Stablecoins have changed.

Author: Shanaka Anslem Perera

The U.S. Treasury bypassed the Federal Reserve and carried out structural reforms to the U.S. monetary system, forcing the private sector to purchase government bonds and potentially temporarily solving the fundamental problem of deficit financing. This change did not require a constitutional amendment, a political revolution, or even a large-scale public debate. All of this was achieved with just 47 pages of financial regulatory documents.

On July 18, 2025, President Trump signed the Guidius Act (Guiding and Building a National Innovation for Stablecoins in the United States). This act was touted as a consumer protection measure for digital currencies.

In reality, it represents the most significant peacetime restructuring of the sovereign debt market since the 1951 Treasury-Federal Reserve Agreement—but in a completely opposite direction. The 1951 agreement established the central bank's independence from fiscal authority, while the GENIUS Act weaponizes the regulatory framework for the digital dollar, subordinating monetary policy to the Treasury's funding needs. The mechanism is ingenious. The Act stipulates that all dollar-pegged stablecoins (digital tokens) must hold 100% of U.S. Treasury securities or central bank cash reserves. Regulatory authority rests with the Office of the Comptroller of the Currency (OCC), a branch of the Treasury, not the independent Federal Reserve. The Act prohibits these issuers from investing reserves in corporate bonds, commercial paper, or any other assets other than short-term government bonds. The result is that every newly minted digital dollar becomes a fiat purchase of U.S. sovereign debt. U.S. Treasury Secretary Scott Bessant has publicly predicted that by 2030, the stablecoin market capitalization will grow from the current $309 billion to $2 trillion to $3.7 trillion. If this prediction comes true, the stablecoin industry will become the second-largest holder of U.S. government debt after the Federal Reserve—but unlike the Fed's balance sheet, this demand is not created through central bank money printing, but rather stems from private capital flows, primarily from emerging markets seeking dollar exposure in the face of local currency instability. This is not quantitative easing, but privatized quantitative easing—fiscal authorities artificially create structural demand for their own debt through regulatory directives, unaffected by central bank policy stances. Its impact extends far beyond technical debt management; it shakes the very foundations of the post-Bretton Woods monetary order. The key innovation of the GENIUS Act lies not in what it permits, but in what it prohibits. Traditional banking regulations allow financial institutions to hold diversified portfolios, manage maturity transformation, and generate returns through lending. Under this act, stablecoin issuers are prohibited from engaging in all of these activities. They can only hold three types of assets: dollar deposits in banks insured by the Federal Deposit Insurance Corporation (FDIC), Treasury bills with maturities of 90 days or less, or repurchase agreements secured by these Treasury bills. They are explicitly prohibited from re-collateralizing these assets—that is, pledging the same collateral multiple times—except to raise liquidity through the overnight repurchase market to meet redemption demands. This structure transforms stablecoin issuers into "narrow banks" with a single mission: to convert private savings into government liabilities. Circle, Tether, and any future licensed issuers act as conduits, directly channeling global dollar demand into Treasury bill auctions. The regulatory framework ensures that these funds do not flow into the broader private sector. A study by the Bank for International Settlements has empirically measured this effect. A working paper analyzing stablecoin flows from 2022 to 2024 found that a $3.5 billion increase in market capitalization would lower short-term Treasury yields by 2.5 to 5 basis points. Crucially, this effect is asymmetrical: outflows lead to yield increases two to three times greater than inflows lead to yield decreases. Extrapolating this relationship to Secretary Bessant's proposed $3 trillion target implies a structural restraint of 25 to 50 basis points on the short-term yield curve. For a government with $38 trillion in debt, a 30-basis-point reduction in borrowing costs equates to approximately $114 billion in annual interest savings—almost double the entire Department of Homeland Security budget. This marks a fundamental decoupling between fiscal and monetary policy. The Federal Reserve may raise the federal funds rate to 5% in an attempt to tighten financial conditions, but if the Treasury can keep rates below 4.5% through mandatory purchases of stablecoins, the Fed's policy transmission mechanism will fail. The central bank sets the policy rate, while the Treasury sets its own borrowing costs. Secretary Bessant's public statement reveals his strategic considerations. In his testimony following the passage of the GENIUS Act, he stated that the expansion of the stablecoin market would allow the Treasury to "at least for the next few quarters" without having to increase the size of its bond coupon auctions. This is not just empty talk; it's the government's acknowledgment that it views the growth