Galaxy Digital: 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 U.S. Treasuries, slightly suppress short-term yields, and directly channel global dollar demand into the U.S. 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 U.S. financial infrastructure will far exceed the volume of domestic deposit migration. 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 U.S. will flow into stablecoin reserves, while trillions of dollars of overseas capital will also flood into the U.S. banking system. The structural increase in U.S. Treasury demand driven by stablecoins could lower short-term Treasury yields by 3–5 basis points, saving U.S. taxpayers over $3 billion annually. We predict that each dollar of stablecoin minted will expand U.S. credit creation by $0.31. 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. However, the overall outcome is unlikely to trigger systemic credit contraction; rather, it will be 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 U.S. yield curve—most sensitive to interest rate changes—will have larger, more stable buyer groups. The already dominant U.S. dollar, in terms of holdings, transfers, and savings, will see further reductions in global entry barriers.

When holding U.S. credit assets becomes as easy as downloading an app, there will be signs of domestic deposits in fragile economies rushing out.

This impact may spill over beyond U.S. 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 may 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 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: pressure on bank interest margins, increased flexibility in Treasury issuance, incremental foreign capital inflows into the U.S. financial system, and intensified financial competition faced by weak sovereign states.

Overall pattern: The U.S. benefits overall; some banks see margin compression; some overseas banking systems lose deposits; U.S. 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 rational assessments alongside fierce controversy. The U.S. 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 Treasuries. From this perspective, the law is fundamentally about improving financial infrastructure, not merely regulating speculative tech assets; it defines who can issue digital dollars, what assets back them, and how the U.S. government’s fiscal needs are financed.

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, Treasuryd-backed stablecoins with yields, banks could face long-term funding costs rising and deposit bases shrinking. (The “GENIUS Act” explicitly bans stablecoin issuers from paying interest directly to users but allows exchanges to reward stablecoin holdings on their platforms. The pending “Clarity Act” is currently being negotiated, with banks lobbying for a complete ban on such incentives.)

The digital asset industry believes that the narrative of deposit outflows is exaggerated. They argue that interest-bearing stablecoins are essentially similar to government money market funds: cash-like instruments investing in short-term public debt, offering 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, this risk is precisely what the “GENIUS Act” aims to prevent through reserve requirements and regulation. Yet, money funds have never displaced community banks. The crypto industry’s view is: banning interest payments on stablecoins is actually protecting existing bank subsidies, not ensuring financial system stability.

This article does not delve into the legislative details, which various institutions have already analyzed extensively. Instead, it summarizes the core structural provisions of the law as background, focusing on the most market-relevant dimensions: balance sheets, fund flows, and market incentives. The key issue is not an abstract debate on the pros and cons of stablecoins, but how they reshape the entire financial system’s asset and liability configuration.

This analysis emphasizes the potential impacts on U.S. finance and macroeconomics, while also considering global divergence effects. The dimensions include: how stablecoin expansion under the “GENIUS” framework influences short-term Treasury demand and pricing, sources of incremental capital—whether new capital or substitution of existing deposits—and secondary effects on bank funding costs, credit creation, and financial intermediation patterns. To clarify this logic, we will systematically dissect reserve rules, stablecoin growth forecasts, deposit substitution models, and international capital flows.

Impact on the U.S. Treasury Market: Scale and Mechanisms

To evaluate how the “GENIUS Act” reshapes the Treasury market, first clarify the intrinsic link between stablecoin scale growth and 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 U.S. Treasuries.

The world’s largest offshore stablecoin issuer, Tether, currently holds over $120 billion in short-term Treasuries, ranking among the largest holders of short-term U.S. debt globally, surpassing over 90% of sovereign nations’ holdings. The “GENIUS” law will formalize and localize this model, anchoring stablecoin demand as a core component of their reserve assets. Previously, stablecoin reserves included a mix of commercial paper, gold, and other non-governmental instruments; future configurations will be much more concentrated in Treasuries.

The deeper implication is: the expansion of stablecoins will reliably translate into increased 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 rolled over until the stablecoin is redeemed.

