The U.S. Advances Stablecoin Legislation: A New Way Out of the Debt Crisis?

In May 2025, the U.S. Congress passed a procedural motion for the GENIUS stablecoin bill with a vote of 66 in favor and 32 against. 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 may be the beginning of a more complex and profound systemic transformation.

In the context of significant debt pressure in the United States and the divergence between the government and the central bank on monetary policy, the timing of the advancement of the stablecoin bill is worth pondering.

Debt Crisis Spurs Stablecoin Policies

During the pandemic, the United States initiated an unprecedented scale of monetary expansion. The M2 money supply of the Federal Reserve surged from $15.5 trillion in February 2020 to $21.6 trillion now, with a growth rate peaking at 26.9%, far exceeding the levels during the 2008 financial crisis and the high inflation periods 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, equivalent to 25% of GDP, exceeding the total expenditure of 13 major wars in American history.

In short, the United States has issued 7 trillion dollars in just two years, laying hidden dangers for subsequent inflation and debt crises.

As of April 2025, the total amount of U.S. government debt has exceeded $36 trillion. The total principal and interest that will be due for repayment in 2025 is expected to be about $9 trillion, with approximately $7.2 trillion of that being principal. Over the next decade, the government's interest expenses are projected to reach $13.8 trillion, with the proportion of GDP rising year by year. To repay the debt, the government may need to raise taxes or cut spending, both of which will have a negative impact on the economy.

Discrepancies in Monetary Policy between Government and Central Bank

Government stance: Urgently need to cut interest rates

The government is now in urgent need of the Federal Reserve to cut interest rates, mainly based on the following considerations:

1. High interest rates directly affect mortgages and consumption, which may impact the government's approval rating.
2. The performance of the stock market is seen as a measure of political achievement, and the high interest rate environment has suppressed further growth in the stock market.
3. Tariff policies have led to an increase in import costs, raising the domestic price level. Moderate interest rate cuts can partially offset the negative impact of tariff policies on economic growth and alleviate the trend of economic slowdown.

Central Bank Position: Maintain Status Quo

The dual mandate of the Federal Reserve is to achieve maximum employment and maintain price stability. Unlike the government's decision-making process based on political expectations and stock market performance, the Federal Reserve operates strictly according to a data-driven methodology. They do not make predictive judgments about the economy but instead assess the execution of the dual mandate based on existing economic data, and only when there are issues with inflation or employment targets do they implement corresponding policies.

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%. Due to the impact of tariffs and other policies, any potential economic recession has not yet transmitted to actual data, and the Federal Reserve will not take any action. They believe that the government's tariff policy "is likely to at least temporarily raise inflation" and that "the inflation effect may also be more persistent." Acting rashly to cut interest rates before the inflation data has fully returned to the 2% target could worsen the inflation situation.

Moreover, 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 decisions could be made based on economic fundamentals and professional analysis, ensuring that the formulation of monetary policy is made with the long-term interests of the national economy in mind, rather than catering to short-term political demands. In the face of government pressure, the Federal Reserve insists on defending its independence.

GENIUS Act: A New Financing Channel for US Debt?

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

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 bonds and other dollar assets. The current stablecoin market size has reached $243 billion, and if fully incorporated into the framework of the GENIUS Act, it will create a demand for hundreds of billions of dollars in government bond purchases.

Potential Advantages

1. The direct financing effect is significant: for every 1 dollar 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 GENIUS Act, more stablecoin issuers will be forced to buy U.S. Treasuries, 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 huge pool of funds. This "regulatory arbitrage" allows the government to leverage the guise of innovation to advance traditional debt financing goals while circumventing the political and institutional constraints faced by traditional monetary policy.

potential risks

1. Monetary policy has been hijacked by politics: The large-scale issuance of US dollar stablecoins has effectively given the government a "money printing power" 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 to serve the short-term interests of politicians.

2. Hidden inflation risk: When a user spends 1 dollar to buy a stablecoin, the total amount of currency appears unchanged on the surface, but in reality, the 1 dollar in cash has transformed into two parts: the 1 dollar stablecoin in the user's hands + the 1 dollar short-term government bonds purchased by the issuer. These government bonds also have quasi-currency functions within the financial system. Essentially, the original currency function of 1 dollar has now split into two parts, increasing the effective liquidity of the entire financial system, which may drive up asset prices and consumer demand, exacerbating inflationary pressures.

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 escalating debt crises and excessive interest burdens, there is likely to be political motivation to decouple stablecoins from U.S. Treasuries, ultimately leaving the market to bear the risk.

DeFi: Amplifier of Risks

Stablecoin issuance is 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, multi-staking, and investing in tokenized government bonds, risks may be amplified layer by layer.

The restaking mechanism is a typical example, as it leverages assets repeatedly across different protocols, adding a layer of risk with each additional layer. Once the value of the restaked assets plummets, it may trigger a chain reaction of liquidations, leading to panic selling in the market.

Although the reserves of these stablecoins are still U.S. Treasury bonds, the market behavior has become completely different from that of traditional U.S. Treasury bond holders after multiple layers of DeFi embedding. Moreover, this risk is completely detached from the traditional regulatory system.

Conclusion

The US dollar stablecoin involves multiple fields such as monetary policy, financial regulation, technological innovation, and political maneuvering. An analysis from any single perspective is difficult to comprehensively grasp its impact. The future development of stablecoins will depend on the formulation of regulatory policies, the evolution of technology, 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 US dollar stablecoins on the global financial system.

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