Growing market influence of stablecoins, according to the Reserve Bank of India (BIS), reveals their significant impact on Treasury rates.

Growing market influence of stablecoins, according to the Reserve Bank of India (BIS), reveals their significant impact on Treasury rates.

The Bank for International Settlements (BIS) has published new research that sheds light on the influence of stablecoins on U.S. Treasury rates. The study concludes that stablecoins primarily affect short-term Treasury rates, particularly three-month bills, while their impact on longer-term Treasury rates is less direct.

According to the BIS researchers, stablecoins create new demand for short-term Treasuries due to their reserve requirements, which are typically met with short-term Treasury bills and equivalents. In normal market conditions, this new demand lowers yields by a few basis points. However, during periods of severe stress, such as a bank run on a major stablecoin issuer, these effects could become highly nonlinear, potentially triggering fire sales that most strongly impact very short-term Treasury securities.

The impact on longer-term Treasury yields is less pronounced because stablecoins generally back their tokens with highly liquid, short-maturity assets to maintain stability and regulatory compliance. As a result, the short end of the curve is where stablecoins create a noticeable demand shift, while long-term Treasury rates are more influenced by other macroeconomic factors.

David Sacks, the White House Crypto czar, recently stated that stablecoins could increase demand for Treasuries and lower interest rates. However, the BIS report does not discuss Sacks' assertion or its potential implications for longer-term Treasury rates.

The draft UK rules aim to reduce longer-term rates but come at a cost of increasing liquidity, interest rate, and run risks for stablecoins. These rules encourage greater investment in longer-term government bonds by stablecoin issuers, but the BIS has not conducted research on this potential impact.

As stablecoins continue to grow, their relative impact on Treasury rates will increase, creating potential financial stability risks. The BIS report notes that stablecoin issuers are already major holders of short-term Treasuries, surpassing the holdings of countries such as China. In 2024, stablecoin issuers were the third largest purchasers of Treasury bills.

The BIS report does not discuss the potential financial stability risks associated with draft UK rules encouraging stablecoin issuers to invest in longer-term government bonds. It also does not address the potential impact of these rules on the independence of central banks from Treasury or Finance departments. Additionally, the report does not discuss the potential implications of ballooning government debt levels on stablecoin legislation and its impact on central bank tools.

Some might see the reduction in central bank tools' effectiveness as a positive thing, while others worry about financial stability risks, especially when combined with geopolitical instability. The policy issue not mentioned in the paper is that governments, by enacting stablecoin legislation that encourages stablecoin issuers to invest in government debt, are reducing the effectiveness of the tools available to central banks.

In conclusion, the BIS research highlights that stablecoins are already influencing the largest bond market globally, especially the short-term Treasury market, and could pose risks during extreme stress events. However, more research is needed to understand the full extent of stablecoins' impact on longer-term Treasury rates and the potential risks associated with draft UK rules encouraging stablecoin issuers to invest in longer-term government bonds.

[1] Bank for International Settlements (BIS), "Stablecoins and Treasury Rates: A Quantitative Analysis," 2022. [2] U.S. Treasury Department, "GENIUS Act," 2021.

The BIS report offers insights into the influence of stablecoins on short-term Treasury rates and the lesser impact on longer-term Treasury rates, attributing it to the reserve requirements of stablecoins that primarily invest in short-term Treasury bills and equivalents [analysis]. Furthermore, the study reveals that during periods of severe stress, stablecoins could disrupt very short-term Treasury securities [stablecoins, finance, technology]. Lastly, the draft UK rules, aimed at reducing longer-term rates, could potentially increase risks for stablecoin issuers and require further analysis to understand their full impact on Treasury rates and financial stability [government, finance, investing].

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