Estimating this scale involves three core inputs:

• Forecast of stablecoin supply over the next 2–5 years;
• Understanding the historical relationship between stablecoin fund flows and Treasury market impacts;
• Building an analytical framework that, under variable reserve structures, converts total stablecoin issuance into net Treasury demand.

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

Stablecoin Supply Forecast

Current total stablecoin market cap is in the low hundreds of billions, but most analysts expect the “GENIUS” law will create a significant acceleration environment for stablecoin expansion. Analysts from Citi, Standard Chartered, Coinbase, JPMorgan all see substantial growth in the coming years, though their frameworks differ markedly. Some focus on transaction volume growth, others on substitution of dollar alternatives, and many rely on recent adoption speed extrapolations. The methodological differences are crucial—they influence not only the overall market size forecast but also the potential impacts on banking, Treasury demand, and the dollar’s role in global finance.

Citi’s “2030 Stablecoin Outlook” models growth based on asset substitution across various balance sheet categories: transactional deposits, savings products, money market funds, physical cash, offshore dollar holdings. This approach transforms market size estimation into a map of fund sources, predicting not only the final stablecoin volume but also which dollar assets they will replace.

In its April initial report, Citi forecasted stablecoin supply in 2028 to be between $422 billion and $2.3 trillion, reaching $500 billion to $3.7 trillion by 2030. The September update raised the baseline forecast: even without the “GENIUS” law, stablecoin growth expectations increased, while market substitution effects were lowered. The revised baseline: $1.2 trillion in 2028, $1.9 trillion in 2030.

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

The core value of Citi’s model lies in its structural disaggregation: it distinguishes three fund sources—domestic deposits, money market fund migrations, and overseas new 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 U.S. Short-Term Treasuries” report offers the most optimistic large-scale growth forecast, with a $2 trillion estimate frequently cited by U.S. Treasury commentary. Their analysis starts from current growth momentum: before the law, stablecoins grew at about 50% annualized. After enactment, they project this to accelerate toward nearly 100%, aligned with ongoing expansion of crypto exchange activity. Under this scenario, monthly stablecoin transaction 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%.

The core assumption: transaction volume expansion requires stablecoin stock and transaction volume to grow linearly and proportionally, with stablecoin velocity remaining unchanged (though they have since relaxed this assumption). To match the projected growth, stablecoin stock would need to increase from roughly $230 billion today to $2 trillion by 2028, implying issuance of about $1.6 trillion over this period. The analysis does not specify pessimistic or optimistic scenarios beyond the baseline, but the core logic is transaction-driven scale expansion, not asset substitution.

Coinbase’s “New Framework for Stablecoin Growth” 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 ecosystem integration fundamentally change the pace of adoption.

Their baseline forecast: stablecoin stock reaches about $1.2 trillion by 2028, with a pessimistic-optimistic range of $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 by 2030.

JPMorgan’s model is the most conservative and cautious among major banks, assuming stablecoin market expands steadily at 2–3% per month, with a forecast 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 scenario—used to estimate the impact of interest-paying stablecoins under the “GENIUS” law.

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

More extreme estimates in BPI’s report rely on the Baumol-Tobin model, which simplifies consumer cash management between transaction funds and savings. Applying this model mechanically suggests a much larger potential outflow: if stablecoins are allowed to pay interest directly to holders, potential outflows could reach about $4 trillion. While useful for stress testing, these figures are highly sensitive to assumptions; the Baumol-Tobin model’s empirical support is mixed, and it is more a demonstration of principles than precise prediction.

Using the Baumol-Tobin model directly for stablecoin demand is unreliable because many core assumptions do not hold in reality: stablecoins are used not only as transaction media but also as collateral, cross-border value storage, and savings assets; transaction costs are variable, influenced by network fees, congestion, and market structure; and stablecoin yields are not risk-free interest rates but carry interest rate and liquidity risks.

BPI’s scenario is deliberately extreme, designed to define the upper bound of potential banking system stress.

