Galaxy: Stablecoins, the GENIUS Act, and the Evolution of the U.S. Dollar Financial System

Author: Thaddeus Pinakiewicz, Vice President of Galaxy Digital Research; Source: Galaxy Digital; Translation: Shaw, Golden Finance

Executive Summary

If stablecoins achieve scale under the reserve constraints of the “GENIUS Act,” it will create sustained demand for short-term US Treasuries, slightly suppress short-term yields, and directly channel global dollar demand into the US banking system.

Galaxy Digital Research’s comprehensive model shows that incremental growth of stablecoins will mainly come from overseas, meaning the scale of foreign capital inflows into US financial infrastructure will far exceed the volume of domestic deposit transfers. Counterintuitively, the net final effect will reinforce the dollar system rather than undermine its stability.

We expect that hundreds of billions of dollars of domestic deposits within the US will flow into stablecoin reserves, while trillions of dollars of overseas capital will also flood into the US banking system. The structural increase in US Treasury demand driven by stablecoins could lower short-term US Treasury yields by 3–5 basis points, saving US taxpayers over $3 billion annually. We predict that each dollar of stablecoin minted will generate $0.31 of credit creation expansion in the US. Emerging countries with weak financial systems may face severe capital outflows as capital shifts toward compliant stablecoins.

It should be clear that: banks will face operational pressures. Some low-cost deposits will migrate, marginal funding costs will rise, and net interest margins in rate-sensitive sectors will narrow. But the likely outcome is not systemic credit contraction, but a reallocation of credit creation structures. Stablecoins will not weaken overall credit supply but will redistribute the spread income of safe assets among different market participants. Meanwhile, the short end of the US Treasury yield curve, most sensitive to interest rate changes, will have larger and more stable buyer groups. The dominant role of the US dollar, already established, will further lower global thresholds for holding, transferring, and saving in dollars.

When holding US credit assets becomes as easy as downloading an app, domestic deposits in fragile economies will show signs of frantic outflows.

This impact may spill over beyond US borders. Countries with weak monetary credibility, fragile banking systems, and strict capital controls will face greater pressure. Once ordinary citizens can conveniently hold dollar credit assets, domestic deposits in high-risk regions will accelerate outflows. The way the “GENIUS Act” consolidates the dollar system is not only by optimizing its own rules but also by weakening the competitiveness of other alternative currencies.

This article argues that the impact of the “GENIUS Act” extends far beyond domestic stablecoin regulation and compliance; it involves a deep transformation of the dollar’s financing structure: banking interest margins under pressure, US debt issuance flexibility increased, incremental foreign capital introduced into the US financial system, and weaker sovereign nations facing intensified financial competition.

Overall pattern: The US benefits overall; some banks lose margin; some overseas banking systems lose deposits; US and global consumers gain easier access to dollar credit assets.

Background

Since the “GENIUS Act” took effect on July 18, 2025, the market has seen both rational assessments and heated controversy. The US government positions it as a strategic financial policy: to regulate and domestically absorb compliant stablecoins, expand global dollar demand, and create structural incremental buyers for short-term US Treasuries. Essentially, the law aims to improve financial infrastructure rather than merely regulate speculative tech assets; key questions include who has the right to issue digital dollars, what assets back them, and how to finance US government spending.

Industry opposition is scattered. A core controversy among traditional banks is whether stablecoins that meet “GENIUS” compliance should be allowed to pay interest or yield rewards to holders. Banks argue that interest-bearing stablecoins directly compete with bank demand deposits. Demand deposits have long been a core, low-cost, sticky funding source supporting traditional lending. The main concern is funding stability: if large amounts of deposits flow into fully reserved, US Treasury-backed, interest-yielding stablecoins, banks could face long-term funding costs rising and deposit bases shrinking. (“GENIUS” explicitly bans issuers from paying interest directly to users but allows exchanges to reward stablecoin holdings within platforms. The pending “Clarity Act” is currently being lobbied to prohibit such incentives entirely.)

The digital asset industry contends that deposit outflows are overstated. They argue that interest-bearing stablecoins are essentially akin to government money market funds: cash-like instruments investing in short-term public debt, providing market-based yields with minimal intermediaries. Money market funds have coexisted with banks for decades; even with occasional net asset value (NAV) dips below par, they have never displaced community banks. The crypto view is: banning interest payments on stablecoins is actually protecting existing bank subsidies, not safeguarding financial stability.

