Author: Rashad Ahmed and Iñaki Aldasoro Compiled by: Institute of Financial Technology, Renmin University of China Dollar-backed stablecoins have experienced significant growth and are poised to reshape financial markets. As of March 2025, the total assets under management of these cryptocurrencies, which promise to be redeemable at par with U.S. dollars and backed by dollar-denominated assets, exceeded $200 billion, exceeding the short-term U.S. securities held by major foreign investors such as China (Figure 1, left panel). Stablecoin issuers, especially Tether (USDT) and Circle (USDC), mainly back their tokens through U.S. Treasury bills (T-bills) and money market instruments, making them important players in short-term debt markets. In fact, dollar-backed stablecoins purchased nearly $40 billion of U.S. Treasury bills in 2024, comparable in size to the largest U.S. government money market fund and exceeding purchases by most foreign investors (Figure 1, right panel). Although previous research has 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 remains underexplored. 
This paper examines 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 an effect comparable to the effect of a small-scale quantitative easing on long-term yields. In our most stringent specification, which overcomes endogeneity concerns using a range of crypto shocks that affect stablecoin flows but not directly affect Treasury yields, we find that $3.5 billion of 5-day stablecoin inflows (i.e., 2 standard deviations) lowers the 3-month Treasury yield by about 2-2.5 basis points (bps) over 10 days. Second, we decompose the yield effect into issuer-specific contributions and find that USDT contributes the most to the depressing of Treasury yields, 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 collect data on the market capitalization of the six largest USD-backed stablecoins and aggregate them into a single number. We then use the 5-day change in the total stablecoin market capitalization as a proxy for stablecoin inflows. We collect data on the U.S. Treasury yield curve as well as cryptocurrency prices (Bitcoin and Ethereum). We choose the 3-month Treasury yield as our outcome variable of interest because the largest stablecoins have disclosed or publicly stated this tenor as their preferred investment tenor. A simple univariate local projection linking changes in 3-month Treasury yields to 5-day stablecoin flows can be subject to significant endogeneity bias. Indeed, estimates from this “naive” specification suggest that $3.5 billion of stablecoin inflows are associated with a drop in 3-month Treasury yields by as much as 25 basis points over a 30-day period. The magnitude of this effect is incredibly large, as it suggests that 2 standard deviations of stablecoin inflows have a similar effect on short-term rates as a cut in the Fed’s policy rate. We argue that these large estimates can be explained by the presence of endogeneity that biases the estimates downward (i.e., more negative estimates relative to the true effect) due to omitted variable bias (because potential confounders are not controlled for) and simultaneity bias (because Treasury yields can affect stablecoin flows). To overcome the endogeneity problem, we first extend the local projection specification to control for the U.S. Treasury yield curve as well as cryptoasset prices. These control variables are divided into two groups. The first group includes the forward changes in U.S. Treasury yields of maturities other than 3 months (from t to t+h). We control for the evolution of the forward Treasury yield curve to isolate the conditional effect of stablecoin flows on the 3-month yield based on the changes in yields of neighboring maturities within the same local projection period. The second group of control variables includes 5-day changes in Treasury yields and cryptoasset prices (from t-5 to t) to control for various financial and macroeconomic conditions that may be associated with stablecoin flows. After introducing these control variables, the local projection estimates that the Treasury yield falls by 2.5 to 5 basis points after $3.5 billion of stablecoin inflows. These estimates are statistically significant but nearly an order of magnitude smaller than the “naive” estimates. The decay in the estimates is consistent with our expectations for the sign of the endogeneity bias. In the third specification, we further strengthen identification via an instrumental variable (IV) strategy. Following the approach of Aldasoro et al. (2025), we instrument 5-day stablecoin flows with a series of crypto shocks constructed based on the unpredictable component of the Bloomberg Galaxy Crypto Index. We use the cumulative sum of the crypto shock series as an instrumental variable to capture the idiosyncratic but persistent nature of crypto market booms and busts. A first-stage regression of 5-day stablecoin flows on cumulative crypto shocks satisfies the correlation condition and shows that stablecoins tend to have significant inflows during crypto market booms. We argue