US Stablecoin Bill: A Remedy for the Debt Crisis or a Risk Amplifier?

On May 19, 2025, the U.S. Senate passed the procedural motion for the GENIUS stablecoin bill with a vote of 66-32. On the surface, this is a technical piece of legislation aimed at regulating digital assets and protecting consumer rights. However, a deeper analysis of the political and economic logic behind it reveals that this could be the beginning of a more complex and far-reaching systemic transformation.

In the context of the enormous debt pressure currently facing the United States and the divergence among policymakers in monetary policy, the timing of advancing the stablecoin bill is worth pondering.

Debt Crisis: The Catalyst for Stablecoin Policies

During the pandemic, the United States implemented an unprecedented monetary expansion policy. The M2 money supply of the Federal Reserve surged from $15.5 trillion in February 2020 to the current $21.6 trillion, with a growth rate peaking at 26.9%, far exceeding the levels during the 2008 financial crisis and the high inflation periods of the 1970s and 1980s.

At the same time, the Federal Reserve's balance sheet has expanded to $7.1 trillion, with pandemic relief spending reaching $5.2 trillion, equivalent to 25% of GDP, exceeding the total expenditure of 13 major wars in U.S. history.

In short, the United States added approximately $7 trillion to its money supply over the past two years, laying the groundwork for subsequent inflation and a debt crisis.

The interest expenditure on the U.S. government's debt is reaching historical highs. As of April 2025, the total U.S. national debt has exceeded $36 trillion, with an estimated total of about $9 trillion in principal and interest to be repaid in 2025, of which the principal due is approximately $7.2 trillion.

In the next ten years, the U.S. government's interest payments are expected to reach $13.8 trillion, with the proportion of interest expenses on national debt rising year by year in relation to GDP. To repay the debt, the government may need to further increase taxes or cut spending, both of which will have a negative impact on the economy.

Policy Divergence: Controversy Over Interest Rate Cuts

Trump camp: Calls for interest rate cuts

Trump urgently needs the Federal Reserve to cut interest rates for the following main reasons:

1. High interest rates directly affect mortgages and consumption, which may threaten Trump's political prospects.

2. Trump has always viewed the performance of the stock market as a measure of his achievements, and the high interest rate environment has suppressed further increases in the stock market.

3. Tariff policies have led to an increase in import costs, raising domestic price levels and increasing inflationary pressure. Moderate interest rate cuts can, to some extent, offset the negative impact of tariff policies on economic growth, alleviate the trend of economic slowdown, and create a more favorable economic environment for re-election.

Powell's stance: data-driven

The dual mandate of the Federal Reserve is to achieve maximum employment and maintain price stability. Unlike Trump's decision-making approach based on political expectations and stock market performance, Powell strictly adheres to the Federal Reserve's data-driven methodology:

1. Evaluate the execution of the dual mission based on existing economic data and formulate corresponding policies accordingly.

2. The unemployment rate in the U.S. for April is 4.2%, with inflation roughly aligning with the long-term target of 2%. The potential economic recession due to the impact of tariffs and other policies has not yet reflected in the actual data, and Powell is unlikely to take hasty action.

3. Powell believes that Trump's tariff policy "is likely to raise inflation at least temporarily," and that "the inflation effects may also be more persistent." Raising interest rates recklessly while inflation data has not fully returned to the 2% target could worsen the inflation situation.

4. The independence of the Federal Reserve is a core principle in its decision-making process. In the face of external pressure, Powell insists on defending the Fed's independence, stating, "I never actively seek to meet with the President, nor will I ever."

GENIUS Act: New Financing Channels for U.S. Debt

Market data shows that stablecoins have had a significant impact on the U.S. Treasury market. In 2024, the largest stablecoin issuer net purchased $33.1 billion in U.S. Treasury bonds, becoming the seventh largest buyer of U.S. Treasuries globally, with a total holding of $113 billion. The second largest stablecoin issuer has a market capitalization of about $60 billion, which is also fully backed by cash and short-term Treasury bonds.

The GENIUS Act requires that stablecoin issuance must maintain reserves at a ratio of at least 1:1, with reserve assets including short-term U.S. Treasury securities and other dollar assets. The current stablecoin market size has reached $243 billion, and if fully incorporated into the GENIUS Act framework, it will create hundreds of billions of dollars in Treasury bond purchasing demand.

potential advantages

1. The effect of direct financing is significant; for every 1 dollar of stablecoin issued, theoretically, 1 dollar of short-term U.S. Treasury bonds or equivalent assets needs to be purchased, providing a new source of funding for government financing.

2. Cost advantage: Compared to traditional government bond auctions, the demand for stablecoin reserves is more stable and predictable, reducing the uncertainty of government financing.

3. Economies of scale: After the implementation of the bill, more stablecoin issuers will be forced to purchase U.S. Treasury bonds, creating a scaled institutional demand.

4. Regulatory premium: The government controls the issuance standards of stablecoins through legislation, gaining the power to influence the allocation of this huge pool of funds. This "regulatory arbitrage" allows the government to leverage the guise of innovation to advance traditional debt financing objectives while circumventing the political and institutional constraints faced by traditional monetary policy.

potential risks

1. Monetary policy is hijacked by politics: The massive issuance of USD stablecoins has effectively given policymakers the "printing press" to bypass the Federal Reserve, allowing them to indirectly achieve the goal of lowering interest rates to stimulate the economy. When monetary policy is no longer constrained by the professional judgment and independent decision-making of central banks, it can easily become a tool to serve short-term interests.

2. Hidden inflation risk: After users purchase a 1 dollar stablecoin, the actual 1 dollar cash is divided into two parts: the 1 dollar stablecoin held by the user and the 1 dollar short-term government bonds purchased by the issuer. These government bonds have a quasi-money function within the financial system, which may increase the effective liquidity of the entire financial system, drive up asset prices and consumption demand, and intensify inflationary pressure.

3. Historical Lessons: In 1971, the U.S. government unilaterally announced the decoupling of the dollar from gold in the face of inadequate gold reserves and economic pressure, fundamentally changing the international monetary system. Similarly, when the U.S. government faces an intensifying debt crisis and a heavy interest burden, there may be political incentives to decouple stablecoins from U.S. Treasury bonds, ultimately leaving the market to bear the risks.

DeFi: Risk Amplifier

After the issuance of stablecoins, they are likely to flow into the DeFi ecosystem, participating in activities such as liquidity mining, collateralized lending, and various yield farming. Through operations like DeFi lending, staking and re-staking, and investing in tokenized government bonds, risks may be amplified layer by layer.

The restaking mechanism is a typical example, leveraging assets repeatedly across different protocols, with each added layer increasing the risk. Once the value of the restaked assets drops significantly, it may trigger a chain liquidation, leading to panic selling in the market.

Although the reserves of these stablecoins are still U.S. Treasury bonds, after multiple layers of DeFi nesting, market behavior has become completely different from traditional U.S. Treasury bond holders, and this risk is entirely outside the traditional regulatory framework.

Conclusion

The US dollar stablecoin involves multiple aspects such as monetary policy, financial regulation, technological innovation, and political games. Any single perspective analysis is difficult to comprehensively grasp its impact. The future development direction of stablecoins will depend on the formulation of regulatory policies, technological advancements, the behavior of market participants, and changes in the macroeconomic environment. Only through continuous observation and rational analysis can we truly understand the profound impact of the US dollar stablecoin on the global financial system.

However, one thing seems certain: in this financial game, ordinary investors are likely to remain the ultimate risk bearers.