Stablecoins and US national debt: Is a new financial market crisis looming?

With the GENIUS Act (Guiding and Establishing National Innovation for U.S. Stablecoins of 2025) the USA aim to promote the market for stablecoins. The consequences of a deepening interconnection between stablecoins and the globally largest and most liquid market for government bonds are crucial for global financial stability. 

The government debt of the USA sums currently to 122 percent of its gross domestic product (GDP). It has increased inter alia because the life expectancy of the US population has increased from 70 years in the year 1966 to 78 years in the year 2024. Demographic change has contributed to the increased expenditures for Medicare and Medicaid from 0.2 percent of the GDP each to 3.6 and 3.1 percent of the GDP and it has contributed to increased expenditures for Social Security from 2.4 percent to 4.8 percent of the GDP over the same time span. Also responsible for the growing debt ratio is the growing gap between government spending and tax revenues. Moreover, 13 percent of the tax revenues in the USA cannot be collected.

Despite the high government expenditures in relation to the tax revenues are foreign investors willing to finance the government debt, because the USA is the globally most important safe haven for investors and the US-Dollar is the most important reserve and transaction currency in global foreign exchange markets. US-Treasuries are the globally most important safe assets. The high global demand for this safe asset contributes to the low financing cost of the USA. 

One reason to worry is the process of de-dollarization, which is a reduction in the use of the US-Dollar in global trade and financial transactions. The promotion of the market for stablecoins could lessen the de-dollarization. Similar to money market funds could stablecoins connect the liquidity demand of households and companies to government financing. 

However, the interconnection between the US government debt and stablecoins could lead to threats to global financial stability. If the market for US government bonds would come under pressure, stablecoins would no longer be regarded as safe money by their holders. Similar to money market funds, stablecoins would be prone to a run-risk. If panicking holders of a large stablecoin could try to withdraw money, this will force its management to enact fire-sales of the fund’s bonds which could trigger a price drop of US government bonds. Because of the high global importance of the US capital market as a safe haven this could trigger a global financial crisis.