that the exclusion restriction is satisfied because the idiosyncratic crypto boom is sufficiently isolated to have no meaningful impact on Treasury market pricing—unless, through stablecoin inflows, issuers use these funds to purchase Treasury bonds. Our IV estimates suggest that $3.5 billion of stablecoin inflows would reduce the 3-month Treasury yield by 2-2.5 bps. These results are robust to changing the set of control variables by focusing on maturities with lower correlations with the 3-month yield—if anything, the results are quantitatively slightly stronger. In additional analyses, we do not find spillovers from stablecoin purchases to longer maturities such as 2-year and 5-year maturities, although we do find limited spillovers to the 10-year maturity. In principle, the effects of inflows and outflows could be asymmetric, as the former allow issuers some discretion in the timing of purchases, while such flexibility does not exist when market conditions are tight. When we allow the estimates to differ conditional on inflows and outflows, we indeed find that outflows have a larger quantitative impact on yields than inflows (+6-8 bps vs. -3 bps, respectively). Finally, based on our IV strategy and baseline specification, we also decompose the estimated yield impact of stablecoin flows into issuer-specific contributions. We find that USDT flows have the largest average contribution, about 70%, while USDC flows contribute about 19% to the estimated yield impact. Other stablecoin issuers contributed the rest (about 11%). These contributions are qualitatively proportional to the size of the issuer. Our findings have important implications for policy, especially if the stablecoin market continues to grow. With respect to monetary policy, our yield impact estimates suggest that if the stablecoin industry continues to grow rapidly, it could eventually affect the transmission of monetary policy to Treasury yields. The growing influence of stablecoins in the Treasury market could also lead to a scarcity of safe assets for non-bank financial institutions, which could affect liquidity premia. With respect to stablecoin regulation, our results highlight the importance of transparent reserve disclosures in order to effectively monitor concentrated stablecoin reserve portfolios. There are potential financial stability implications when stablecoins become large investors in Treasury markets. On the one hand, it exposes markets to the risk of a sell-off that could occur in the event of a run on a major stablecoin. In fact, our estimates suggest that this asymmetric effect is already measurable. The magnitude of our estimates is likely a lower bound on the potential sell-off effect, as they are based on a sample based primarily on growth markets and thus may underestimate the potential for nonlinear effects under severe stress. In addition, stablecoins themselves, through investments such as reverse repurchase agreements backed by Treasury collateral, may facilitate arbitrage strategies such as Treasury basis trades, which are of primary concern to regulators. Equity and liquidity buffers may mitigate some of these financial stability risks. Our analysis is based on daily data from January 2021 to March 2025. First, we collected market capitalization data for six USD-backed stablecoins from CoinMarketCap: USDT, USDC, TUSD, BUSD, FDUSD, and PYUSD. We aggregated the data for these stablecoins to obtain a measure of the total stablecoin market capitalization and then calculated its 5-day change. We collected daily prices of the two largest cryptocurrencies, Bitcoin and Ethereum, from Yahoo Finance. We obtained the daily series of the US 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 use a daily version of the crypto shock series proposed by Aldasoro et al. (2025). Crypto shocks are calculated as the unpredictable component of the Bloomberg Galaxy Crypto Index (BGCI), which captures broad crypto market dynamics (we provide more details on crypto shocks below). Figure 2 shows the market capitalization of USD-backed stablecoins and U.S. Treasury yields over the sample period. Stablecoin market capitalization has been rising since the second half of 2023, with significant increases in early and late 2024. The sector is highly concentrated. The two largest stablecoins (USDT and USDC) account for more than 95% of outstanding amounts. Treasury yields in our sample cover both the rate hike cycle and the pause and subsequent easing cycle that began around mid-2024. The sample period also includes a period of significant curve inversion, most notably the dark blue line moving from the bottom to the top of the yield curve. Conclusion and Implications