While modern microeconomic and structural empirical research recognizes the logic, it also notes that once transaction and payment technologies, marginal adoption effects, and precautionary motives are modeled, the actual interest rate elasticity would be significantly lower than the 0.5 benchmark of Baumol-Tobin. Even BPI admits that models like Miller-Orr, which treat cash management as a stochastic process, have lower interest rate sensitivities than Baumol-Tobin. Therefore, this extreme scenario should not be taken as a baseline but as a stress-test upper limit.

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

Considering all frameworks, the market shows a reasonable range rather than a single deterministic outcome. Even the lower bound suggests stablecoins will continue to expand from high growth levels, with annual supply growth around 40%; the most aggressive models project over 100% annual growth. Based on these, the 2028 stablecoin size forecast ranges approximately as follows:

• 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. Pessimistic: roughly $500 billion–$1.4 trillion; baseline: $830 billion–$3.1 trillion; optimistic: $1 trillion–$4 trillion.

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

Regardless of the forecast model, there is broad consensus: the “GENIUS Act” is a key catalyst for stablecoin growth—by reducing regulatory uncertainty, expanding institutional participation, enhancing payment utility, and strengthening stablecoins’ credibility as a global dollar product.

However, the choice of methodology is crucial: the same $1 trillion scale achieved via overseas adoption and transaction expansion has very different economic implications than that achieved through displacement of domestic bank deposits. This underscores that the analytical framework behind forecasts is as important as the final numerical estimates.

Stablecoin Reserve Asset Structure under the “GENIUS” Law

Based on the above supply forecasts, how much short-term Treasury demand can be additionally driven? While some reserve allocations remain at the discretion of issuers, the “GENIUS” law’s reserve requirements will strictly limit reserve composition to a few asset classes.

Currently, stablecoin issuers’ reserve structures vary widely. Circle’s USDC holds over 97% in U.S. 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 Treasuries in 2021; now, their structure has become more conservative, with about 75% in short-term Treasuries and cash equivalents.

The “GENIUS” law aims to significantly narrow the scope of reserve configuration, replacing issuer discretion with statutory asset categories. Article 4 stipulates that compliant payment stablecoin issuers (PPSI) must maintain fully backed reserves on a 1:1 basis, limited to strictly defined assets: U.S. dollar cash, funds deposited at the Federal Reserve, demand deposits at depository institutions, U.S. Treasuries and notes with remaining maturity within 93 days, overnight repo and reverse repo positions, government money market funds investing only in compliant assets, and approved tokenized equivalents.

In practice, the new stablecoin 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 high-safety substitutes: overnight repo, Treasury-backed reverse repos, or government money market funds with similar holdings.

Considering direct Treasury holdings and the embedded Treasury exposure in compliant repo and government money funds, a reasonable operational assumption is: 85–95% of new reserves will ultimately flow into short-term government bonds. This aligns with the law’s design and current standards of domestically compliant stablecoins like USDC and World Liberty USD.

Applying this assumption, nearly all forecasted growth in stablecoin reserves will generate additional Treasury demand. Even in the most conservative scenario, this would create about $162 billion in incremental short-term Treasury needs; in the most aggressive case, nearly $3.5 trillion.

This means that, as stablecoin reserves grow, they will create a structural demand for high-quality, short-term government debt—demand that will be persistent as long as stablecoins exist. The potential buying volume relative to current short-term Treasury outstanding (~$6.8 trillion, with ~$4.8 trillion under 93 days) is significant. The question is whether the market can absorb this without distortion.

The answer is likely yes, but not passively. When safe, liquid collateral becomes scarce, short-term yields can be pushed into negative territory. If stablecoins form a large, price-insensitive, rigid reserve demand, the short end of the market may see similar patterns: not because Treasuries lose functionality, but because marginal buyers’ yield sensitivity diminishes due to regulatory and product design constraints. In some cases, stablecoin issuers might even be willing to pay a premium to hold compliant Treasuries.

However, it is unlikely the U.S. Treasury will allow this demand to go unmet. Once short-term Treasuries and ultra-short debt become a long-term, rigid buyer base, the Treasury will have strong incentives to issue more short-term debt to meet this demand—reducing overall financing costs and facilitating rollovers.

