Source: Liang Zhonghua Macro Research
Authors: Ying Jiahua, He Yuan, Liang Zhonghua
• Summary •
Currently, stablecoins are dominated by dollar tokens, which essentially represent a currency system on the blockchain dominated by the dollar. The development of stablecoins has marginally reinforced the dollar's dominant position in the monetary system, extending the dollar's dominance into the realm of digital currency. At present, the market scale of stablecoins is still relatively limited, and the scale of held assets is also limited, resulting in a limited impact on global asset prices.
Stablecoins are usually pegged to some stable assets, such as fiat currencies (mainly the dollar), precious metals, or other digital currencies, to achieve relative stability in value. Unlike cryptocurrencies, which have their scarcity naturally guaranteed by algorithms and code, the 'social consensus' of stablecoins is exogenous, predominantly built on the credit of fiat currencies, primarily the dollar's credit serves as a 'digital extension' in the realm of digital currencies.
Since 2020, the stablecoin market has significantly expanded, currently with a market cap of nearly 245 billion dollars. We believe that the growth is mainly driven by several factors:
1. In payment and settlement, stablecoins have clear advantages compared to traditional fiat currencies or other digital currencies: they are efficient, immediate, cost-saving, and risk-averse.
2. Stablecoins serve as the underlying pricing and settlement tools, and the expansion of the digital currency market itself will lead to an increase in the demand for stablecoins.
III. The intensifying geopolitical risks and the continuous turmoil in regional economies have created an 'alternative' demand for stablecoins in Emerging Markets.
In the future, if major regulatory bills can take effect, it will inject new momentum into market development. The clarity of the regulatory framework essentially represents official recognition and legitimization of stablecoins, which helps enhance the 'social consensus' around the currency, crucial for attracting more funds into the market and for large-scale applications.
For the Global monetary system, stablecoins have expanded the use of the US dollar in the Cryptos field, which marginally enhances the dollar's position in the Global monetary system, while posing a certain impact on the value-unstable fiat currencies. For US Bonds, although the expansion of the USD stablecoin market will directly increase demand for US Bonds, the overall impact on short Bonds is very limited and cannot alleviate the pressure on US long Bonds.
The short-term interest rates of US Bonds are primarily determined by the Federal Reserve's monetary policy rates, rather than simple market supply and demand. Overall, the current core issue of the US fiscal crisis still lies in the long-term uncontrollable fiscal deficits and heavy interest expenses.
In summary, the current stablecoins are mainly USD-based tokens, which essentially represent a currency system on the blockchain dominated by the US dollar. The development of stablecoins has actually extended the dollar's dominant status into the Cryptos field. However, the damage to the dollar's credibility during the US's de-globalization process cannot be reversed by the development of stablecoins.
Risk warning: There is an insufficient understanding of the Industry and policies.
On May 20, the US Senate voted to pass the 'Stablecoin Uniform Standards Assurance Act' (GENIUS), marking an important step in establishing a regulatory framework for stablecoins in the US. Following this, on May 21, the Legislative Council of Hong Kong also passed the 'Stablecoin Regulation Draft,' meaning that Hong Kong has officially established a licensing system for fiat-backed stablecoin issuers. With significant progress in stablecoin-related legislation in the US and Hong Kong, there has been a notable increase in market attention towards Cryptos and stablecoins recently.
What are stablecoins? How do they differ from other crypto assets? If the US legislation is formally implemented, what does the development prospect of the stablecoin market look like, and how will it affect global asset pricing? This topic will explore these questions.
1. Stablecoin: A digital extension of dollar credit.
Stablecoins are a type of cryptocurrency designed to maintain a relatively stable price. Unlike mainstream cryptocurrencies that experience significant price volatility, stablecoins are typically pegged to some stable asset, such as fiat currencies (currently, the vast majority are pegged 1:1 to the dollar), precious metals, or other cryptocurrencies, in order to achieve relative price stability and provide a stable store of value and medium of exchange in the cryptocurrency market. In other words, the 'stability' of stablecoins refers to their value, and in fact, the mainstream stablecoins currently issued have very little value fluctuation.