This article does not detail the legislative intricacies of the law, as various institutions have provided detailed interpretations. Instead, it summarizes the core structural provisions as background, focusing on the most market-relevant dimensions: balance sheets, fund flows, and market incentives. The key issue is not an abstract debate over stablecoin pros and cons, but how stablecoins reshape the entire financial system’s asset and liability configuration.

This analysis emphasizes the potential impacts of the law on US finance and macroeconomics, while also considering global divergence effects. The analysis covers: how stablecoin expansion under the “GENIUS” framework affects short-term US Treasury demand and pricing, where incremental funds come from, whether they are new capital or just substitution of existing deposits; and secondary effects on bank funding costs, credit creation, and financial intermediation patterns. To clarify this logic, we will systematically decompose the reserve rules, stablecoin growth forecasts, deposit substitution models, and international capital flows.

Impact on the US Treasury Market: Scale and Mechanisms

To evaluate how the “GENIUS Law” reshapes the US Treasury market, first understand the intrinsic link between stablecoin growth and US Treasury demand. The law requires stablecoin reserves to meet strict standards: high credit quality, high liquidity, and short duration. In practice, most reserves will be invested in short-term US Treasuries.

The world’s largest offshore stablecoin issuer, Tether, currently holds over $120 billion in short-term US Treasuries, ranking among the largest holders of short-end Treasuries globally—over 90% of sovereign holdings. The “GENIUS Law” will formalize and domestically absorb this model, anchoring stablecoin demand within the US Treasury asset class. Previously, stablecoin reserves included a broader mix: commercial paper, gold, non-government financial instruments; these will be significantly compressed moving forward.

The deeper implication is: the expansion of stablecoin scale will reliably translate into increased US Treasury demand, far exceeding past levels. In equilibrium, each additional dollar of stablecoin issuance requires roughly one dollar of short-term Treasuries, which must be continuously rolled over until the stablecoin is redeemed.

To estimate the scale of this effect, three core inputs are needed:

• Forecast of stablecoin supply over the next 2–5 years;
• Understanding historical stablecoin fund flow patterns into US Treasuries;
• Building an analytical framework that, under variable reserve asset structures, converts total stablecoin issuance into net US Treasury demand.

The certainty that stablecoin scale expansion translates into US Treasury demand is much higher than before.

Stablecoin Supply Growth Forecast

Current total stablecoin market cap is in the low hundreds of billions, but most analysts believe the “GENIUS Law” will create a regulatory environment that accelerates stablecoin expansion significantly. Analysts from Citi, Standard Chartered, Coinbase, JPMorgan all expect substantial growth over the coming years, though their frameworks differ markedly. Some focus on transaction volume growth, others on substitution of dollar alternatives, and some on recent adoption speed extrapolated statistically. These methodological differences are crucial—they influence not only the overall market size forecast but also the potential impacts on banks, US Treasury demand, and the dollar’s role in financial intermediation.

Citi’s “2030 Stablecoin Outlook” models growth by asset-liability substitution: covering transaction deposits, savings products, money market funds, physical cash, offshore dollar holdings. This approach maps market size to fund source structures, predicting not just the final stablecoin volume but also which dollar assets they will replace.

In its April initial report, Citi forecasted stablecoin supply between $422 billion and $2.3 trillion by 2028, reaching $500 billion to $3.7 trillion by 2030. In September, Citi updated its model: even without the “GENIUS Law,” it raised growth expectations and lowered the substitution effect assumptions. The revised baseline predicts: $1.2 trillion in 2028, $1.9 trillion in 2030.

Not all stablecoin growth has the same macroeconomic impact: $1 of cash outflow and $1 of bank deposit outflow have very different effects.

Citi’s core value lies in its structural disaggregation: it distinguishes three fund sources—domestic US deposits, migration from money market products, and new overseas allocations—building a logical link between growth forecasts and subsequent bank credit and credit creation impacts. This will be reflected later: each dollar of stablecoin growth has different economic implications, depending on whether it replaces physical cash or bank demand deposits. Citi’s framework most clearly captures these structural differences.