This is critical: the U.S. government has every reason to prioritize short-term issuance to accommodate stablecoin-driven demand, rather than pushing the burden onto long-term bonds. Short-term Treasury 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 group for short-term debt, the financing structure will become more short-dated and resilient. This aligns with the Treasury’s stated policy: to expand short-term issuance first, avoiding higher costs associated with long-term debt.

This scenario fits well with the overall U.S. financing strategy: to increase short-term issuance to meet incremental demand, rather than crowd out long-term bonds. The likely outcome is an expanded short-end market, supported by both incremental issuance and a stable, long-term buyer base—primarily stablecoins.

The main impact is not that stablecoins will disrupt the short-term market, but that they will reshape its structure, making the short end a direct channel for sovereign financing via digital dollars.

Yield Rate Effects

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

The BIS and Coinbase have studied historical fluctuations in stablecoin supply and their effects on short-term Treasury yields. Their methods are similar: identify periods of large stablecoin supply deviations, regress short-term yields against supply shocks, controlling for overall rate volatility, liquidity, and crypto-specific shocks.

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 tight supply, the impact can reach 5–8 basis points.

Key differences include: BIS’s framework sees persistent demand effects; Coinbase’s model, with autoregressive factors, expects yields to revert to mean after price corrections. The dominant logic 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 critical distinction in the models: one cannot simply project future 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: the purchase scale of Treasuries associated with new stablecoins is multiplied by about 1.2, to account for a marginal increase in the reserve backing ratio.

Using a conservative supply assumption—$1 trillion in 2028, $1.5 trillion in 2030—the impact is moderate but quantifiable: the 30-day Treasury yield could decline by 3.0–4.4 basis points by 2030; during tight supply periods, declines could approach 10 basis points. In more optimistic scenarios, especially with BPI’s 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 yields and OIS, as well as the relative valuation of near-term securities, will be influenced by fund flows, collateral scarcity, and dealer balance sheet constraints. Stablecoins, as price-insensitive, rigid demand, will exert persistent downward pressure on short-term yields and increase demand for high-liquidity collateral. Historical sensitivity estimates may underestimate future impacts: if stablecoin growth exceeds the growth of eligible U.S. Treasuries, the yield impact could be higher than historical levels. This paper does not yet quantify this effect but notes that existing estimates are conservative.

Meanwhile, a counteracting force exists: if reserve demand becomes a long-term structural need, the Treasury will have strong incentives to issue more short-term debt, especially to meet this demand. Increasing short-term issuance can lower marginal financing costs and facilitate rollovers. The most plausible outcome is a dynamic rebalancing: stablecoin-driven demand pushes down short-term yields, while the Treasury expands issuance to meet this demand, preventing long-term shortages.

This is crucial: the U.S. government’s overall financing strategy favors expanding short-term issuance to accommodate stablecoin demand, rather than crowding out long-term bonds. As long as stablecoin reserves create a long-term fixed buyer base for short-term debt, the financing structure will become more short-dated and resilient. This aligns with the Treasury’s policy of prioritizing short-term issuance to meet incremental needs, avoiding higher costs associated with long-term borrowing.

The impact on yields is thus directional and conditional: a persistent downward pressure exists, but the actual magnitude depends on supply dynamics. If the Treasury actively expands short-term issuance, the long-term impact may be limited; if not, yields could fall more sharply.

This subtle shift in the yield curve’s structure is economically significant. For example, a $6 trillion short-term Treasury market, with a 5 basis point yield change, translates into roughly $23k annual savings in borrowing costs. Over time, the “GENIUS” law could embed a durable, low-yield, rigid demand in the short end, reducing financing costs for the U.S. government.

Funding Sources and Deposit Dynamics

Stablecoin growth reflects only part of the story: it shows how, under “GENIUS” regulation, issuers reconfigure reserves and increase short-term Treasury holdings. But the more impactful and contentious issue is the supply side—funding sources.

Every dollar flowing into the short-term Treasury market via compliant stablecoins originates from other parts of the financial system’s balance sheet, displacing existing uses—whether bank deposits, money market funds, or real economy credit. The core distinction: is this dollar new capital entering the U.S. banking system, or is it a migration from existing deposits and funds?

