion inflow of stablecoins leads to a decline of 2-2.5 basis points in the 3-month Treasury yield. These results are robust to changing the set of control variables by focusing on maturities that are less correlated with the 3-month yield—if anything, the results are slightly stronger in magnitude. In additional analyses, we found no spillover effects of stablecoin purchases on longer maturities such as the 2-year and 5-year yields, although we did find limited spillover effects in the 10-year maturity. In principle, the effects of inflows and outflows may be asymmetric, as the former allows issuers some discretion in timing purchases, while such flexibility is absent during periods of market stress. When we allow the estimates to differ under inflow and outflow conditions, we indeed find that outflows have a quantitatively larger impact on yields than inflows (approximately +6-8 basis points versus -3 basis points, respectively). Finally, based on our IV strategy and baseline specifications, we also decompose the estimated yield impact of stablecoin flows into issuer-specific contributions. We find that the average contribution of USDT flows is the largest, at about 70%, while the contribution of USDC flows to the estimated yield impact is about 19%. Other stablecoin issuers contribute the remaining portion (approximately 11%). These contributions are qualitatively proportional to the size of the issuers.
Our findings have important policy implications, especially if the stablecoin market continues to grow. Regarding monetary policy, our yield impact estimates suggest that if the stablecoin industry continues to grow rapidly, it may ultimately affect the transmission of monetary policy to Treasury yields. The increasing influence of stablecoins in the Treasury market may also lead to a scarcity of safe assets for non-bank financial institutions, potentially affecting liquidity premiums. Regarding stablecoin regulation, our results highlight the importance of transparent reserve disclosures to effectively monitor concentrated stablecoin reserve portfolios.
As stablecoins become large investors in the Treasury market, potential financial stability implications may arise. On one hand, it exposes the market to the risk of sell-offs that may occur during a run on major stablecoins. In fact, our estimates suggest that this asymmetric effect is already measurable. The magnitude of our estimates may represent a lower bound for potential sell-off effects, as they are based on a sample primarily from a growth market, thus potentially underestimating the potential for nonlinear effects under severe stress. Additionally, stablecoins themselves may facilitate arbitrage strategies, such as Treasury basis trading, through investments supported by Treasury collateralized reverse repurchase agreements, which is a primary concern for regulators. Equity and liquidity buffers may mitigate some of these financial stability risks.
Data and Methodology
Our analysis is based on daily data from January 2021 to March 2025. First, we collected market capitalization data for six dollar-backed stablecoins from CoinMarketCap: USDT, USDC, TUSD, BUSD, FDUSD, and PYUSD. We aggregated the data for these stablecoins to obtain a measure of total stablecoin market capitalization, and then calculated its 5-day change. We collected daily prices for Bitcoin and Ethereum, the two largest cryptocurrencies, from Yahoo Finance. We obtained daily series for the U.S. Treasury yield curve from FRED. We considered the following maturities: 1 month, 3 months, 6 months, 1 year, 2 years, and 10 years.
As part of our identification strategy, we also used a daily version of the crypto shock series proposed by Aldasoro et al. (2025). Crypto shocks are calculated as the unpredictable components of the Bloomberg Galaxy Crypto Index (BGCI), which captures broad dynamics in the crypto market (we will provide more details on crypto shocks below).
Figure 2 shows the market capitalization of dollar-backed stablecoins and U.S. Treasury yields during the sample period. Since the second half of 2023, the market capitalization of stablecoins has been rising, with significant growth at the beginning and end of 2024. The industry is highly concentrated, with the two largest stablecoins (USDT and USDC) accounting for over 95% of the outstanding amount. The Treasury yields in our sample cover both the rate hike cycle and the subsequent pause and easing cycle that began around mid-2024. The sample period also includes a notable period of curve inversion, most prominently illustrated by the deep blue line moving from the bottom to the top of the yield curve.