Standard Chartered’s “Stablecoins, Dollar Hegemony, and US Short-Term Treasuries” report offers the most optimistic large-scale growth forecast, including a $2 trillion estimate frequently cited by US Treasury commentary. The UK bank’s analysis starts from current growth momentum: before the law, stablecoin supply was growing at about 50% annualized. After enactment, SCB expects this to accelerate toward nearly 100%, aligned with ongoing exchange activity expansion. Under this scenario, monthly stablecoin trading volume could rise from about $700 billion today to around $6 trillion by late 2028; stablecoins’ share in FX spot trading could increase from about 1% to nearly 10%.

SCB’s core assumption: trading volume expansion requires stablecoin stock and trading volume to grow linearly and proportionally, with stablecoin velocity remaining unchanged (though they later relax this). To match the forecasted trading growth, stablecoin issuance would need to increase from about $230 billion today to roughly $2 trillion by 2028, implying about $1.6 trillion of new issuance by then. Their analysis does not include pessimistic or optimistic marginal scenarios beyond the baseline, so their core logic is trading-driven scale expansion, not stock substitution.

Coinbase’s “New Stablecoin Growth Framework” uses a stochastic model based on historical growth rates, giving higher weight to growth phases under a friendly policy environment post-2024. They see the current environment as a structural inflection point: regulation, institutional acceptance, and product ecosystem integration fundamentally change the pace of adoption.

Baseline forecast: stablecoin stock around $1.2 trillion in 2028; pessimistic to optimistic range: $975 billion to $1.4 trillion. Even in the pessimistic case, Coinbase’s growth rate remains among the most optimistic, with a compound annual growth rate over 100%. They do not forecast beyond 2028, but extrapolating their model suggests $1.4–$2.2 trillion in 2030.

JPMorgan’s model is the most conservative and cautious among major banks, assuming monthly growth of 2–3%, with a forecast range of $500–$750 billion in 2028; extending to 2030 yields about $630 billion to $1.05 trillion.

Finally, BPI (Bank Policy Institute) presents an extremely optimistic, $4–6 trillion potential demand estimate, used to simulate the impact of interest-paying stablecoins under the “GENIUS Law.”

BPI’s forecast references the April 2025 US Treasury Borrowing Advisory Committee (TBAC) report, broadly defining the market as all non-interest-bearing demand deposits that could be replaced by stablecoins. Based on this, the estimated deposit scale is about $6.6 trillion—over 50% higher than the most optimistic crypto forecasts, roughly one-third of total US bank deposits.

More extreme estimates in BPI rely on the Baumol-Tobin model, which simplifies consumer cash management between transaction funds and savings. Applying this model mechanically suggests a potential outflow of up to about $4 trillion if stablecoins are allowed to pay interest directly to holders. While useful for stress testing, these figures are highly sensitive to assumptions and should be interpreted cautiously.

The Baumol-Tobin model’s assumptions—such as stable transaction costs, stable interest rates, and stable cash holding motives—are often unrealistic. It is more a demonstration of monetary demand principles than a precise predictor. Using it directly for stablecoin demand projections is unreliable because stablecoins serve multiple functions: transaction medium, collateral, store of value, and savings; transaction costs fluctuate; and yields are not risk-free.

BPI’s scenario is an extreme stress test, not a baseline forecast, illustrating the upper bounds of bank system pressure.

Modern microeconomic and structural empirical research recognizes that once cash withdrawal, payment technology, marginal adoption, and precautionary motives are modeled, the actual interest rate elasticity is much lower than the 0.5 assumed in Baumol-Tobin. Even BPI admits that models like Miller-Orr, which treat cash management as a stochastic process, have lower interest rate sensitivities. Therefore, this extreme scenario is not a realistic baseline but a hypothetical maximum stress case.

In summary, BPI’s assumptions are too broad to serve as reliable forecasts. The idea that all incremental stablecoin demand comes solely from US bank deposits, with all non-interest-bearing demand shifting entirely into interest-yielding digital dollars, is implausible. It ignores other domestic sources and the massive international demand that has historically supported stablecoin growth. Objectively, the US Treasury does not treat $6.6 trillion as a baseline; it uses the $2 trillion 2028 SCB forecast as a reference, with $6.6 trillion as an extreme scenario.