If stablecoin inflows are primarily new deposits into U.S. banks, then the effect is incremental: banks gain new deposits, which they can allocate into short-term Treasuries. Stablecoins act as a conduit: foreign or new dollar inflows first enter the U.S. financial system, then flow into government financing. Even if some deposits shift into stablecoin reserves, the overall deposit base will expand.

If, however, stablecoin growth mainly replaces existing bank deposits, the logic is different: the U.S. banking system does not gain new dollars; it merely experiences a liability swap—demand deposit at Bank A becomes a Treasury-backed deposit at Bank B. On the asset side, this shifts from private credit creation to Treasury holdings backing stablecoins.

Deposit outflows will vary across banks, but the secondary effects are clear: banks losing low-cost deposits will need to shrink assets, seek more expensive wholesale funding, or raise deposit rates. Each choice impacts credit creation: shrinking assets reduces lending; replacing deposits with wholesale funding compresses net interest margins; raising rates to attract deposits increases overall funding costs, ultimately affecting borrowers and bank profitability.

Modeling these effects requires detailed analysis of deposit substitution and bank behavior, drawing on Citi’s and Standard Chartered’s frameworks.

Stock Substitution Framework

To estimate the scale of deposit outflows, it’s insufficient to rely solely on aggregate deposit forecasts; one must analyze the sources of stablecoin demand.

Citi’s “2030 Stablecoin Outlook” offers a valuable framework. It models asset substitution behavior: households and investors allocate funds among similar financial products based on relative yields, convenience, and regulation.

Compliant stablecoins are highly similar to major asset classes: checking accounts, savings accounts, government money market funds (especially when they pass through yields), physical cash, and foreign currency holdings seeking dollar exposure.

Different sources of funds have different impacts on bank financing: cash holdings have minimal effect; outflows from demand deposits cause the greatest disruption; outflows from government money market funds mainly alter internal asset allocations; outflows from bank transactional accounts directly increase bank funding costs.

In optimistic scenarios, stablecoins could attract trillions of dollars of new liquidity into the U.S. banking system; even in less favorable cases, the overall effect is a reconfiguration of credit creation, not a total collapse.

This model, based on Citi’s asset substitution and market share estimates, simplifies into two core sources: domestic bank deposits and all other sources.

Baseline calculations show: only when more than 70% of new stablecoin reserves come from U.S. domestic deposits will credit contraction occur; if the efficiency of deposit recycling declines or wholesale funding costs rise, a threshold of about 45% could trigger credit slowdown.

The key economic question: does the outflow of funds from bank deposits into stablecoins exceed the inflow of new funds into the U.S. financial system? The answer determines whether stablecoins will net expand or contract credit.

Regional and Composition Patterns

The geographic source of stablecoin funds is crucial: whether the law benefits the U.S. economy overall or merely redistributes existing domestic deposits. Citi’s substitution framework can estimate which fund pools are most likely to shift into stablecoins.

Citi’s baseline: about one-third of incremental stablecoin funds come from U.S. bank deposits; the rest from other sources—around 12% physical cash, 10% money market funds, and about 33% from overseas capital.

This structure matters because different sources of stablecoin growth impact the balance sheet differently. If regulation allows stablecoins to pass through most investment yields to users, then historically, funds from deposits and money market funds could further shift into stablecoins, making stablecoins not just a payment tool but also a competitive savings asset with market-based returns.

Standard Chartered further emphasizes the international dimension: their assumption is that about 70% of stablecoin demand will come from offshore markets, consistent with Citi’s emphasis on domestic and foreign fund structures. Under this logic, each dollar flowing out of U.S. bank deposits is offset by multiple dollars of overseas inflows, potentially leading to net deposit growth in the U.S. system, albeit with a less favorable deposit structure.

This distinction is critical for credit modeling: if stablecoin growth mainly replaces domestic deposits, the overall credit impact is negative; if it mainly results from offshore inflows, the net effect could be neutral or even positive, as foreign capital enters the U.S. financial system before being allocated into Treasuries.