Conclusion and Implications
Scale. The estimated yield impact of 2 to 2.5 basis points comes from a $3.5 billion (or 2 standard deviations) inflow of stablecoins, with the industry size estimated to be around $200 billion by the end of 2024. As the stablecoin industry continues to grow, it is not unreasonable to expect its footprint in the Treasury market to increase. Assuming the stablecoin industry grows tenfold to $2 trillion by 2028, the difference in 5-day flows would increase proportionally. Then, a 2 standard deviation flow would reach approximately $11 billion, with an estimated impact on Treasury yields of -6.28 to -7.85 basis points. These estimates suggest that the continuously growing stablecoin industry may ultimately suppress short-term yields, thereby fully affecting the transmission of Federal Reserve monetary policy to market yields.
Mechanism. Stablecoins can influence Treasury market pricing through at least three channels. The first is through direct demand, as the purchase of stablecoins reduces the available supply of cash, as long as the funds flowing into stablecoins do not flow into Treasuries. The second channel is indirect, as the demand for U.S. Treasuries from stablecoins may alleviate dealers' balance sheet constraints. This, in turn, would affect asset prices, as it would reduce the amount of Treasuries that dealers need to absorb. The third channel is through signaling effects, as large inflows may signal institutional risk appetite or lack thereof, which investors then incorporate into the market.
Policy Implications. Policies surrounding reserve transparency will interact with the growing footprint of stablecoins in the Treasury market. For example, the granular reserve disclosures of USDC enhance market predictability, while the opacity of USDT complicates analysis. Regulatory requirements for standardized reporting could mitigate the systemic risks associated with concentrated ownership of Treasuries by making some of these flows more transparent and predictable. Although the stablecoin market remains relatively small, stablecoin issuers are already significant participants in the Treasury market, and our findings suggest that yields have already been affected to some extent at this early stage.
Monetary policy will also interact with the role of stablecoins as investors in the Treasury market. For instance, in the case where stablecoins become very large, yield compression driven by stablecoins could weaken the Federal Reserve's control over short-term interest rates, potentially necessitating coordination among regulators to effectively influence financial conditions. This perspective is not merely theoretical— for example, the "green dilemma" of the early 21st century stemmed from the Federal Reserve's monetary policy not having the expected impact on long-term Treasury yields. At that time, this was primarily due to the enormous demand from foreign investors affecting the pricing of U.S. Treasuries.
Finally, the entry of stablecoins as investors in the Treasury market has clear implications for financial stability. As discussed in the literature on stablecoins, they can still operate, with their balance sheets affected by liquidity and interest rate risks, as well as some credit risks. Therefore, if a major stablecoin faces severe redemption pressure, particularly considering the lack of access to discount windows or a lender of last resort, the concentrated positions in Treasuries could expose the market to sell-off risks, especially for those Treasuries that do not mature immediately. The evidence we provide regarding asymmetric effects suggests that the impact of stablecoins on the Treasury market may be greater in environments characterized by large-scale and abrupt outflows. In this regard, the magnitude suggested by our estimates may represent a lower bound, as they are derived from a sample primarily consisting of a growing market. As the stablecoin industry expands, this situation may change, exacerbating concerns about the stability of the Treasury market.
Limitations. Our analysis provides some preliminary evidence of the emerging footprint of stablecoins in the Treasury market. However, our results should be interpreted with caution. First, we face data constraints in our analysis due to incomplete maturity disclosures of the USDT reserve portfolio, complicating identification. Therefore, we must assume which Treasury maturities are most likely to be affected by stablecoin flows. Second, we control for financial market volatility by including the returns of Bitcoin and Ethereum, as well as yield changes across various Treasury maturities. However, these variables may not fully capture the risk sentiment and macroeconomic conditions that jointly influence stablecoin flows and Treasury yields. We attempted to address this issue through an instrumental variable strategy, but we recognize that our instruments may themselves be limited, including mis-specifications in our local project model. Additionally, due to data limitations and the high concentration of the stablecoin industry, our estimates rely almost entirely on time series variations, as the cross-section is too limited to be utilized in any meaningful way.
In summary, stablecoins have become important participants in the Treasury market, exerting measurable and significant impacts on short-term yields. Their growth blurs the lines between cryptocurrency and traditional finance, prompting regulators to focus on reserve practices, potential impacts on monetary policy transmission, and financial stability risks. Future research could explore cross-border spillover effects and interactions with money market funds, particularly during liquidity crises.
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