Considering all frameworks, the market presents a reasonable range rather than a single point estimate. Even the lower bounds imply continued high growth, with annual supply expansion around 40%; the most aggressive models project over 100% annual growth. Rough estimates for 2028 stablecoin size are:

• Pessimistic: about $420–$970 billion
• Baseline: about $625 billion–$1.2 trillion
• Optimistic: about $750 billion–$2.5 trillion

By 2030, these estimates diverge further, with pessimistic around $500 billion–$1.4 trillion, baseline about $830 billion–$3.1 trillion, and optimistic reaching $1 trillion–$4 trillion.

For subsequent analysis, this article adopts a conservative baseline: stablecoin stock of $1 trillion in 2028, rising to $1.5 trillion in 2030. This is at the lower end of the baseline range, providing a reasonable and cautious foundation for further modeling.

Regardless of the forecast model, consensus holds that the “GENIUS Law” is a key catalyst for stablecoin growth—by reducing regulatory uncertainty, expanding institutional participation, enhancing payment utility, and strengthening the dollar’s global trustworthiness.

However, the choice of methodology is crucial: the same $1 trillion scale achieved via overseas proliferation and transaction volume expansion has vastly different economic implications than that achieved solely through domestic deposit displacement. This underscores that the analytical framework behind forecasts is as important as the final numbers.

Stablecoin Reserve Asset Structure under the “GENIUS Law”

Based on the above supply forecasts, how much short-term US Treasury demand can be additionally supported? While some reserve allocations remain at the issuer’s discretion, the “GENIUS Law” imposes strict regulatory limits on reserve assets, restricting them to a few high-quality, highly liquid, short-duration assets.

Currently, stablecoin issuers’ reserve structures vary widely. Circle’s USDC holds over 97% in US Treasuries and cash equivalents; USDT’s reserves have historically been more diverse, including Bitcoin, gold, collateralized loans, and commercial paper at different times. Tether’s early investments were riskier, with only about 25% in short-term US Treasuries in 2021; now, their structure has matured, with about 75% in short-term Treasuries and cash equivalents.

The “GENIUS Law” aims to sharply narrow these differences, replacing issuer discretion with statutory asset classifications. Article 4 mandates that compliant payment stablecoins (PPSI) must maintain fully backed, traceable reserves at a 1:1 ratio, limited to assets such as US dollar cash, funds deposited at the Fed, demand deposits at depository institutions, US Treasuries and notes with remaining maturity within 93 days, overnight repo and reverse repo positions, government money market funds invested solely in compliant assets, and approved tokenized equivalents.

In practice, the new reserve structure under the law will resemble current Circle configurations more than Tether’s past diversified mix. Even if reserves do not directly hold Treasuries, regulations will steer issuers toward assets with similar economic properties—overnight repo, Treasury-backed reverse repo, or government money market funds with high safety profiles.

Considering direct holdings of Treasuries and the embedded exposure in compliant repo and government money funds, a reasonable operational assumption is that 85–95% of new reserves will ultimately flow into short-term government bonds. This aligns with the law’s design and the current compliant stablecoin standards (e.g., USDC, World Liberty USD1).

Applying this assumption, nearly all forecasted growth in stablecoin reserves will generate significant US Treasury demand. Even in the most conservative scenario, with $420 billion in 2028, about $162 billion will be in incremental Treasury holdings; in the most aggressive case, demand could approach $3.5 trillion.

This means that, as long as stablecoins exist, a substantial and persistent demand for safe, short-term government assets will be maintained. The potential buyer’s scale relative to the current short-term Treasury market (~$6.8 trillion, with ~$4.8 trillion under 93 days) is enormous. The US Treasury can likely accommodate this demand by increasing issuance, especially if the market perceives stablecoins as a stable, long-term source of funding.

Investable Market Size

The current short-term US Treasury securities outstanding are about $6.8 trillion, with roughly $4.8 trillion under 93 days remaining maturity—these are the assets eligible as collateral under the “GENIUS Law.”

No matter which supply forecast is used, stablecoin issuers will rank among the largest holders of short-term Treasuries within the 93-day maturity segment—second only to money market funds (~$2.6 trillion), and likely surpassing all foreign official and private holdings in this maturity range.

Beyond short-term Treasuries, each month also sees issuance of coupon-bearing debt (medium and long-term notes) maturing within 93 days. The supply of such assets can be estimated from the US Treasury’s “Monthly Public Debt Report” (MSPD), which at any time shows about $600–$700 billion in eligible securities.

