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Stablecoin Regulation Could Boost U.S. Treasury Demand by Over $1 Trillion, Says Citigroup
Stablecoin issuers have the potential to become some of the largest holders of U.S. Treasuries by 2030 if the United States establishes a supportive regulatory framework, according to a recent report from Citigroup. The bank estimates that the growth of stablecoins could generate more than $1 trillion in additional demand for U.S. government debt over the next decade.
How Stablecoin Regulation Could Impact Treasury Demand
Citigroup highlights that a clear regulatory framework for stablecoins in the U.S. could significantly increase demand for “dollar risk-free assets” both domestically and internationally. Stablecoin issuers would be required to back their digital currencies with safe, low-risk assets like U.S. Treasuries. This move would ensure the stability of the coins and provide a secure form of collateral.
“Creating a U.S. regulatory framework for stablecoins would support demand for dollar risk-free assets inside and outside the U.S. The stablecoin issuers will have to buy U.S. Treasuries, or comparable low-risk assets, against each stablecoin as a measure of having safe underlying collateral.”
According to Citigroup’s projections, if this regulatory framework is implemented, stablecoin issuers could hold more U.S. Treasuries by 2030 than any single jurisdiction currently does. This shift would position stablecoin issuers among the largest holders of U.S. government debt globally.
Key Projections on U.S. Treasury Holdings
The report outlines a scenario in which stablecoin issuers could rank as top holders of U.S. Treasuries, surpassing other jurisdictions in terms of volume. This growth would not only benefit the stablecoin ecosystem but also bolster demand for U.S. government-backed assets, providing additional liquidity to the market.
Risks and Challenges in Stablecoin Growth
Despite the promising outlook, Citigroup’s analysts caution against potential risks associated with stablecoin adoption. One significant concern is the “run-risk” inherent in stablecoins. The failure of a major issuer could lead to a contagion effect, destabilizing the broader financial ecosystem. In 2023 alone, stablecoins de-pegged approximately 1,900 times, with around 600 instances involving large-cap stablecoins.
Geopolitical risks also pose challenges to global stablecoin adoption. Citigroup warns that stablecoins may be perceived as instruments of U.S. dollar hegemony by policymakers in other regions, potentially hindering adoption. Countries like China and members of the European Union are likely to prioritize the development of central bank digital currencies (CBDCs) or stablecoins denominated in their own currencies.
“Policymakers in China and Europe will be keen to promote central bank digital currencies or stablecoins issued in their own currency,” Citigroup noted.
What This Means for Investors
For investors and enthusiasts in the cryptocurrency space, the potential regulation of stablecoins represents both opportunities and challenges. Here are some key takeaways:
- Increased Market Stability: A regulatory framework could enhance the stability of stablecoins, making them more attractive for both retail and institutional investors.
- Higher Demand for U.S. Treasuries: The potential $1 trillion increase in Treasury demand could impact bond markets, offering new opportunities for investors.
- Geopolitical Implications: The competition between U.S.-backed stablecoins and foreign digital currencies may influence global financial dynamics.
- Risk Awareness: Investors should remain cautious about the potential for de-pegging and other risks associated with stablecoins.
As the cryptocurrency market evolves, the role of stablecoins and their relationship with traditional financial instruments like U.S. Treasuries will remain a critical area to watch. Regulatory clarity will be a key driver in shaping the future of this growing sector.