Size. An estimated 2 to 2.5 basis points yield impact comes from $3.5 billion (or 2 standard deviations) of stablecoin inflows, with the industry size being 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 as well. Assume that the stablecoin industry grows 10x to $2 trillion by 2028, with the difference in 5-day flows increasing proportionally. Then, 2 standard deviation flows would amount to around $11 billion, with an estimated impact on Treasury yields of -6.28 to 7.85 basis points. These estimates suggest that a growing stablecoin industry could eventually suppress short-term yields, completely impacting the transmission of the Fed’s monetary policy to market yields. Mechanisms. There are at least three channels through which stablecoins can affect pricing in the Treasury market. The first is through direct demand, as stablecoin purchases reduce the available supply of paper money, as long as inflows into stablecoins do not flow into Treasuries. The second channel is indirect, as stablecoin demand for Treasuries may ease dealers' balance sheet constraints. This in turn could affect asset prices because it would reduce the supply of Treasuries that dealers need to absorb. The third channel is through signaling effects, as large inflows could serve as a signal of institutional risk appetite, or lack thereof, which investors then factor into the market. Policy Implications. Policies around reserve transparency will interact with the growing footprint of stablecoins in Treasury markets. For example, USDC’s granular reserve disclosure improves market predictability, while USDT’s opacity complicates analysis. Regulatory requirements for standardized reporting could mitigate the systemic risks posed by concentrated ownership of Treasury bonds by making some of these flows more transparent and predictable. While the stablecoin market is still relatively small, stablecoin issuers are already a meaningful player in Treasury markets, and our findings suggest that there is already some impact on yields at this early stage. Monetary policy will also interact with the role of stablecoins as investors in Treasury markets. For example, in the case of stablecoins becoming very large, stablecoin-driven yield compression could undermine the Fed’s control over short-term interest rates, which may require coordinated monetary policy among regulators to effectively influence financial conditions. This view is not merely theoretical—for example, the “green dilemma” of the early 2000s stemmed from the Fed’s monetary policy not having the expected impact on long-term Treasury yields. At the time, this was largely due to the huge demand for U.S. Treasuries from foreign investors that affected pricing in the Treasury market.
Finally, the emergence of stablecoins as investors in Treasury markets has clear implications for financial stability. As discussed in the literature on stablecoins, they can still operate with balance sheets subject to liquidity and interest rate risk, as well as some credit risk. Therefore, if a major stablecoin were to face severe redemption pressures, concentrated positions in Treasury securities could expose the market to sell-offs, especially for those that do not mature immediately, especially given the lack of access to a discount window or lender of last resort. The evidence we provide on asymmetric effects suggests that the impact of stablecoins on Treasury markets could be larger in an environment characterized by large and sharp outflows. In this regard, the magnitude suggested by our estimates is likely a lower bound, as they are obtained based on a sample that primarily includes growing markets . This situation could change as the stablecoin industry grows, exacerbating concerns about the stability of Treasury markets.
Limitations. Our analysis provides some preliminary evidence of an emerging footprint of stablecoins in Treasury markets. However, our results should be interpreted with caution. First, we face data constraints in our analysis because the maturity disclosure of the USDT reserve portfolio is incomplete, complicating identification. We must therefore make assumptions about which Treasury maturities are most likely to be affected by stablecoin flows. Second, we control for financial market volatility by including returns on Bitcoin and Ether as well as changes in yields across various Treasury maturities. However, these variables may not fully capture risk sentiment and macroeconomic conditions that jointly affect stablecoin flows and Treasury yields. We attempt to address this issue through an instrumental variables strategy, but we realize that our instrumental variables themselves may be subject to limitations, including misspecifications in our local project model. Furthermore, due to data limitations and the high concentration of the stablecoin industry, our estimates rely almost exclusively on time series variation, which is too limited to exploit in any meaningful way.
In summary, stablecoins have become important players in the Treasury market, with a measurable and significant impact on short-term yields. Their growth blurs the line between cryptocurrencies and traditional finance, requiring regulators to pay attention to reserve methods, potential impacts on monetary policy transmission, and financial stability risks. Future research could explore cross-border spillovers and interactions with money market funds, especially during liquidity crises.
