Overview

Stablecoin issuers that buy US Treasury bills become a new source of demand for safe public debt. In the model, stronger demand raises bill prices and lowers yields, potentially reducing debt-service costs and creating fiscal space for tax cuts or spending. The benefit is conditional on pass-through to the budget and can be offset by lost cash seigniorage, bank-funding pressure, short-term refinancing risk, fiscal delay and redemption-driven fire sales. Debt levels, bill share, holder location and demand persistence determine the size and direction; reported figures are calibration results, not universal effects.

Learning outcomes

Treasury-bill demand can raise prices and lower yields, but fiscal space comes from reduced debt-service costs, not the price gain itself.
A higher short-term debt share can strengthen the channel while increasing refinancing exposure if stablecoin demand reverses.
Foreign demand may support public financing with less domestic deposit substitution, but its additionality and persistence are assumptions.

Keywords

StablecoinsTreasury billsFiscalYieldsSeigniorageRefinancing

Why Treasury Bills Turn Private Tokens Into a Fiscal Question

This chapter examines the asset side of stablecoin issuance: what happens when an issuer invests backing funds in short-term government debt. The key question is how additional demand for Treasury bills can become fiscal space, and whether that public benefit is large enough to offset the pressure on bank lending. Following the chain from issuer purchases to yields, debt service and tax policy gives the reader a way to compare the two channels without treating lower borrowing costs as a free gain.

How reserve demand changes the Treasury market

A stablecoin issuer does not normally leave the proceeds from issuance as an unused cash balance. It invests them in assets that are meant to support the token and meet redemptions. In the baseline quantitative model, issuers hold short-term government bonds—US Treasury bills—rather than bank deposits or central-bank reserves. This choice makes the issuer a participant in the market for safe, liquid public debt.

The mechanism begins with demand. When a household buys a stablecoin, the issuer receives funds and seeks a matching reserve asset. If it buys a Treasury bill, it must purchase that bill from an existing holder. The seller may be a bank, a money-market fund or another non-bank financial institution. The issuer’s new demand competes with those buyers for the available supply of bills. At a given supply, stronger demand raises the bill price and lowers its yield.

Treasury bills have value beyond their promised repayment. Banks use them as liquid assets and collateral for short-term funding, including transactions that help them manage unexpected withdrawals. This convenience value means that banks’ demand for bills can decline as their holdings grow, but it approaches the price that would prevail for an otherwise similar risk-free asset when bills become abundant. The working paper represents this extra value as a convenience yield. Stablecoin issuers add a new demand curve to the market, while the government can adjust bill issuance when financing conditions change.

The yield response depends on market depth and the size of the new buyer. In the paper’s US calibration, a $2 trillion increase in stablecoin adoption lowers the Treasury-bill yield by almost 25 basis points. The authors note that an empirical estimate cited in the paper puts the effect of a comparable increase in bill demand at around 30 basis points. These figures are not universal prices for stablecoin growth: they come from a model calibrated to a particular debt market, reserve rule and adoption scenario. They show why the composition of reserves matters. A stablecoin backed by a broad portfolio may create a different demand shock from one backed almost entirely by short-term sovereign debt.

The effect can also change the composition of public borrowing. If bills become relatively cheaper than long-term bonds, the government may issue a greater share of short-term debt to take advantage of the additional demand. In the model, the debt-maturity rule responds to the slope between short- and long-term yields. This response spreads the initial market effect over the government’s debt stock: the relevant question is not only how much the yield on one new bill changes, but how much existing debt is financed at the affected rate and how the maturity structure evolves.

The distinction between a bill’s price and the government’s total financing cost is important. Bond prices and yields move in opposite directions: when an issuer’s demand bids up the price of a bill, the return required by a new buyer falls. The government benefits only to the extent that it can refinance or issue debt at that lower return.

Published by DeepMox

FAQ

What is the Treasury-bill convenience yield?

The Treasury-bill convenience yield is the extra value investors place on bills as liquid assets and collateral beyond their risk-free repayment. Stablecoin demand can compete for that convenience and push bill prices higher.

Why doesn’t a lower Treasury yield equal government revenue?

A lower yield creates potential savings only when the government issues or refinances debt at that rate. The fiscal effect also depends on debt maturity, demand persistence and how the government uses the resulting budget space.

How does foreign stablecoin demand differ from domestic demand?

Foreign demand can add capital to the issuer’s reserve portfolio without the same substitution away from domestic deposits. Its benefit remains conditional because the flow may replace existing offshore dollars or reverse.

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Stablecoins and Treasury Fiscal Space

Why Treasury Bills Turn Private Tokens Into a Fiscal Question

How reserve demand changes the Treasury market

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