Stablecoin issuers can invest in both existing short-term Treasuries and near-maturity coupon debt. However, liquidity premiums exist between new and old issues, and issuers will likely avoid near-maturity coupon bonds. Regardless, stablecoins will substantially absorb a large share of the shortest-duration government debt.

A natural question arises: can the market absorb this large incremental demand without distortion? The answer is probably yes, but not passively.

The short end of the Treasury yield curve can sometimes be pushed into very high valuation territory; when safe, liquid collateral is scarce, short yields can even turn negative. If stablecoins form a large, price-insensitive, rigid reserve buyer base, the short-term market may exhibit similar patterns: not because Treasuries lose functionality, but because marginal buyers’ yield sensitivity diminishes, constrained by regulation and product design. In some cases, stablecoin issuers might even pay a premium to hold compliant Treasuries.

In reality, the US Treasury is unlikely to allow this demand to go unmet. Once short-term Treasuries and ultra-short debt become long-term, persistent buyers, the Treasury will have strong incentives to increase issuance of short-term debt to meet this demand—reducing marginal financing costs and facilitating rollovers.

This is crucial: the US government has a clear strategic interest in expanding short-term issuance to meet stablecoin-driven demand, rather than issuing long-term debt that could raise borrowing costs. Short-term issuance is cheaper, more flexible, and better aligned with the market’s short-end focus. As stablecoin reserves grow, creating a long-term fixed buyer base for short-term debt, the US financing structure will become more short-dated and resilient. This aligns with the Treasury’s stated policy of prioritizing short-term issuance to meet incremental needs, avoiding long-term borrowing at higher costs.

The most likely outcome is not a shortage of short-term debt, but a rebalancing: stablecoin-driven demand pushes up short-term yields and prices, prompting the Treasury to increase short-term issuance, which in turn supports the demand. This dynamic will reshape the Treasury market, making the short end a core channel for sovereign financing in the digital dollar era.

Yield Rate Impact

The inflow of funds from compliant stablecoins, relative to investable short-term debt, is substantial. How much will this demand influence US Treasury yields?

The BIS and Coinbase have studied historical stablecoin supply fluctuations and their impact on short-term Treasury yields. Their methods involve identifying periods of large supply deviations, regressing short-term yields against stablecoin supply shocks, and controlling for overall interest rate and liquidity conditions.

Empirical estimates suggest that a weekly stablecoin inflow of about 2 standard deviations (~$31 billion) can reduce 3-month Treasury yields by 2.5–3.5 basis points; during periods of scarce short-term debt, the impact can reach 5–8 basis points.

Two models differ in their conclusions: BIS’s framework suggests persistent demand has a lasting effect; Coinbase’s model, incorporating autoregressive factors, expects yields to revert to the mean over time as prices adjust.

Which view dominates depends on whether stablecoin demand is short-term or structural. Under the “GENIUS” law, structural demand is more realistic, and subsequent analysis will assume this.

A key difference in the models: one cannot simply project future US Treasury demand based on current reserve asset structures. Compared to past stablecoin cycles, the law will likely increase the proportion of Treasuries and similar government assets in reserves. To reflect this, the model is adjusted to assume a higher weight of Treasuries in new stablecoin reserves—about 1.2 times the historical ratio—indicating a marginal increase in Treasury backing.

Using a conservative baseline—$1 trillion in 2028, $1.5 trillion in 2030—the impact on yields is moderate: a 3.0–4.4 basis point decline in 30-day Treasury yields by 2030; during tight supply periods, declines could approach 10 basis points. In more optimistic scenarios, especially with deposit substitution assumptions, the decline could reach 14–20 basis points.

The short end of the Treasury yield curve remains anchored by the Federal Reserve’s policy rate, but the spread between short-term Treasuries, OIS, and repo rates, as well as relative valuations of nearby maturities, will be influenced by fund flows, collateral scarcity, and dealer balance sheet constraints. Stablecoins, as price-insensitive, rigid reserve buyers, will exert downward pressure on short-term yields and increase demand for high-liquidity collateral. Existing estimates of interest rate sensitivity are conservative; if stablecoin growth exceeds the growth of eligible US Treasuries, the impact on yields could be higher.

