Asset Allocation Bi-Weekly – Stablecoin: Treasury's Next Big Bet? (7/21/25)

The US Treasury is looking for answers as it eyes higher interest rates in an environment of uncertain demand for rising US debt. Confluence Associate Market Analyst and Certified Business Economist Thomas Wash joins Phil Adler to discuss why stablecoins, a cryptocurrency, may be a partial solution.

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Podcasts from Confluence Investment Management LLC, featuring the periodic Confluence of Ideas series, as well as two bi-weekly series: the Asset Allocation Bi-Weekly and the Bi-Weekly Geopolitical Report (new episodes posted on alternating Mondays).

Phil Adler: 00:04

Welcome to the Confluence Investment Management Bi-Weekly Asset Allocation report for 07/21/2025. I'm Phil Adler. The US Treasury is looking for answers as it eyes higher interest rates in an environment of uncertain demand for rising US debt. Confluence Associate Market Analyst and Certified Business Economist Thomas Wash joins us now to discuss why stablecoins, a cryptocurrency, may be a partial solution. First, let's get basic, Thomas.

Phil Adler: 00:36

How do stablecoins differ from other cryptocurrencies?

Thomas Wash: 00:41

Stablecoins differ significantly from other cryptocurrencies such as Bitcoin or Ethereum primarily because they are backed by reserve assets. These reserves typically include traditional currencies like the US dollar, treasury bills, commercial paper, or other tangible assets. This backing is crucial because it aims to minimize price volatility, making stablecoins more money like compared to the often wild price swings seen in other cryptocurrencies. Their inherent stability makes them more suitable for transactions, savings, and a unit of account.

Phil Adler: 01:13

Well, you talk about their inherent stability. So would you describe stablecoins as relatively stable?

Thomas Wash: 01:20

Yes. By their nature and name, stablecoins are designed to be relatively stable. However, this stability isn't absolute. Stablecoins are susceptible to what's known as runs, which can lead to them breaking the buck, meaning their value deviates from their intended peg. A prominent example of this occurred 2022 when the Terra USD stablecoin collapsed due to a run on its reserves, which were linked to risky commercial paper tied to the Chinese real estate market.

Thomas Wash: 01:47

This event highlighted the importance of robust and transparent reserve management for stablecoins.

Phil Adler: 01:53

So let's dig deeper on this a little bit. When they are backed by the dollar, does their historical performance in fact inspire trust?

Thomas Wash: 02:02

Generally, the backing by a stable sovereign currency like the US dollar has indeed inspired a greater degree of trust in stablecoins. This trust stems from the ability of holders to convert their stablecoin into the underlying reserve currency on demand. This convertibility is a key feature that makes dollar backed stablecoins highly liquid compared to many other cryptocurrencies, which can be difficult to convert into traditional currency quickly without significant price impact.

Phil Adler: 02:29

Well, let's get to the latest on this. What is the evidence that the US treasury is contemplating stablecoins as a burgeoning buyer of US debt?

Thomas Wash: 02:39

Well, the Trump administration has expressed a clear desire to position The US as a global leader in cryptocurrency innovation. While the president has voiced his broader ambition, the more specific evidence regarding stablecoin as a potential buyer of US debt can be found in the US treasury meeting minutes with the first notable mention appearing in April. These discussions suggest the treasury is actively exploring the role stablecoins could play in diversifying the buyer base for government debt.

Phil Adler: 03:08

Does this suggest to you in any way that the treasury might be alarmed by the emerging demand environment for government debt?

Thomas Wash: 03:16

No. I wouldn't interpret this as a sign of alarm, but rather as an adaptive strategy to a changing financial landscape. You know, The US has been increasingly issuing shorter duration debt. And in this context, the treasury is continually seeking ways to broaden and deepen demand for its securities. The potential inclusion of stablecoin reserves as an additional source of demand could provide a valuable buffer as The US manages and refinances its continually growing national debt.

Thomas Wash: 03:45

It's a proactive measure to ensure ample demand, not a reaction to a supposed crisis.

Phil Adler: 03:52

So could you summarize here a little bit? What advantages do stablecoins offer for The US Treasury?

Thomas Wash: 03:59

The primary advantage of the US Treasury is the introduction of a new substantial buyer for its debt. This expanded buyer base can ensure that the US government can continue to borrow at the lowest possible cost, thereby reducing the overall interest payments on national debt. Additionally, if stable coin demand for shorter term treasury bills proves robust, it could allow the treasury to allocate less of its issuance to longer term bonds. This shift could help prevent an excessive supply of long term bonds, which can push up borrowing costs across the economy.

Phil Adler: 04:31

How might the expanded dependence on stablecoins affect the role and strength of the dollar?

