Merely five years ago stablecoins were a crypto curiosity; digital IOUs purportedly pegged to the US dollar, the euro or some other real-world asset. Today they are edging towards systemic relevance.
According to filings, Tether – the dominant stablecoin issuer – made $28.2-billion in net purchases of US government bonds in 2025, making it the seventh largest offshore buyer of Treasuries. That ranks it ahead of some of the largest sovereign investors, including China, in terms of new purchases. Combined gross Treasury bond holdings of Tether and Circle – another issuer – exceed the holdings of many major countries, including South Korea and Saudi Arabia.
For a market that has long been dominated by central banks, institutional investors and pension funds, this is a stunning shift. America’s vast fiscal borrowing machine, which must issue ever more debt to fund spiralling deficits, has found an unlikely patron in the world of crypto.
Resistance to crypto as a tool of dollar dominance
Whether this is a positive development or not depends on one’s point of view. To Scott Bessent, US Treasury Secretary, stablecoins are an instrument of statecraft. According to him, not only do they entrench the greenback’s global reserve currency position by expanding the use of dollar-pegged digital tokens abroad, they create a fresh demand for Treasuries. He believes the sector’s market capitalisation could swell from roughly $300-billion today to $3-trillion. That is alluring when many traditional international investors are starting to lose faith in US government bonds.
Yet, the idea that privately held, lightly regulated crypto companies (Tether is based in El Salvador and remains opaque) might become important financiers of the US government unsettles many outside the US. They argue that this is just another form of dollar imperialism. Martin Wolf, chief economics commentator of the Financial Times, wrote recently that “the world should worry about stablecoins”, and that while “dollar-based digital currencies offer benefits for the US, Britain and the EU are better off resisting them”.
More surprisingly, however, resistance is also emerging from within the US itself – specifically, the banking titans of Wall Street.
Last week the White House convened a meeting between bankers and crypto executives to thrash out the details of proposed stablecoin regulation. Based on previous form, the discussion was sure to be vibrant. Last month at the World Economic Forum in Davos, JPMorgan chairperson and CEO Jamie Dimon described Brian Armstrong of Coinbase as “full of shit”.
The most contentious issue relates to who can charge interest. In 2024, the Trump administration signed off on the “Genius Act”, a bipartisan effort to regulate stablecoins domestically. Issuers such as Tether were barred from paying interest directly on balances. Third parties, including exchanges like Coinbase, could however offer rewards. A subsequent draft bill, known as “Clarity”, seeks to revisit that compromise.
To bankers, the concept that crypto exchanges can offer a yield on deposits is not only terrifying, but existential. Wall Street banks sit atop of roughly $18-trillion in deposits. These deposits are the raw material of lending, and their stickiest and cheapest source of funding. If retail clients can park savings in tokenised dollars that yield more than a traditional savings account, and move it for free at the tap of a screen, why keep cash in a bank?
US lobby group the Bank Policy Institute has hit back in a recent report. They argue that rapid stablecoin growth would drain deposits, curtail lending, increase interest rates and heighten systemic risk, drawing nasty parallels with the sub-prime crisis and credit crunch of 2008.
If holders of stablecoin rushed to draw holdings en masse, issuers would be forced to fire sell treasuries. The fact that stablecoin issuers hold a non-negligible amount of collateral in speculative assets like bitcoin, resulting in rating agencies like S&P Global classifying Tether as a “weak” credit, does not help. It reflects a view that USDT’s ability to maintain its 1:1 peg to the US dollar is fragile.
Armstrong of Coinbase laughs off these arguments as doom-mongering and the banks desperately trying to preserve a monopoly. Even exponential growth in stablecoins would leave the stablecoin sector dwarfed by the banking system. Moreover, a growing share of American credit already comes from private-credit funds and other non-bank lenders. The erosion of banks’ dominance, the crypto lobby argue, is well under way; stablecoins are just the latest competitor. Dimon’s riposte suggests he is unconvinced.
Implications for investors and consumers
Outside of the bickering, three areas merit attention for investors.
The first is the implications for the Treasury market itself. If stablecoin issuers continue to channel tens of billions of dollars into short-dated government paper, they could become a critical source of demand, especially at the short end of the curve. As Bessent hopes, this could help keep a lid on shorter interest rates, regardless of what happens in the Federal Reserve. Yet, such a dependence on an untested source of demand is not without its own risks. A blowout in stablecoins could then have broader, and more systemic, implications.
The second is the broader competitive architecture of finance and payments. Will tokenised money remain a niche payment “rail” or evolve into a fully fledged alternative to bank deposits and payments? This could be more of a question mark in the US, which remains far behind in terms of free and instant payment systems. In Europe, meanwhile, not only is the European Central Bank aiming to build its own digital euro by next year, but many banks – notable among them Societe Generale – have built their own, regulated, euro-based stablecoins.
Either way, if stablecoins become embedded in everyday commerce – perhaps integrated into messaging apps or global marketplaces – the boundary between “crypto” and “mainstream” finance would blur. This is what Chris Dixon of venture capital investor Andreessen Horowitz has termed the “WhatsApp moment for money”.
The third are the political shenanigans. President Trump returned to office with a cornerstone of his funding and support base coming from the crypto lobby. Not uncoincidentally, Howard Lutnick, the commerce secretary, has ties to Tether. Tech magnates who have championed digital assets and bankrolled Trump expect a friendly reception in Washington.
Yet, in the opposite corner, Wall Street banks are formidable donors and enjoy deep relationships with the Republican elite. Hence, the battle lines are drawn; crypto insurgents versus financial incumbents.
Stepping back therefore, such intra-party fragmentation echoes other skirmishes, from disputes over high-skilled visas to the release of the Epstein files. The Maga movement is splintering. Stablecoins are yet another front in the battleground.
Most, at least for now, expect the banks to win. Stephen Miran, an influential presence in the court of Trump, seems to agree; he told the University of Cambridge Judge Business School last year that demand for stablecoins would probably stay muted inside the US, if they did not offer yields.
“I expect most of the uptake [for stablecoins],” he observed, “to come from places where they can’t access dollar instruments.” It does not take an expert to realise he is thinking of emerging markets.
This puts markets like South Africa in a fascinating position. Can stablecoins evolve to become a genuine alternative to traditional central bank assets? How will regulators react?
Stablecoins have outgrown their origins as a crypto sideshow. They are now important actors in the world’s most critical bond market and potential challengers to the core funding model of banks. Whether that inspires confidence or unease is subjective, but a degree of irony is definitely needed; the world’s largest economy is becoming buttressed, at least in part, by digital tokens supposedly born in defiance of the financial establishment. DM