A counterbalancing force exists: if reserve demand becomes a long-term structural need, the US Treasury will be motivated to increase short-term issuance, especially if it can lower overall borrowing costs and improve refinancing flexibility. This would lead to a dynamic rebalancing: stablecoin demand pushes short-term yields down, while Treasury issuance expands to meet this demand, preventing long-term shortages.

This scenario aligns with the US Treasury’s strategic preference: to expand short-term issuance to meet incremental needs, rather than issuing more long-term debt at higher costs. As long as stablecoin reserves support a long-term fixed buyer base for short-term debt, the overall financing structure will become more short-dated and resilient, with the short end of the yield curve serving as a primary channel for sovereign funding in the digital dollar era.

Yield Rate Effects

The incremental demand from stablecoins will exert a significant influence on US Treasury yields. Empirical research indicates that a large, sustained inflow of stablecoins can lower short-term yields by several basis points, with potential for larger effects during periods of tight supply.

The impact is directionally clear: stablecoin-driven demand will tend to suppress short-term yields, especially if the demand becomes a persistent, structural feature. The US Treasury can accommodate this by increasing short-term issuance, which will reinforce the rebalancing and support the stability of the US debt market.

In summary: Stablecoins under the “GENIUS” framework will likely lead to a structural shift in the US Treasury market, favoring short-term issuance, and exert downward pressure on short-term yields, with broad implications for US fiscal and monetary policy.

Balance Sheet, Leverage, and Model Results

Modern banking does not operate on a simple deposit-creation-for-loans model; rather, it involves loan derivation of deposits, constrained by capital adequacy and regulatory requirements. From a leverage perspective, $1 of stablecoin reserves recorded as bank liabilities is not equivalent to $1 of retail deposit funds used for lending.

When deposit funds shift from retail accounts to stablecoin issuer reserves, even if total bank liabilities stay the same, the asset structure changes. Regional and community banks rely heavily on deposit-based net interest margins; thus, they are more sensitive to such shifts than diversified large institutions with multiple revenue streams.

Combining Standard Chartered’s global capital distribution assumptions with Citi’s detailed US fund substitution framework, the analysis estimates that about 30–40% of new stablecoin reserves will originate from US bank deposits; the rest from overseas inflows (~30–40%) and domestic non-deposit sources like cash and money market funds (~20–30%). These figures include scenarios with interest-yielding stablecoins.

Under this structure, total bank funding could still grow, but the composition shifts: domestic low-cost deposits decline, replaced by higher-cost wholesale funding or increased reserve-backed assets. The overall credit creation capacity may contract or shift, depending on the extent of deposit substitution.

Implication: If more than 70% of new stablecoin reserves come from US bank deposits, credit could face contraction; if the proportion is lower, the overall effect may be neutral or even expansionary, with overseas inflows offsetting domestic deposit outflows.

Regional and Funding Composition

The geographic origin of stablecoin funding is critical: whether the demand mainly displaces domestic deposits or is driven by offshore capital inflows determines the net effect on the US economy and banking system.

Citi’s baseline estimates: about one-third of incremental stablecoin funding comes from US bank deposits; the remaining two-thirds from other sources—cash (12%), money market funds (10%), and crucially, offshore capital (33%).

This difference is significant because the impact on bank balance sheets varies: if stablecoins mainly replace domestic retail deposits, the total US deposit base remains unchanged, but bank lending capacity may weaken. If most demand stems from offshore inflows, the US banking system effectively gains new dollars, which are then invested in Treasuries, supporting credit expansion.

The structure of inflows influences the distribution of benefits and risks: domestic deposit displacement tends to weaken bank profitability and credit, while offshore inflows can bolster the US financial system’s liquidity and credit capacity, albeit with increased foreign exposure.

Each dollar flowing out of US bank deposits could be offset by multiple dollars of offshore capital inflows, depending on the structure.

This core insight underpins the overall impact assessment: if stablecoin growth relies heavily on domestic deposit substitution, credit may contract; if driven by offshore inflows, the US system could see net expansion.

Regulatory and Credit Dynamics

Jessie Wang of the Federal Reserve provides a clear framework for understanding how stablecoin expansion influences deposits, credit creation, and broader financial intermediation. The model disaggregates credit effects into five key variables: total bank deposit outflows, lending capacity, the proportion of stablecoin reserves returning to banks, changes in overall funding costs, and exogenous capital inflows from outside the banking sector. This approach shifts focus from mere market size to the specific transmission channels through which stablecoins affect bank balance sheets.