of regulated stablecoins as a direct alternative to demand in the traditional bond market. The timing aligns with fiscal needs. The Omnibus Act of 2025 suspended the debt ceiling and authorized an additional $5 trillion in lending capacity. Finding buyers for these bonds without driving up yields is a critical challenge for the Treasury. If the stablecoin industry reaches its expected size, it will be the solution. Demand primarily comes from emerging markets. An analysis by the ASEAN+3 Macroeconomic Research Office indicates that dollar-denominated stablecoins have become a major medium for cross-border payments in Southeast Asia, Latin America, and parts of Africa. These regions face currency instability and capital controls, thus viewing regulated dollar tokens as a superior store of value compared to domestic banking systems. This creates an anomaly. The US exports inflation to developing countries, whose citizens respond by abandoning their own currencies and adopting digital dollars. Stablecoin issuers then exploit this capital flight, channeling it back to the US Treasury. The US government thus finances its fiscal deficit through the collapse of currencies in the Global South—a form of 21st-century financial imperialism, albeit through software protocols rather than gunboat diplomacy. The Strategic Bitcoin Reserve, established by executive order in March 2025, completes this framework. The Treasury holds approximately 198,000 bitcoins (worth $15 billion to $20 billion) as a sovereign reserve, explicitly stating "never to be sold," to hedge against its own debt strategy risks. If a massive influx of digital dollars into the global market ultimately leads to currency devaluation—a potential long-term consequence of persistent deficit spending—then Bitcoin reserves will appreciate in dollar terms, offsetting the liabilities on sovereign balance sheets. The strongest evidence that this shift represents a genuine regime change doesn't come from Washington, but from Wall Street. On October 15, 2025, JPMorgan Chase—the largest bank in the United States and historically the most hostile major financial institution to cryptocurrencies—announced that it would begin accepting Bitcoin and Ethereum as collateral for institutional loans. For a decade, JPMorgan Chase CEO Jamie Dimon has denounced Bitcoin as a "scam" and a tool for criminals. The current policy reversal is not a change in attitude, but rather an acceptance of changes in incentive mechanisms. With the Genius Act mandating that stablecoins must hold government bonds and the Fair Banking Executive Order prohibiting discrimination against digital asset companies, JPMorgan Chase believes the benefits of this accommodative policy outweigh the resistance. The new mechanism integrates crypto assets into the collateral chain of the shadow banking system. Institutional clients—including hedge funds, family offices, and corporate finance departments—can now pledge digital assets to JPMorgan Chase and use them as collateral to borrow dollars or government bonds. This increases the velocity of capital in the financial system, enabling previously idle crypto assets to generate liquidity and flow into the government bond market. JPMorgan Chase's move signals widespread industry acceptance of digital asset strategies. When this most influential commercial bank aligns itself with the Treasury's digital asset strategy, it confirms that "smart money" has already incorporated the new system into its considerations. The institution is positioning itself as the central bank of the crypto economy, issuing loans using Bitcoin reserves as collateral, much like the Federal Reserve has previously used Treasury bonds as collateral. Asymmetric Risk and the Fed's Fatal Blow The Treasury's strategy has a fatal dependency: it ties the stability of the U.S. sovereign debt market to the volatility of crypto asset prices. This introduces tail risk, which the Federal Reserve will ultimately be forced to bear. This mechanism works well during market expansion. As demand for stablecoins grows, issuers buy Treasury bonds, thereby lowering yields and easing fiscal pressure. However, the Bank for International Settlements' asymmetric analysis reveals a reverse risk. If a cryptocurrency market crash triggers massive redemptions—users converting stablecoins back to dollars—issuers must immediately liquidate their holdings of government bonds to meet these redemptions. Given this 2-3x asymmetry, a $500 billion loss in stablecoin market capitalization could cause short-term yields to surge by 75 to 150 basis points within days. For a government that rolls over trillions of dollars in maturing debt every quarter, this would undoubtedly be a liquidity crisis. The Treasury would face a dilemma: either accept catastrophic borrowing costs or suspend bond auctions—either option could lead to a downgrade of its sovereign credit rating. The Federal Reserve would be forced to intervene as the dealer of last resort, purchasing the government bonds sold by stablecoin issuers. This would transform a private sector balance sheet crisis into central bank monetization—precisely the outcome the Treasury sought to avoid by establishing stablecoin funding channels. This is the inherent, fatal trap of the structure. The Treasury benefits from low-cost financing during economic expansions, while the Federal Reserve bears catastrophic