Citi: The US dollar stablecoin "reflects rather than reinforces" the dollar's status, while non-US stablecoins are an important indicator of "de-dollarization".

The demand for US Treasury bonds is unlikely to significantly increase in the short term due to the rise of stablecoins, and the relative growth of non-USD stablecoins will become an important indicator of the de-dollarization trend.

Written by: Xu Chao, Wall Street Journal

The demand for U.S. Treasury bonds will not significantly increase in the short term due to the rise of stablecoins?

According to information from the Chasing Wind Trading Platform, Citigroup stated in a report on June 20 that the rise of the dollar stablecoin is more a reflection of the dollar's reserve status rather than a driving factor. The demand for U.S. Treasury bonds is not expected to significantly increase in the short term due to the rise of stablecoins, and the relative growth of non-dollar stablecoins will become an important indicator to observe the trend of de-dollarization.

Stablecoin rise is difficult to substantively drive demand for U.S. Treasuries

The GENIUS stablecoin bill has been passed by the Senate, and the House's STABLE bill has also come out of committee. Citigroup believes this is an important step in providing regulatory clarity for digital assets in the United States, which is beneficial for the entire industry. The passage of legislation is a key milestone in the improvement of the regulatory framework for digital assets and will help accelerate the widespread adoption of stablecoins.

The market is generally concerned about whether stablecoins will become a new rise in demand for U.S. Treasury bonds (enhancing the status of the U.S. dollar).

Citibank's analysis suggests that the answer to this question is conditional: "both yes and no." The key lies in the source of funds: if the newly issued stablecoins come from transfers of existing bank deposits or money market funds, it will not actually create a net new demand for U.S. Treasury securities.

Currently, Tether and Circle mainly hold U.S. Treasury bonds and support assets through repurchase transactions.

Citigroup believes that in the short term, before the widespread adoption of stablecoins, their rise will not significantly increase the demand for U.S. Treasury securities. The current growth of stablecoins may divert bank deposits (reducing banks' demand for U.S. Treasuries) and/or money market funds (directly decreasing the demand for U.S. Treasuries). If stablecoins begin to accrue interest, it may lead to larger-scale growth, but this will also divert some funds from existing holders.

The source of stablecoin growth is crucial. If the growth comes from the transfer of funds from other US Treasury holding instruments such as money market funds (MMFs), it does not constitute net new demand.

Citigroup estimates that under the baseline scenario, the potential long-term size of the stablecoin market will reach $1.6 trillion by 2030. Among this, $240 billion from the reallocation of US dollar cash, $109 billion from the reallocation of global M0, and $273 billion from the reallocation of foreign-held deposits constitute the real incremental demand for US Treasuries.

Non-USD stablecoins have become an important indicator of de-dollarization

Citibank believes that the dominance of the US dollar as a reserve currency will continue, which is unrelated to stablecoins. In terms of reserve diversification, the euro is the only possible long-term competitor.

Based on current trends, Citibank expects that the US dollar will maintain its position as the dominant reserve currency until 2070. Even under aggressive assumptions (a 12.5% annual decline in the dollar's share and a 5% annual rise in the euro), this position will last until 2046.

Citi emphasizes that the issuance trends of stablecoins will become an interesting indicator for tracking changes in the dominance of the US dollar. Since the launch of euro stablecoins under the European MiCA legislation, their market capitalization has increased, which coincides with the weakening of the dollar and cracks in the "American exceptionalism" narrative.

Currently, the euro stablecoin accounts for only a small portion of the US dollar stablecoin, despite the dollar's share in foreign exchange reserves being around 50% and nearly 80% in foreign exchange transactions. This indicates that the adoption of stablecoins may present both an opportunity and a threat to the dollar's dominance.

Analysts expect that the dollar's dominance will remain in the foreseeable future. The existing reserve status and network effects of the dollar mean that dollar-based stablecoins may continue to dominate the market. The relative popularity and issuance of non-dollar stablecoins will be interesting indicators to track the trend of de-dollarization.