Stablecoin Retreat Tests Bessent’s Hopes for New Treasury Buyers

Treasury Secretary Scott Bessent held out the prospect that stablecoin companies could emerge as trillion-dollar buyers of US government debt.

But the industry’s growth is stalling out just when the market could most use the support.

The slump in cryptocurrency trading is reducing demand for stablecoins, curbing a source of demand for government debt. The coins, which are designed to hold their value against the dollar and are backed by reserves that include short-term Treasury bills and other highly liquid assets, are largely used as a place for traders to park their funds while shifting in and out of positions.

Tether’s USDT, the world’s biggest stablecoin, contracted by nearly $3 billion to about $184 billion during the first six months of the year, putting it on track to shrink for the first time since the crypto industry’s 2022 crash. The amount of Circle Internet Group Inc.’s USDC, its nearest rival, dropped by a similar amount to roughly $72 billion, the company’s figures show.

The shift at least temporarily undercuts the administration’s argument that its embrace of crypto will throw off benefits for the government by expanding the market for its debt.

Last year, Bessent said the stablecoin market could swell tenfold by the end of the decade to $3 trillion, potentially creating a major new source of demand for the approximately $7 trillion of short-term Treasury bills now outstanding. Tether and Circle, which account for the vast majority of the stablecoins in circulation, report owning about $134 billion and $63 billion of Treasuries and reverse repurchase agreements collateralized by US government debt, respectively.

The recent trend indicates stablecoin companies will do little anytime soon to ease the pressure on the Treasury market as investors demand higher yields to compensate for elevated inflation and the swelling national debt.

Bessent has sought to curb the jump in long-term rates by increasing bond buybacks and relying more on the sale of short-term Treasury bills like those that stablecoin issuers buy. On Friday, some Treasury yields jumped after surprisingly strong job growth last month reinforced expectations that the Federal Reserve is likely to start raising interest rates at its Sept. 16 meeting.

Barclays Plc’s Samuel Earl, a strategist who follows short-term debt markets, said investors were doubtful that stablecoins would swell into a significant force anytime soon. “I never thought they’d see that growth various folks were claiming would come,” he said.

The stalled growth may prove temporary since stablecoins are closely tethered to swings in crypto trading, which dried up after prices crashed late last year. While Bitcoin has recently jumped, it remains well below its October peak. Rival tokens like Ethereum have fallen sharply too.

That downturn is the primary driver of the shift in stablecoin supply, according to Carlos Guzman, a research analyst at crypto market-maker GSR. “We saw a decline in USDT balances on exchanges,” he said, referring to Tether’s stablecoin, as well as outflows from blockchains associated with trading activity around Ethereum.

The use of stablecoins for payments, cross-border remittances and other transactions is seen as one avenue of growth. Tether said it has been moving to hasten such adoption and credited it with offsetting the impact of the crypto trading slump. “The current pause in stablecoin growth should not be mistaken for a ceiling on Treasury demand,” the company said in response to questions.

A spokesperson for Circle declined to comment. Spokespeople for the Treasury didn’t return a request for comment.

In July, stablecoin-based card payments — issued by the likes of RedotPay and EtherFi — topped $1 billion for the first time, Paymentscan data show. And a McKinsey study earlier this year found the total volume for stablecoin-based payments is about $390 billion annually, predominantly comprised of business-to-business transactions.

Yet that won’t necessarily increase the supply of stablecoins in the near-term because the same token can change hands repeatedly without requiring its issuer to create another one, said Chris Maurice, chief executive officer at Yellow Card, a stablecoin payments firm.

“We’re seeing this shift from speculative use cases to payments,” Maurice said. “It’s the US government’s job to really actively encourage these payments.”