The first variable: total deposit outflow. It’s straightforward but not the only concern; the composition matters. Different deposit types have different economic properties: retail deposits are typically more stable and cheaper than wholesale or stablecoin-backed deposits. Regulatory metrics like the Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR) impose different constraints, making the impact on credit capacity highly sensitive to deposit structure.

The second variable: deposit multiplier. This measures how deposit changes translate into credit expansion or contraction. Empirical studies (e.g., Kundu, Park, Vats 2025) suggest that a $1 decline in deposits can lead to a $1.26 reduction in lending, implying a deposit-to-credit multiplier of about 1.26. This parameter is critical: it determines how much credit shrinks or expands in response to deposit outflows or inflows.

The third variable: reserve fund reflow. Not all dollars leaving the banking system vanish; some remain within the broader financial ecosystem—cash, repos, government funds—thus reducing the net outflow impact. The proportion of reserves that re-enter the banking system influences the net credit effect.

The fourth variable: overall funding costs. Even if reserves stay within the system, the nature of stablecoin-backed liabilities differs from traditional deposits. They tend to be more sensitive to interest rate changes and market stress, potentially forcing banks to hold more liquid assets, shorten asset durations, and narrow net interest margins.

The fifth variable: external capital inflows. Stablecoins can attract foreign capital, which, once inside the US financial system, can support credit expansion. The net effect depends on the balance between domestic deposit displacement and foreign inflows.

The model estimates that, if $1,000 billion of stablecoin reserves are diverted from US bank deposits, bank lending could shrink by roughly $600–$3B, depending on the deposit-to-credit multiplier and other factors. This provides an upper bound for credit contraction under domestic deposit substitution.

However, if a significant portion of stablecoin demand is driven by offshore capital inflows, the net effect could be positive: new foreign dollars entering the US system can support additional Treasuries and credit, offsetting domestic deposit outflows.

Each dollar of US bank deposit outflow could be offset by multiple dollars of offshore inflows, depending on the structure.

This core insight underscores that the overall impact hinges on the source of stablecoin funding: domestic or offshore. The “GENIUS Law” combined with global capital flows will determine whether the US credit environment contracts or expands.

Geographical and Funding Composition

The geographic source of stablecoin funding is pivotal. Whether demand mainly displaces domestic deposits or is driven by offshore inflows determines the net effect on the US economy and banking system.

Citi’s baseline: about one-third of incremental stablecoin funding comes from US bank deposits; the rest from cash (12%), money market funds (10%), and offshore capital (33%).

This structure matters because different sources have different implications: domestic deposit displacement reduces bank funding and credit; offshore inflows effectively add new dollars, supporting Treasury issuance and credit growth. The impact on bank profitability and systemic stability depends on the dominant source.

Each dollar of domestic deposit outflow could be offset by multiple dollars of offshore inflows, depending on the structure.

This insight is fundamental: if stablecoin growth is mainly domestic deposit substitution, credit could shrink; if driven by offshore inflows, the US system could see net expansion, with increased foreign capital supporting Treasury issuance and credit.

Regulatory and Credit Dynamics

Jessie Wang’s framework from the Fed offers a detailed view of how stablecoin-driven deposit shifts influence credit creation. It emphasizes that the net effect depends on deposit composition, the degree of reserve reflow, and the sensitivity of bank funding costs.

If stablecoin demand mainly displaces low-cost retail deposits, credit contraction is likely. If offshore inflows dominate, the US can see net credit expansion, with stablecoins supporting Treasury issuance and broader financial activity.

The key is the balance: the impact on the US credit environment depends on whether stablecoins primarily substitute domestic deposits or attract foreign capital inflows, with the latter potentially boosting overall credit.

Regulatory and Policy Considerations

Jessie Wang’s analysis highlights that the impact of stablecoins on bank deposits and credit depends critically on deposit structure, reserve reflow, and external capital flows. The “GENIUS Law” aims to regulate reserve assets tightly, which will influence these dynamics.