Based on the underlying collateral and price stability mechanisms, stablecoins can be divided into three types:
First, off-chain asset-collateralized types, primarily using dollars and U.S. Treasury bonds as collateral. The issuer holds sufficiently creditworthy fiat currencies or short-term government bonds, commercial papers, and other highly liquid, low-risk assets as reserves, and issues stablecoins of corresponding value on the blockchain. For example, in the case of dollar-collateralized stablecoins, when a user deposits 1 dollar with the issuer, the issuer issues 1 stablecoin. When the user redeems, the issuer destroys 1 stablecoin and the user receives back 1 dollar. The characteristic of this type of stablecoin is that the collateral assets are stored in traditional banks or trust institutions, rather than on the blockchain, which has a certain 'centralized' feature. Currently, fiat-collateralized stablecoins (such as USDT, USDC, etc.) dominate the entire stablecoin market.
Second, on-chain asset-collateralized types, which use crypto assets as collateral and are usually over-collateralized. These stablecoins are over-collateralized with other crypto assets and rely on smart contracts for automated management. Their core characteristic is that the collateral assets are entirely held on-chain, achieving complete decentralized operation. To prevent price fluctuations from causing under-collateralization, the collateralization ratio is typically required to be greater than 100%. If the collateral value falls below a threshold, the system will automatically auction off the collateral to repay the debt, ensuring that stablecoins are always fully backed.
Third, emerging algorithmic types, which carry relatively high risk. Algorithmic stablecoins do not rely on or partially rely on off-chain asset collateral and use algorithms and smart contracts to adjust supply and demand to maintain price stability. For instance, in dual-coin or multi-coin models, when the stablecoin price exceeds 1 dollar, users destroy governance tokens to mint stablecoins, increasing supply to lower the price; conversely, when the price drops, the opposite occurs. However, algorithmic stablecoins are riskier, as evidenced by the extreme collapse incident of LUNA/UST in 2022.
Combining the analysis of the essence of currency, how should stablecoins be viewed?
In Series One, 'The Evolutionary History of Currency', we explained that the essence of currency is a form of accounting tool, and whether it possesses intrinsic value is not important. However, there must be a 'scarcity' and a 'social consensus' for it to be recognized as currency widely by people. Fiat paper money largely relies on government credit backing, where the government guarantees the relative scarcity of the paper currency; the scarcity of gold is guaranteed by nature. Therefore, cryptocurrencies have not transcended this framework and belong to the digital age's 'accounting tools', merely changing the medium of accounting from paper to code.
However, stablecoins and many other Cryptos have taken different approaches to how they construct their 'scarcity' social consensus: generally, the scarcity of other Cryptos is guaranteed by their underlying algorithms and code, and the establishment of this 'social consensus' does not rely on any centralized authorities but rather comes from their decentralized execution and verification mechanism.
The social consensus of stablecoins is exogenous, mostly based on the credit of fiat currency. For example, the dollar stablecoin represented by USDT is essentially an extension of the dollar credit—users trust that the issuer will Hold dollar reserves in a 1:1 ratio and maintain the stability of the currency value through a 'minting/burning' mechanism. This is similar to the credit endorsement mechanism of fiat currency, except that the issuer has shifted from a state to an Institution.
It is worth noting that the value anchoring of the current mainstream stablecoins is still deeply tied to the dollar system, and its ability to maintain 'relative scarcity' in the future depends on two factors: the transparency of reserves and the trust consensus it can maintain, and the credit of the dollar itself. Stablecoins perform the function of daily Trade and pricing in the crypto ecosystem, and currently serve more as a 'digital extension' of dollar credit in the Cryptocurrency space.
2. Current Situation: Accelerating Growth Since 2020
Since 2020, the stablecoin market has significantly expanded, currently approaching a Market Cap of nearly 245 billion dollars. The first stablecoin, USDT, was issued in 2014, but the early stablecoin market grew slowly until it began to expand in 2020. From 2020 to 2025, the Market Cap increased by nearly 200 billion dollars, reaching nearly 245 billion dollars by the end of May 2025. Compared to the overall Cryptocurrency market's total Market Cap of about 3.4 trillion dollars, stablecoins remain relatively small (accounting for 7% of the total Market Cap of Cryptocurrencies).
