The GENIUS Act Could Have Interest-Rate Implications. Here’s How.

The Senate on Wednesday passed the GENIUS Act, a breakthrough for the cryptocurrency industry that could have a far-reaching impact on government finances and monetary policy.

The bill, which passed in a 68-30 vote, is the first piece of legislation to establish rules for the creation and regulation of dollar-pegged stablecoins. The act requires that stablecoin issuers maintain a 1:1 reserve backing their coins with eligible assets, such as U.S. dollars and short-term Treasury bills. 

Citigroup earlier this year estimated the stablecoin market would total about $1.6 trillion by 2030, a sevenfold increase from $230 billion in March. Citi forecasts stablecoin issuers will drive $1 trillion of net new purchases of U.S. Treasury bills over that time, accumulating $1.2 trillion of U.S. federal debt, more than any single jurisdiction today.

How Stablecoins Could Affect Yields, Interest Rates

According to a recent study by the Bank for International Settlements, increased demand for Treasury-backed stablecoins could drive down yields on short-term debt. (The GENIUS Act, as passed by the Senate, bars stablecoins from being backed by Treasurys with maturities exceeding 3 months.) That could allow the Treasury to reduce its financing costs by issuing more short-term debt. 

The Treasury’s costs have ballooned in the last few years as the Federal Reserve’s rate hikes have lifted the interest paid on America’s national debt. Interest payments on the debt nearly tripled between 2020 and 2024, rising to $881 billion from $345 billion, according to the Committee for a Responsible Federal Budget. And interest payments are expected to exceed $1 trillion a year by 2026.

The impact of stablecoins on some consumer loans, though, might be minimal. BIS found little evidence that stablecoin demand would move yields on long-term Treasurys like the 10-year note or 30-year bond, which influence interest rates for business and consumer loans like mortgages.

The Risk Stablecoins Pose to the Treasury Market

One risk of a growing stablecoin market is they could put more upward pressure on yields during panics than they do downward pressure during calm periods.

“Stablecoin outflows raise yields by two to three times as much as inflows lower them,” according to the BIS study. That “exposes the [Treasury] market to potential fire sales in the event of a run on a major stablecoin.” BIS researchers believe their models may underestimate the risk that stablecoin runs pose to financial stability considering how much the market is expected to grow in the coming years.

BIS also found that the concentration of Treasury debt with stablecoin issuers could eventually hinder the Fed’s ability to move short-term interest rates, complicating efforts to control inflation or stimulate economic growth.

The stablecoin industry’s growing footprint in the Treasury market could also create a shortage of safe assets for non-bank financial institutions, like insurance companies, affecting the liquidity premium—or the additional return investors demand for less liquid assets.