US Dollar Stablecoin: A New Round of Change Amid the US Debt Crisis

On May 19, 2025, the U.S. Senate passed a procedural motion for the GENIUS stablecoin bill. On the surface, this is a technical piece of legislation that regulates digital assets and protects consumer rights, but a deeper analysis of the political and economic logic behind it reveals that this may be the beginning of a more complex and far-reaching systemic change.

In the context of the enormous debt pressure in the United States and the differences in monetary policy between Trump and Federal Reserve Chairman Powell, the timing of advancing the stablecoin bill is worth pondering.

US Debt Crisis: Catalyzing Stablecoin Policy

During the pandemic, the United States launched an unprecedented monetary easing policy. The M2 money supply of the Federal Reserve skyrocketed from $15.5 trillion in February 2020 to $21.6 trillion now, with the growth rate soaring from 5% to 25%, peaking at 26.9% in February 2021, far exceeding the growth rates during the 2008 financial crisis and the high inflation period of the 70s and 80s.

At the same time, the Federal Reserve's balance sheet has expanded to $7.1 trillion, with pandemic relief spending reaching $5.2 trillion, accounting for 25% of GDP, surpassing the total cost of the 13 most expensive wars in U.S. history.

In short, the United States printed an additional 7 trillion dollars over the course of two years, laying the groundwork for future inflation and debt crises.

The interest expenditures on the U.S. government's debt are reaching historic 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 approximately $7.2 trillion is just the maturing principal.

In the next decade, interest payments by the U.S. government are expected to reach up to $13.8 trillion, with the proportion of national debt interest expenditure to GDP rising year by year. 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.

Trump and Powell: Discrepancies on Interest Rate Cuts

Trump: Call for interest rate cuts

Trump currently urgently needs the Federal Reserve to cut interest rates for a very practical reason: high rates directly affect mortgage and consumption, which poses a threat to Trump's political prospects. More critically, Trump has always viewed stock market performance as an indicator of his achievements, and a high-interest-rate environment suppresses further gains in the stock market, which directly threatens the core data that Trump uses to showcase his accomplishments.

In addition, tariff policies have led to an increase in import costs, which in turn has pushed up domestic price levels and increased inflationary pressure. Moderate interest rate cuts can partially 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: Maintain Independence

The Federal Reserve's dual mandate is to achieve maximum employment and maintain price stability. Unlike Trump's decision-making approach based on political expectations and stock market performance, Powell acts strictly according to the data-driven methodology of the Federal Reserve. He does not make predictive judgments about the economy, but instead assesses the execution of the dual mandate based on current economic data, only implementing targeted policies to remedy issues when inflation or employment goals are at risk.

The unemployment rate in the U.S. in April was 4.2%, and inflation is also basically in line with the long-term target of 2%. Before the possible economic recession, influenced by tariffs and other policies, is transmitted to actual data, Powell will not take any action. He believes that Trump's tariff policy "is likely to raise inflation at least temporarily" and that the "inflation effects may also be more persistent." Acting hastily to lower interest rates before inflation data has fully returned to the 2% target could worsen the inflation situation.

In addition, the independence of the Federal Reserve is a crucial principle in its decision-making process. The original intention of establishing the Federal Reserve was to ensure that monetary policy could be based on economic fundamentals and professional analysis, ensuring that the formulation of monetary policy is made with consideration for the long-term interests of the entire national economy, rather than catering to short-term political demands. In the face of pressure from Trump, Powell insisted on defending the independence of the Federal Reserve, stating, "I never ask to meet with the president, and I never will."

GENIUS Act: A New Financing Channel for US Debt

Market data fully demonstrates the significant impact of stablecoins on the U.S. Treasury market. A large stablecoin issuer net purchased $33.1 billion of U.S. Treasury bonds in 2024, making it the seventh largest U.S. Treasury buyer in the world. According to the company's fourth-quarter report for 2024, its U.S. Treasury holdings have reached $113 billion. Another major stablecoin issuer, with a stablecoin market value of about $60 billion, is also fully backed by cash and short-term Treasury bonds.

The GENIUS Act requires that stablecoin issuances 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 market size of stablecoins has reached $243 billion, and if fully incorporated into the GENIUS Act framework, it will generate hundreds of billions of dollars in Treasury bond purchasing demand.

potential advantages

1. The direct financing effect is significant. For every 1 dollar stablecoin issued, theoretically, it requires the purchase of 1 dollar of short-term U.S. Treasury bonds or equivalent assets, which directly provides 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. Scale Effect: After the implementation of the GENIUS Act, 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 the GENIUS Act, effectively gaining the power to influence the allocation of this enormous pool of funds. This "regulatory arbitrage" allows the government to leverage innovation to promote traditional debt financing goals while circumventing the political and institutional constraints faced by traditional monetary policy.

potential risks

1. The risk of monetary policy being hijacked by politics: The large-scale issuance of US dollar stablecoins effectively gives the government a "printing press" that bypasses the Federal Reserve, allowing it 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 serving the short-term interests of politicians.

2. Hidden inflation risk: When a user spends 1 dollar to buy a stablecoin, on the surface, the money seems unchanged, but in reality, the 1 dollar cash is divided into two parts: the 1 dollar stablecoin in the user's hand + the 1 dollar short-term government bonds purchased by the issuer. These bonds also have quasi-currency functions in the financial system — high liquidity, can be used as collateral, and banks use them to manage liquidity. In other words, the original currency function of 1 dollar has now split into two, effectively increasing the liquidity in the entire financial system, driving up asset prices and consumer demand, and inflation will inevitably face upward pressure.

3. Historical Lessons: In 1971, the U.S. government unilaterally announced the decoupling of the dollar from gold in the face of insufficient gold reserves and economic pressure, fundamentally changing the international monetary system. Similarly, when the U.S. government faces a worsening debt crisis and excessive interest burdens, there is likely to be political motivation to decouple stablecoins from U.S. Treasuries, ultimately forcing the market to bear the cost.

DeFi: Risk Amplifier

After the issuance of stablecoins, they will most likely flow into the DeFi ecosystem——liquidity mining, borrowing and collateral, various financial derivatives, etc. Through a series of operations such as DeFi lending, staking and re-staking, and investing in tokenized treasury bonds, the risks are amplified layer by layer.

The restaking mechanism is a typical example, repeatedly leveraging assets across different protocols. Each additional layer adds a layer of risk, and if the value of the restaked assets plummets, it may trigger a chain reaction of liquidations and panic selling in the market.

Although the reserves of these stablecoins are still US Treasuries, after multiple layers of DeFi nesting, market behavior has become completely different from that of traditional US Treasury holders, and this risk is entirely outside the traditional regulatory system.

Conclusion

The US dollar stablecoin involves monetary policy, financial regulation, technological innovation, and political gamesmanship; any analysis from a single perspective is insufficient. The ultimate direction of stablecoins depends on how regulations are formulated, how technology develops, how market participants operate, 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 is certain: ordinary investors need to be especially cautious in this game to avoid becoming the ultimate bearers of risk.