Structurally, dollar stablecoins dominate the market. Currently, over 99% of stablecoins are dollar-denominated, maintaining a 1:1 anchoring to the dollar; there are also a few stablecoins pegged to other assets like Gold (1XAUt=1 ounce of London Gold), Euro (EURC), and Yen (GYEN). Additionally, the concentration in the dollar stablecoin market is quite high, with USDT (Tether) and USDC being the two largest dollar stablecoins, together accounting for 88% of the total Market Cap.
USDT is the earliest stablecoin, launched by Tether in 2014, while USDC was first issued by Circle in 2018. As of April 2025, USDT has a Market Cap of 145.6 billion dollars, constituting 62.8% of the total stablecoin market, while USDC has a Market Cap of 59.2 billion dollars, accounting for 25.5%. Moreover, the reserves of both USDT and USDC are backed by 100% equivalent dollar assets (such as Cash / Money Market, short-term government bonds, etc.).
Additionally, there are other dollar stablecoins with Market Caps in the billions, such as DAI, which uses an over-collateralization model with Cryptos, and USDe, which is a synthetic dollar stablecoin based on stETH and derivatives hedging. Although they are all pegged to the dollar, the types of collateral are significantly different from the first two.
3. Outlook: Regulatory implementation leads to compliant growth.
Since 2020, the stablecoin market has shown rapid growth. It is believed that if the major regulatory bills can be officially implemented, they will inject new momentum into market development. In addition to policy dividends, the endogenous and exogenous forces of stablecoins in recent years will continue to play a role, jointly promoting further development of the Industry.
First, the application scenarios for stablecoins have expanded from their initial transactional use to multiple fields including decentralized finance (DeFi), daily consumption, digital collectibles (NFTs), and institutional fund management. Of course, their convenience and low-cost transaction attributes remain their core competitive advantage, which will continue to enhance the penetration rate of stablecoins in global transaction settlements.
In cross-border payment settlements, the advantages of stablecoins are obvious compared to traditional fiat currencies or other Cryptos.
First, efficient and instant: Blockchain-based stablecoin payments can achieve 24/7 instant settlement, with transaction confirmation times usually taking only a few minutes, while traditional cross-border remittances often take 1-5 working days.
Second, cost savings: The peer-to-peer transfer model of stablecoins eliminates the intermediary bank process, significantly reducing transaction fees. The cost of a single cross-border transfer can be controlled at a few dollars, far lower than the average fee of $20-50 for traditional SWIFT remittances.
Third, risk avoidance: Stablecoins effectively avoid exchange rate fluctuation risks by being pegged to the U.S. dollar, so that both parties in cross-border transactions do not have to bear additional foreign exchange losses.
Therefore, since 2020, the application of stablecoins in transaction settlements has grown rapidly. According to Nic Carter's Statistics, by this year, its average monthly transaction volume may have exceeded Visa, approaching 30% of the American Clearing House (ACH) transaction volume. Stablecoins have also performed better than other mainstream Cryptos. In the Cryptocurrency market, stablecoins account for 7% of Market Cap while bearing over 2/3 of the transaction volume share, far surpassing other mainstream Cryptos.
Meanwhile, stablecoins are the main pricing and settlement tool in the digital world, and the expansion of the Cryptos market will inherently lead to an increase in stablecoin demand. Looking ahead, as the prices of mainstream Cryptos continue to fluctuate significantly and grow, investors will conduct buying and selling operations more frequently through stablecoins to lock in profits or seize opportunities, which will drive up the demand for stablecoins.
Furthermore, the intensification of geopolitical risks and the ongoing turmoil in regional economies have created a 'substitution' demand for stablecoins as an important external driving force.
Since 2020, residents in some countries, such as Turkey and Argentina, have faced severe inflation and pressure from currency devaluation, urgently needing assets like the US dollar and Gold to hedge against risks. However, there are generally foreign exchange control policies in place, making it expensive to obtain US dollars, hence US dollar stablecoins have become an important alternative currency. Moreover, compared to other Cryptos, stablecoins offer value stability and transaction convenience, allowing them to occupy an increasingly important role in asset storage and trading scenarios in Emerging Markets.
