Stablecoins, or dollar-pegged assets, are now being recognized and included by major financial institutions. Moreover, they are competing for short-term assets such as Treasury bills, which are used for collateralization and earnings.
US banking giant JPMorgan has collated some useful data regarding the footprint of stablecoins.
Competition for Treasury Bills
On September 27, Chief Economist at stablecoin issuer Circle, Gordon Liao, shared some recent data from JPMorgan.
He noted that at around 2% of the Treasury bill market, “stablecoin issuers represent a small sliver of the overall market.”
However, stablecoin issuers are competing with money market funds for short-term assets like T-bills. The Federal Reserve limited access to a key facility called overnight reverse repo (ON RRP) earlier this year.
That means stablecoins, seeking to put cash in liquid assets and unable to access the Fed facility, will likely have to compete with the $5.64 trillion money-market fund.
This could potentially push those rates below the offering level on the RRP, which is currently 5.3%. Liao suggested that lowering T-Bill returns could cause an increase in bank deposits on those offering better returns.
“The missing point is that the crowding-out of T-bill buyers is the crowding-in of bank deposits.”
JPMorgan strategists led by Teresa Ho wrote, “While it is a tail risk, the cryptocurrency market seems to be more prone to it.”
Moreover, rapid liquidation of assets like T-bills by stablecoins could impact money market funds and other stablecoin issuers, prompting further liquidations, according to JPMorgan.
Liao continued to state that as non-interest-bearing instruments, stablecoins compete with over $2 trillion of physical bills in circulation. Moreover, that is growing at a rate of $100-200 billion a year.
“If stablecoins were to expand in a large way, the marginal t-bill sellers that are crowded out would deposit into banks. This is counter-intuitive, but more and more research suggests this to be the likely scenario.”
Stablecoin Decline Halted
Stablecoin market capitalization may have been in decline for the past year, but the trend is slowing.
Since mid-2022, overall stablecoin market capitalization has been in decline, suggesting industry outflows. However, those declines slowed to a plateau in August 2023.
DeFi researcher Thor Hartvigsen, who shared the chart, observed:
“Stablecoins are one of the biggest use cases of crypto currently and I expect the sector to grow significantly in a bull market.”
The total stablecoin market cap is currently $123.5 billion, equating to around 11.4% of the total crypto market cap, according to CoinGecko.
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