Thomas Wash: 04:37

The use of stablecoins could significantly bolster the global role and strength of the US dollar, though this impact extends beyond just treasury operation. Stablecoins, particularly those pegged to the dollar, provide a way for individuals and entities globally to gain exposure to the US dollar without necessarily engaging with the traditional banking system. This is particularly beneficial for people living in countries with high inflation or unstable local currencies, offering them a more stable store value and medium of exchange. Increased adoption of dollar backed stablecoins could further cement the dollar's position as the world's reserve currency in the digital age.

Phil Adler: 05:14

Thomas, stablecoins are already invested to some extent in US debt, but what exactly would it take for this to expand and for stablecoins to become a major buyer of US debt? Well, that's

Thomas Wash: 05:27

a great question. For stablecoins to become a major buyer of US debt, the most critical step is the establishment of a clear and comprehensive legal framework by congress. Currently, the lack of explicit enforcement mechanisms means that regulators have broad discretion which can lead to policy uncertainty depending on the administration. A well defined regulatory structure would provide much needed clarity and confidence for stablecoin issuers and users encouraging greater investment in US treasury as a reliable and compliant reserve asset. This legal certainty is essential for scaling stablecoin operations and their investment in government debt.

Phil Adler: 06:03

So if treasury was to continue along this path, what can we expect next?

Thomas Wash: 06:09

So if the treasury continues down this path, we can expect them to primarily gauge the potential demand from the stable coin market and then adjust their bond issuance strategies accordingly. The overarching goal for the treasury is always to maximize the number of buyers for its debt to keep borrowing costs at a minimum. Therefore, they will be carefully monitoring the growth and stability of the stablecoin sector to determine how best to integrate it into their debt management strategy.

Phil Adler: 06:36

And are you anticipating this will in fact happen?

Thomas Wash: 06:40

There's definitely a push from the treasury to explore the potential of stablecoins. Given its proactive stance, I wouldn't be surprised if stablecoins become a significant participant in the treasury auction process within the next two years. The momentum for regulatory clarity and the treasury's interest in diversifying its buyer base suggests a strong likelihood of this scenario unfolding.

Phil Adler: 07:01

Do you think increased dependence on stablecoins might be a way for the government to reduce the cost of borrowing all the way down to the consumer level.

Thomas Wash: 07:11

Yep. There's a plausible argument that it could indirectly impact borrowing costs down to the consumer level. If stablecoin demand allows the treasury to allocate less of its debt issuance to maturities, the resulting reduction in the supply of long term bonds in the market could make it easier for the rest of the market to absorb the demand for those bonds. This could potentially lead to lower long term interest rates across the economy, which in turn could translate to lower borrowing costs for consumers on things like mortgages and car loans.

Phil Adler: 07:39

Thomas, what are possible drawbacks to this increased potential role for stablecoins?

Thomas Wash: 07:46

The major drawback to an increased reliance on stablecoins, if it leads to an overreliance on shorter duration bonds for government financing is the potential for rollover risk. If the Federal Reserve were to rapidly raise interest rates or if there was a sudden run on stablecoin, it could create significant challenges for the treasury in refinancing its short term debt. Such a scenario could potentially lead to financial instability or even a crisis if not managed carefully.

Phil Adler: 08:13

Might all this perhaps open the door to increased acceptance by investors and possibly government acceptance of all cryptocurrencies or at least many more of them?

Thomas Wash: 08:24

Well, I think that's the goal. I believe that establishing clear robust laws around stablecoins would likely boost overall confidence in the broader cryptocurrency market. As investors seek alternative assets as a store of value and look for diversification, the regulatory clarity and perceived stability gained through stablecoin legislation could encourage greater acceptance and adoptions of other cryptocurrencies as well. It could serve as a stepping stone towards the wider integration of digital assets into mainstream finance.

Phil Adler: 08:53

Final question, Thomas, and I'm sure this is a question that you're getting a lot. How close is Confluence Investment Management to incorporating cryptocurrencies in its asset allocation strategies?

Thomas Wash: 09:06

At Confluence Investment Management, we are closely monitoring developments in the cryptocurrency space, including stablecoins, and are actively weighing our options. Our primary goal is to safeguard our investors' interest and ensure we are not exposing them to undue risk. Given the relatively short history of cryptocurrencies and their inherent volatility, we believe it's essential to take our time to establish proper guardrails and a thorough understanding of the asset class before incorporating it into our asset allocation strategies. We are committed to due diligence to ensure we can protect investor returns effectively.

Phil Adler: 09:43

Thank you, Thomas. The title of this week's report is stablecoin, treasury's next big bet, and you can find a link to the written report on the Confluence webpage, confluenceinvestment.com. Our discussion today is based upon sources and data believed to be accurate and reliable. Opinions and forward looking statements expressed are subject to change without notice. Also, this information does not constitute a solicitation or an offer to buy or sell any security.

Phil Adler: 10:08

Our audio engineer is Dane Stole. I'm Phil Adler.