risks during economic contractions. The central bank is strategically subordinate: it can neither prevent the Treasury from creating this dependency nor refuse to intervene when the system collapses. Federal Reserve Governor Stephen Milan acknowledged this dynamic in a November 2025 speech, noting that stablecoins have become "a force to be reckoned with," capable of influencing interest rates beyond the Fed's control. His analysis cleverly avoids the obvious: the Treasury has constructed a parallel monetary policy transmission mechanism that operates regardless of the Fed's consent. Geopolitical Projection and the Digital Bretton Woods System The GENIUS Act has far-reaching domestic implications, but its international impact may be even greater. It does more than just fund the US fiscal deficit—it solidifies the dollar's dominance in the 21st century by making the dollar programmable, portable, and superior to any other competing medium of exchange. 90% of existing stablecoins are pegged to the dollar. By establishing a regulated, Treasury-backed digital dollar infrastructure, the US has laid the foundation for a new international monetary system. Citizens of emerging market countries can now hold dollars without relying on traditional correspondent banking systems, which have been increasingly exploited by sanctions and anti-money laundering measures, excluding large populations. This expands the potential market for the US dollar. Vietnamese farmers, Nigerian shopkeepers, or Argentinian software developers can exchange their local currency for USDC with just a smartphone and internet connection. This stablecoin becomes a superior store of value compared to domestic banking systems plagued by inflation, capital controls, or political instability. Every adoption means capital outflow, ultimately flowing into the US Treasury auction market. China, through its digital yuan, pursues a contrasting vision with a radically different architecture from the US. The electronic yuan (e-CNY) is a central bank digital currency—issued, regulated, and controlled by the government. It increases efficiency but also requires users to accept state oversight. The US model, however, outsources issuance to private entities (such as Circle, PayPal, and potentially JPMorgan Chase) while ensuring these entities are structurally dependent on government bonds. This model creates the illusion of private sector innovation while simultaneously protecting national sovereign interests. This represents a digital Bretton Woods system—in which the dollar's reserve currency status is not maintained through the recycling of petrodollars or military coercion of oil trade, but rather through the network effects of digital payment infrastructure. The more merchants accept USDC, the higher the value of USDC. The higher the value of USDC, the greater the demand for US Treasury bonds. This system is self-reinforcing until it collapses. Conclusion: The Shift in the Voice of Sovereignty The term "silent coup" is not an exaggeration, but a precise institutional analysis. The Treasury Department did not abolish the Federal Reserve, nor did it amend the Constitution. It merely established a parallel financial system that allows fiscal policy to influence monetary policy, thereby reversing the central bank's seventy-year independence. The Genius Act, the Fair Banking Executive Order, the Strategic Bitcoin Reserve, and personnel pressure on Chairman Powell constitute a coordinated strategy aimed at subordinating the Federal Reserve to the Treasury Department's funding needs. Secretary Bessant's $3 trillion stablecoin prediction was not a market forecast, but a policy objective. If realized, the Treasury will become the dominant force in determining U.S. interest rates. The institutional compromise embodied in JPMorgan Chase's policy reversal confirms that major financial institutions have accepted this new reality. Their adjustments are not based on endorsement of this strategy, but on the fact that resistance is futile. The game theory landscape has shifted: cooperation earns favor with the Treasury and new liquidity mechanisms; opposition risks regulatory marginalization. Most ironically, this shift did not stem from a populist movement or political mandate, but rather from routine financial regulatory mechanisms. A mere 47-page legislative text, debated primarily in obscure congressional committees, has reshaped the relationship between U.S. fiscal and monetary authorities more thoroughly than any policy since the abandonment of the gold standard in the 1970s. Whether this represents institutional evolution or a civilizational risk depends on some unmeasured variables. Can the $3 trillion stablecoin market maintain a 1:1 redemption rate during a cryptocurrency winter? Will the asymmetric capital outflow dynamics discovered by the Bank for International Settlements (BIS) trigger instability in the Treasury market before issuers reach systemic size? If markets realize that the Federal Reserve will ultimately have to guarantee a system it neither designed nor can control, can the Fed maintain its credibility? The answers to these questions will not be found in congressional hearings or academic papers, but rather in the real-time stress tests of future market crises. The Treasury has built the infrastructure. Now, we will test its ability to bear the weight of an empire.