In addition to traditional Cryptos-developed regions like the US and Europe, countries such as Turkey, Thailand, and Brazil have also become important growth points for the stablecoin market in recent years. Among them, the amount spent on buying stablecoins in Turkey accounts for nearly 4% of its GDP, ranking first in the world. Stablecoins have become an important 'alternative currency' in some Emerging Markets countries.
Overall, stablecoins have expanded the use of the US dollar in the Cryptos field, which marginally enhances the status of the US dollar in the Global monetary system and could have certain impacts on fiat currencies that are not stable in value.
Finally, from a policy perspective, the removal of regulatory uncertainty is crucial.
The GENIUS Act has passed a procedural vote in the Senate in May 2025, entering the final review stage. The bill attempts to establish a compliance framework applicable to 'payment-type stablecoins', specifying criteria for issuance eligibility, reserve requirements, compliance obligations, anti-money laundering, user protection, and other key aspects. The core requirement is that issuers must hold at least one compliant reserve for every one US dollar stablecoin issued; compliant reserves are limited to Cash / Money Market, insured deposits, short-term government bonds, repurchase agreements, etc.; the composition of reserves and the number of outstanding stablecoins must be publicly disclosed monthly; issuers with issuance scales exceeding 10 billion US dollars must be under federal regulation; and issuers are prohibited from issuing interest-bearing stablecoins.
If the bill is eventually implemented, on one hand, the clarity of the regulatory framework essentially constitutes official recognition and legitimization of stablecoins, thereby enhancing the 'social consensus' around the currency. This is very important for attracting more funds into the market and for large-scale application. On the other hand, the market will also anticipate that the US government will proactively promote the legalization and widespread use of Cryptos to increase the demand for US Treasury bonds and maintain its leading position in the global Digital Currency competition.
Apart from the United States, other regions are also actively advancing stablecoin regulation to respond to the increasingly fierce competition in stablecoins.
In May, Hong Kong implemented the "Stablecoin Ordinance Draft" through the Legislative Council, establishing a licensing system for stablecoin issuers that requires issuing Institutions to meet capital adequacy, reserve asset liquidity, anti-money laundering (AML), and risk management requirements. The bill positions stablecoins as "payment tools," differing from the U.S. focus on the dominance of USD stablecoins, and it requires stablecoins to be pegged 1:1 to fiat currency, without strict limitations on the types of currencies, aiming to create an international and diverse stablecoin ecosystem, and hopes to enhance Hong Kong's competitiveness as an international financial center and Web3 hub.
In addition, the EU officially issued the "Regulation on Markets in Crypto-Assets" (MiCA) in June 2023, which includes strict regulations on stablecoins and will take effect in phases in 2024 and 2025.
We anticipate that with the advancement and implementation of stablecoin regulatory frameworks in multiple regions, the stablecoin market will usher in a new, more standardized phase of rapid development under regulation.
4. How will it affect Global and asset classes?
As a form of Digital Currency, the widespread application of stablecoins theoretically challenges traditional fiat currencies, or rather, the monetary sovereignty of various countries, potentially leading to deposit diversion and weakening the effectiveness of monetary policy. However, it is observed that the vast majority of stablecoins currently exist not independently from the fiat currency system, but are strongly pegged to the dollar, serving as an 'extension' of the dollar in the digital world. Therefore, the current impact of stablecoins on the dollar and other non-U.S. currencies is clearly asymmetric.
For the dollar, if the new bill is formally implemented, the expansion of the USD stablecoin market will help reinforce dollar hegemony. The bill mandates that compliant stablecoins must be pegged to the dollar at a 1:1 ratio, which means the value of each stablecoin is directly equivalent to one dollar. Moreover, to maintain the 1:1 peg, stablecoin issuers must hold an equivalent amount of dollars or highly liquid assets priced in dollars as reserves. Thus, the expansion of the stablecoin market essentially increases the penetration of the dollar in the digital economy and global payment fields, and will boost the demand for dollar assets. The President's team has also been relatively honest and transparent about their motivations for stablecoin legislation. They openly state that the core goal of the bill is to 'maintain the dollar's status as the global dominant reserve currency.'