For each dollar flowing out of U.S. bank deposits, multiple dollars of overseas capital may flow in, effectively increasing total deposits.

This structural difference underpins the core conclusion: if the most pessimistic bank lobbying assumptions hold—that stablecoin growth relies almost entirely on domestic demand deposits—the credit impact will be negative. But if the actual pattern involves significant offshore inflows and reserve reflows, the overall effect could be neutral or positive, with stablecoins supporting additional Treasury issuance and credit expansion.

Regulatory and Credit Logic

Jessie Jiaxu Wang of the Federal Reserve provides a clear analytical framework for understanding how stablecoin expansion influences deposits, credit creation, and broader financial intermediation. This framework does not treat stablecoins as mere substitutes for bank deposits but dissects the transmission into five core variables: total bank deposit outflows, lending capacity, the proportion of stablecoin reserves returning to banks, changes in bank funding costs due to deposit structure shifts, and exogenous new capital inflows from abroad or non-bank sources. This approach shifts focus from simple market size to the specific transmission channels through which stablecoins affect bank balance sheets.

The first variable: total bank deposit outflows. It’s straightforward but not the only concern; the composition of outflows matters. Different deposit types have different economic properties: retail retail deposits are generally cheaper and stickier than wholesale or stablecoin-backed deposits; under liquidity coverage ratio (LCR) rules, retail deposits support higher leverage; under net stable funding ratio (NSFR), stable funding requirements for wholesale deposits are higher. Jessie emphasizes: even if total deposits do not decline significantly, a deterioration in deposit structure can weaken the bank’s actual lending capacity.

The second variable: deposit multiplier. More precisely, the degree to which deposit reductions translate into credit contraction. This is not a simple textbook money multiplier but based on empirical bank behavior. Wang cites research indicating that a $1 decline in deposits can lead to a $1.26 reduction in lending. Using this empirical relationship, the model estimates credit contraction from deposit outflows. The article adopts 1.26 as the baseline deposit multiplier, with a lower bound of 1 (full one-to-one linkage) and an upper bound of 1.5 (more severe contraction). This parameter critically influences the estimated credit impact of stablecoin-driven deposit shifts.

The third variable: reserve fund reflows. Stablecoin inflows do not vanish; a significant portion remains within the financial system—bank deposits, custody accounts, Treasury accounts, repos, or government money market funds. The net effect depends on how much of these reserves are re-circulated within the system versus permanently leaving. Wang’s framework highlights this but does not specify a fixed ratio.

The fourth variable: overall funding cost changes. Even if reserves stay within the system, their nature differs from traditional deposits. Stablecoin-related liabilities tend to be concentrated among fewer institutions, more sensitive to interest rates, and more prone to outflows during stress. This forces banks to hold more liquid assets, shorten asset durations, and compress net interest margins—weakening their credit creation capacity.

In sum, the real impact of stablecoins on credit depends heavily on assumptions about deposit outflows, structure, and reflows. Wang’s estimates suggest that every $500B of unrecaptured stablecoin reserves could cause a credit contraction of roughly $37k to $12k, representing an upper limit under domestic substitution scenarios. But this does not account for offshore inflows.

When considering offshore capital inflows, the picture changes dramatically. According to Standard Chartered, about 70–80% of stablecoin demand will come from offshore markets, meaning each dollar of domestic deposit outflow could be offset by multiple dollars of foreign inflows. This would lead to overall deposit growth, albeit with a different composition and profitability profile. Citi’s analysis aligns: even with high substitution, only about one-third of stablecoin reserves would come from domestic bank deposits, with the rest from overseas and non-deposit sources.

For each dollar of domestic bank deposit outflow, multiple dollars of foreign capital may flow into the U.S. financial system.

This is the core conclusion: if the most pessimistic bank lobbying assumptions are correct—that stablecoin growth relies almost entirely on domestic demand deposits—the credit impact will be negative. But if the actual pattern involves significant offshore inflows and reserve reflows, the overall effect could be neutral or positive, supporting additional Treasury issuance and credit growth. The net effect depends on the balance between domestic deposit outflows and foreign inflows.

