The Federal Reserve Bank of Cleveland hosted its "2025 Financial Stability Conference" Thursday and Friday, which featured one presentation titled, "Stablecoins and Safe Asset Prices." The Abstract for this segment states, "This paper examines the impact of dollar-backed stablecoin flows on short term US Treasury yields using daily data from 2021 to 2025. Estimates from instrumented local projection regressions suggest that a 2-standard deviation inflow into stablecoins lowers 3-month Treasury yields by 2-2.5 basis points within 10 days, with limited to no spillover effects on longer tenors. The effects are asymmetric (stablecoin outflows raise yields by two to three times as much as inflows lower them) and have strengthened over time with the growth of the market. Decomposing the yield impact by issuer shows that USDT (Tether) has the largest contribution followed by USDC (Circle), consistent with their relative size. Our results highlight stablecoins' growing footprint in safe asset markets, with implications for monetary policy transmission, stablecoin reserve transparency, and financial stability."
The Introduction explains, "Dollar-backed stablecoins have seen remarkable growth and are poised to reshape financial markets. As of March 2025, the combined assets under management of these cryptocurrencies promising par convertibility to the US dollar and backed by dollar-denominated assets exceeded $200 billion, with reserve positions in US Treasury bills (T-bills) of $114 billion, surpassing the holdings of some major foreign investors and [some individual] domestic money funds. Stablecoin issuers, notably Tether (USDT) and Circle (USDC), back their tokens primarily with US T-bills and money market instruments, positioning them as significant players in short-term debt markets. Indeed, dollar-backed stablecoins purchased over $35B of US T-bills in 2024, similar to the largest US government money market funds and larger than most foreign purchases.... While prior research focuses on stablecoins' role in cryptocurrency volatility (Griffin and Shams, 2020), their impact on commercial paper markets (Barthelemy et al., 2023) or their systemic risks (Bullmann et al., 2019), their interaction with traditional safe asset markets remains underexplored."
It tells us, "This paper investigates whether stablecoin flows exert measurable demand pressures on US Treasury yields. We document two key findings. First, stablecoin flows compress short-term T-bill yields, with effects comparable to that of small-scale quantitative easing on long-term yields. In our most stringent specification, which aims to overcome endogeneity concerns by using a series of crypto shocks that affect stablecoin flows but not Treasury yields directly, we find that 5-day stablecoin inflows of $3.5B, or 2 standard deviations, lower 3-month T-bill yields by about 2-2.5 basis points (bps) within 10 days. Second, we decompose yield impacts into issuer-specific contributions to find that USDT has the largest contribution to T-bill yield compression, followed by USDC. We discuss the policy implications of our findings for monetary policy transmission, stablecoin reserve transparency, and financial stability."
The paper says, "Our empirical analysis is based on daily data from January 2021 to March 2025. To construct a measure of stablecoin flows, we collect market capitalization data for the six largest dollar-backed stablecoins and aggregate them into a single number. We then use 5-day changes in aggregate stablecoin market capitalization as our proxy for inflows into stablecoins. We collect data on the US Treasury yield curve, as well as data on cryptocurrency prices (Bitcoin and Ether). We choose the 3-month Treasury bill yield as our outcome variable of interest as the largest stablecoins have either disclosed or publicly stated this tenor as their preferred habitat."
It comments, "A simple univariate local projection of changes in 3-month T-bill yields on 5-day stablecoin flows is likely subject to severe endogeneity bias. Indeed, estimates from this 'naıve' specification suggest that a $3.5B inflow into stablecoins is associated with 3-month T-bill yields declining by up to 25 bps within 30 days. The magnitude of this impact is implausibly large, as it suggests that a 2-standard deviation inflow into stablecoins has a similar impact on short-term interest rates as a Federal Reserve policy rate cut. We argue that these large estimates can be explained by the presence of endogeneity that biases the estimates downward (i.e., larger negative estimates relative to the true effect), due to both omitted variable bias (as potential confounders are not controlled for) and simultaneity bias (as Treasury yields may affect flows into stablecoins)."
The paper then says, "Our findings have important implications for policy, not least if the stablecoin market continues to grow. Concerning monetary policy, our yield impact estimates suggest that if the stablecoin sector continues to grow rapidly, it may eventually affect the pass-through of monetary policy to Treasury yields. Stablecoins' growing footprint in Treasury markets may also contribute to safe asset scarcity for non-bank financial institutions, potentially affecting the liquidity premium (D'Avernas and Vandeweyer, 2024). Concerning stablecoin regulation, our results highlight the importance of transparent reserve disclosures that allow for the effective monitoring of concentrated stablecoin reserve portfolios. Finally, our results can be interpreted as evidence of stablecoins creating a bridge through which shocks to the cryptocurrency ecosystem transmit to traditional financial markets."
It explains, "There are potential financial stability implications that arise when stablecoins become large investors in Treasury markets. For one, it exposes the market to potential fire sales in the event of a run on a major stablecoin. Indeed, our estimates suggest that such asymmetric effects are already measurable. The magnitude of our estimates is likely to be a lower bound of potential fire sale effects, as they are obtained from a sample largely based on a growing market and thus likely underestimate the potential for non-linear effects under severe stress. Moreover, part of the investments of stablecoins themselves for example through reverse repo agreements backed by Treasury collateral may facilitate arbitrage strategies such as the Treasury basis trade, a first order concern for regulators. Equity and liquidity buffers may alleviate some of these financial stability risks (Goel et al., 2025; Liao et al., 2024)."
The piece adds, "Our work relates to research on the demand for safe assets. Krishnamurthy and Vissing-Jorgensen (2012) show that demand for liquidity and safety suppresses Treasury yields. Lower short-term rates may in turn incentivize the issuance of risky short-term debt, potentially undermining financial stability (Greenwood et al., 2015). Doerr et al. (2023) present evidence that money market funds (MMFs) can influence the price of near-money assets such as repos and Treasuries. Foreign demand has also been shown to affect Treasury yields (Ahmed and Rebucci, 2024). Stablecoins, whose balance sheets look very similar to those of MMFs, may contribute to such effects, but their marginal impact remains unquantified despite their growing role in the market."
Finally, it states, "Moreover, we contribute to a growing body of work on stablecoins. Much of this literature studies stablecoin stability (Arner et al., 2020; D’Avernas et al., 2023; Lyons and Viswanath-Natraj, 2023; Kosse et al., 2023), adoption (Bertsch, 2023), runs (Ahmed et al., 2025; Gorton et al., 2022) and market structure (Ma et al., 2023), among others. Closer to our paper, Barthelemy et al. (2023) and Kim (2025a) study the effect of stablecoin investments in the commercial paper market. Our paper focuses instead on the reserve asset that has come to dominate major stablecoins' reserves, namely Treasury securities. In a contemporaneous paper, Kim (2025b) presents evidence of the effect of Tether minting on Treasury exchange-traded funds and use a macro-finance model to argue for a potential non-linear effect of stablecoins on the Treasury market if the former were to grow substantially."