Stablecoins are rapidly penetrating mainstream payment systems, with transaction volumes already surpassing traditional traders like Visa, and are expected to continue growing at a relatively fast pace, supporting the dollar's influence in the 'payment settlement' function.
For non-US currencies, the challenges have clearly intensified. Previously, the foreign exchange purchase and settlement systems in various countries were generally monopolized by the government, limiting the global promotion of the US dollar. However, now that US dollar cryptos have emerged, they can help the dollar reach broader areas. Especially in countries where inflation is high or exchange rates fluctuate wildly, such as Argentina and Turkey, people and businesses have increasingly preferred to hold USD stablecoins like USDT instead of their local currencies, causing central banks to lose control over the money supply and interest rate policies. Additionally, stablecoins may also become a new channel for capital outflow. When expectations are unstable, funds can quickly flow out of the national financial system through stablecoins, exacerbating exchange rate fluctuations and depleting foreign reserves.
For US Treasuries, although the expansion of the US dollar stablecoin market will directly increase the demand for US Treasuries, the overall impact on short-term bonds is very limited and cannot ease the pressure on long-term US Treasuries.
First, the proportion of existing stablecoins allocated to US Treasuries is already significant.
The two main US dollar stablecoins currently (which account for nearly 90% of the market cap), USDT has 66% of its reserve assets in US short-term government bonds, while USDC has 41% in US short-term government bonds. The remaining allocation also largely meets the reserve asset requirements of the legislation, leaving little room for further increases in the proportion of US Treasury reserves. Moreover, even if all other stablecoins are included within the legislative framework, the potential reserve volume that can be converted to US Treasuries is limited. Thus, the US Treasury market mainly sees improvements in future demand expectations rather than an immediate increase in volume.
Second, the main increase is in the demand for ultra-short bonds.
The legislation requires the bonds held by stablecoins to have a duration of less than 3 months. Even if the stablecoin market expands rapidly, it mainly brings incremental demand to the ultra-short bond (T-bills) market. The current stablecoin market is $245 billion, and the scale of US Treasuries in reserves is about $130 billion, accounting for 2.1% of the total $6 trillion in overall T-bills in the US. To achieve an incremental short-term bond demand share of 10%, approximately $600 billion would need to be added, which would require the stablecoin market to expand from its current size of $245 billion to $1.4 trillion.
Moreover, the short-end interest rates of US Treasuries are mainly determined by the monetary policy rates of the Federal Reserve, rather than simple market supply and demand, as the Fed regulates short-end rates by influencing market supply and demand.
Even with such a large-scale increase, it cannot effectively alleviate the current pressure on long-end rates in the US Treasury market. If the Treasury does not proactively adjust the debt issuance structure and increase the proportion of short-term bonds issued to match the demand from stablecoins, the impact on the US Treasury market will be very limited.
Thirdly, the deep binding with the Cryptos market may exacerbate fluctuations in the Treasury Bonds market.
In the long term, the development of stablecoins will deepen the binding of US dollar credit to the Cryptos market. Once a run or trust crisis occurs (such as the 2023 Silicon Valley Bank incident that led to USDC de-pegging), the Treasury Bonds market may be impacted by the selling pressure of stablecoin reserve assets, which in turn threatens the stability of the US dollar.
Overall, the current core of the US fiscal crisis lies in the long-term uncontrolled fiscal deficit and heavy interest payments. Although stablecoins can temporarily absorb some short-term Treasury Bonds issuance, their impact is very limited and cannot change the essence of the US fiscal deficit situation or the excessively high debt growth rate. If new vulnerabilities are created in the process, such as triggering a stablecoin run or a sell-off of Treasury Bonds, it may also exacerbate the trust crisis in the US dollar.
The same applies to the long-term credit issues of the US dollar. Essentially, stablecoins are a form of Digital Currency that relies on US dollar credit on the chain, and the damage to US dollar credit during America's de-globalization process cannot be reversed by the development of stablecoins.
Risk warning: Understanding of the Industry and policy is not accurate enough.
Editor/rice