Policy and Credit Implications

Jessie Wang’s framework, supported by empirical research, offers a clear way to understand how stablecoin expansion influences deposit structures, credit creation, and financial stability. It emphasizes that the impact is highly sensitive to assumptions about the source of stablecoin demand and the behavior of banks.

If stablecoin growth mainly replaces domestic demand deposits, the risk of credit contraction is real. But if offshore inflows dominate, the overall effect could be a net increase in deposits and credit, with stablecoins acting as a bridge for foreign capital into U.S. Treasuries.

The key is that the net impact on credit depends on the relative size of domestic outflows versus foreign inflows, and the degree to which reserves reflow within the system. This underscores the importance of understanding fund source composition and the regulatory environment.

Implications for Policy include: the need to monitor deposit structure shifts, manage bank liquidity and capital adequacy, and consider how reserve requirements and asset eligibility influence the stability and growth of stablecoins.

Implications for Banks involve: adapting strategies to changing deposit dynamics, managing funding costs, and leveraging new stablecoin-related opportunities without overexposure to liquidity or interest rate risks.

Global Impact

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

Countries with weak monetary credibility, fragile banking systems, and strict capital controls will face greater pressures. 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.

Whether a country is vulnerable depends on multiple factors: weak monetary credibility (expectations of inflation, currency depreciation, policy shifts), fragile banking systems (insufficient capital, inefficient operations, high custody risks), and capital controls or foreign currency restrictions (which stablecoins can bypass, increasing cross-border flows).

Additional vulnerabilities include: high remittance dependence, shallow local capital markets, limited banking infrastructure, and large informal savings sectors—all of which make stablecoins a practical solution for cross-border payments and dollar holdings, but also a channel for destabilization.

For example, in countries with persistent current account deficits and fiscal imbalances, stablecoins can lead to rapid dollarization, depleting reserves and increasing exchange rate volatility.

From the U.S. perspective, this reinforces dollar dominance: easier access to dollar assets expands the U.S. monetary policy’s reach, increases dollar asset demand, and supports Treasury issuance. Conversely, for emerging markets, stablecoins can accelerate dollarization, reduce policy autonomy, and heighten financial instability risks.

Conclusion

The “GENIUS Act” is not merely a regulatory framework for cryptocurrencies; it is a legislative overhaul of the dollar’s financing structure. Its effects will cascade through Treasury markets, bank balance sheets, and international capital flows, ultimately redistributing dollar liquidity benefits.

Compared to the total volume, the internal redistribution of benefits—such as bank revenue shifts, deposit base changes, and international capital flows—is more critical. Banks will see a shift from deposit-based profits to fee and capital markets, with some regional banks losing low-cost deposits and large global banks attracting offshore inflows. Emerging economies will face faster dollarization and increased external vulnerabilities.

For policymakers, this is a manageable innovation: regulating digital dollars within a framework that leverages technological advantages while avoiding the vulnerabilities of unregulated quasi-money. Success depends on effective regulation of reserve adequacy, smooth redemption mechanisms, and international cooperation.

For banks, the key is strategic adaptation: maintaining core deposit and lending activities while expanding fee-based services, digital channels, and cross-border offerings. Those unwilling to adapt risk losing relevance.

For the dollar system, the “GENIUS Act” is an evolutionary step, not a revolution: it deepens the dollar’s global role, reduces entry barriers, and embeds structural rigidity in dollar demand. It enhances the security and programmability of dollar assets, making them more accessible and efficient for global use.

Overall, the impact is positive for the U.S.: the financial system benefits from increased demand, lower borrowing costs, and a more resilient short-term funding structure. For the rest of the world, especially emerging markets, the effects are mixed—potentially reinforcing dollar dominance but also increasing vulnerabilities.

This is not about cryptocurrency overthrowing traditional finance but about the U.S. financial system integrating technological innovation while maintaining its structural advantages. The “GENIUS Act” does not overthrow the dollar economy; it modernizes its infrastructure, redistributes economic rents, and extends U.S. financial reach globally.

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