Potential policy improvements include: incorporating Federal Home Loan Bank (FHLB) debt into eligible reserves, and including Ginnie Mae securities as acceptable collateral. These measures can help smooth market impacts, support liquidity, and mitigate systemic risks, especially during stress periods.

Further, allowing a small proportion of reserves to be invested in Ginnie Mae securities could diversify reserve yields without compromising safety. Regulatory flexibility at the state level could also enable pilot programs to test these approaches.

Overall, the law’s design will shape how stablecoin reserves interact with the broader financial system, influencing credit, liquidity, and systemic stability.

Global Impact

Outside the US, the effects are profound and mostly negative for emerging markets.

Countries with weak monetary credibility, fragile banking systems, and strict capital controls will face increased pressure. The IMF has long warned that stablecoins can accelerate currency substitution, amplify cross-border capital flows, and weaken monetary sovereignty—especially in high-inflation, poorly governed economies with low confidence in local policies.

Standard Chartered’s “Impact of Stablecoins on Emerging Markets” echoes this: in dollar-scarce economies, stablecoins will drain local bank deposits into digital dollars, suppress domestic credit creation, and weaken monetary policy transmission.

The vulnerability of a country depends on multiple factors: weak monetary credibility, fragile banking, capital controls, high remittance dependence, shallow capital markets, and reliance on informal savings. Stablecoins address real cross-border payment and dollar access issues, making them attractive but also increasing systemic risks.

For the US, this reinforces dollar dominance: easier access to dollar assets expands the US’s monetary policy reach and increases dollar asset demand. For emerging markets, it complicates macro management, reduces seigniorage, and accelerates dollarization, often triggering financial instability once local deposit bases erode and policy tools weaken.

The “race” extends beyond deposits: when holding dollar assets becomes as easy as downloading an app, countries with weak institutions, high costs, and information asymmetries will face long-term structural disadvantages. The “GENIUS Law” thus consolidates dollar hegemony by lowering barriers, but also by weakening other currencies and banking systems—aligning with US strategic interests to maintain dollar dominance and share the benefits of global dollar issuance.

In essence, the “GENIUS Law” will deepen dollar’s global role, reinforce US financial primacy, and reshape international monetary dynamics.

Conclusion

The “GENIUS Law” is not merely a regulation of crypto assets but a fundamental reform of the dollar’s financing architecture. Its effects will cascade through the US Treasury market, bank balance sheets, and international capital flows, redistributing dollar liquidity benefits.

Compared to total volume impacts, the internal redistribution of benefits and risks is more critical: banks will shift from deposit-based profits to fee and capital markets; regional banks will lose low-cost deposits but gain offshore inflows; weaker sovereigns will face intensified financial competition and dollarization.

For policymakers, this is a manageable innovation: regulate digital dollars within a framework that promotes innovation, expands use cases, and avoids the vulnerabilities of unregulated quasi-money tools. Success depends on effective implementation: controlling reserve adequacy, ensuring smooth stablecoin redemptions during stress, and managing international competitive pressures.

For banks, the key is strategic adaptation: deposit business remains valuable but increasingly relies on comprehensive services, credit access, and customer relationships rather than low-cost deposit advantages. Institutions that rely solely on convenience will see margins narrow; those that deepen client engagement and diversify revenue streams will maintain profitability. The real challenge is not competition itself but resisting the inertia of refusal to adapt.

For the dollar system, the “GENIUS Law” is an evolutionary step, not a revolution: the dollar’s global dominance is already entrenched; the law further lowers barriers, embeds stablecoin demand, and enhances the US’s financial infrastructure. The FedNow system upgrades domestic payments; the law opens programmable dollar services globally, reaching underserved markets and users.

Overall assessment: The US financial system benefits overall; domestic banks sacrifice some margin but remain core; overseas banking faces increased competition and capital outflows; global users gain more efficient, freely transferable dollar assets; US debt issuance costs decline slightly, and issuance stability improves; dollar’s role as a globally trusted, programmable asset deepens.

This is not a story of crypto overthrowing traditional finance but an evolution where the US integrates technological innovation while maintaining its structural advantages. The “GENIUS Law” does not overturn the dollar economy but modernizes its operation, redistributes economic rents, and extends US financial infrastructure globally.

The core question is no longer whether stablecoins will reshape the dollar’s financial landscape but who will capture the value of this transformation and who will bear the costs of adaptation.