US Rates: Stablecoins – they’re only getting started
The desk emphasizes that the evolution of stablecoins is gaining momentum, with notable implications for Treasury market dynamics and the potential rise of tokenized money market funds. Per the full note from J.P. Morgan, there is an increasing interest in how stablecoins can meet investor demand for liquidity and yield as the landscape of digital finance shifts rapidly. This transformation could reshape traditional Treasury demand, as investors seek more efficient vehicles for cash management in a low-rate environment.
What the desk is arguing
The desk maintains that stablecoins are positioned to substantially influence the financial landscape, particularly regarding Treasury securities and liquidity instruments. Per the full note, the introduction of tokenized money market funds could provide innovative alternatives to traditional cash management strategies.
Specific developments in the stablecoin arena, notably the technological advancements and market adoption, indicate a robust push towards integration within mainstream finance. J.P. Morgan’s analysis highlights that, as of July 2025, there is a growing institutional interest in leveraging these assets to enhance liquidity and potentially increase yield opportunities in the fixed income space.
The alternative perspective would suggest that traditional money market funds and Treasury bills might retain dominance amid skepticism about the regulatory environment and the volatility associated with crypto-assets. However, the accelerating pace of digital adoption challenges this status quo.
Where it sits in our coverage
Our consensus target for the USD stablecoin market is projected at 1.075, with a range spanning from 1.04 to 1.12, reflecting the varying views on stablecoin adoption and regulatory developments. Specific firm targets include: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
This assessment aligns with the views of jpmorgan, whose projection closely aligns with our consensus, signaling a bullish sentiment on stablecoins' role in facilitating Treasury transactions as institutional frameworks evolve.
How other firms see it
Firms such as jpmorgan and others maintaining a bullish outlook are seeing the potential for stablecoins to streamline operations in fixed income sectors. Conversely, bofa presents a more cautious stance, reflecting on the inherent risks associated with regulatory pressures and market volatility.
Key indicators to watch include Treasury yields, which will serve as important markers for assessing the impact of stablecoins on demand, as well as broader trends in the digital asset adoption landscape.
01Stablecoins are gaining traction in Treasury and liquidity markets.
02The potential for tokenized money market funds is significant.
03Regulatory clarity will be key to broader adoption.
04Institutional interest in stablecoins is on the rise.
Market implications
Watch for movements in Treasury yields and the broader acceptance of stablecoins which could redefine cash management strategies. The impending regulatory updates will also be critical in determining the pace of adoption for these assets.
Risks to this view
Any major regulatory shifts that inhibit the growth of stablecoins could reverse current trends. Additionally, significant volatility in the crypto markets could deter investor confidence and dampen interest in tokenized funds.
You're listening to At Any Rate, J.P. Morgan's global research podcast. I'm PJ Borah, a U.S. short duration strategist, and I'm joined by Teresa Ho, head of U.S. short duration strategy.
Welcome, everyone. Today, we're going to be diving into the stablecoin market, which is an area that's seen some major developments over the past year, and especially in the last month. With the GENIUS Act recently being passed and the Clarity Act making its way through There's a lot of buzz around this space.
Questions are swirling about how this legislation might reshape the treasury demand and whether stablecoins could eventually compete with bank deposits or even money market funds. But first, to kind of kick things off, for those newer to the space, I personally like to think of a stablecoin as a version of a money market fund. It's liquid.
It's backed by safe assets like T-bills and repo, but it's transacted on blockchain rails. The market size is significantly smaller when comparing stablecoins to other asset classes like the treasury market or even the U.S. equity market. But the overall size of the stablecoin market is still about $230 billion.
So Teresa, you spent a lot of time focusing on the stablecoin market over the years. And now that the GENIUS Act is now law, what are some of your thoughts in terms of how this could change the market landscape? Sure.
Happy to talk about that. Before I do, I just want to touch on something you said earlier. You said you think of stablecoin as a version of a money market fund, and that's completely true in the sense that it's liquid and it's backed by high quality liquid assets like T-bills and repo.
But I would also say that there are some distinct differences that make stablecoins different from a money market fund. One is that stablecoin issuers do not pay out yield to their stablecoin holders in the same way that money funds do to their shareholders. Two is that money funds are not really considered a form of payment in the same way that we think about cash and deposits, where you can pay something with that.
Stablecoins, on the other hand, can be used as a form of payment. At least that's where we think we're heading from a utility perspective. But for as similar as stablecoins are as to deposits, from a payment perspective, I will also say that it's still not quite the same.
And it's not the same because you are not guaranteed that you can redeem your stablecoins at par. In fact, there have been a few instances where stablecoins have deviated or fallen below a dollar NAV. They've depacted from the dollar.
So essentially, the dollar that you put in might be less than a dollar when you take it out. And for obvious reasons, this is a legitimate concern. And kind of going back to your question around the Genius Act, this is where the Genius Act comes in.
You know, the bill provides a framework and establishes the guardrails in which stablecoin issuers can operate. It establishes the guidelines for someone who wants to become a stablecoin issuer at the federal and state level. And said another way, the bill basically establishes the guidelines in terms of what stablecoin issuers can or cannot do.
And this is so important for a market that has largely operated in the gray area for so long. The regulatory clarity is something that the markets have been looking for for a long time. Furthermore, the fact that we have a stablecoin bill means that the government is basically legitimizing stablecoins as a NAFTA class, which I think should go a long way in terms of accelerating the adoption of stablecoins across the financial markets.
Great. Thanks for that. So maybe we can just drill down a little bit in terms of what the bill says stablecoin issuers can or cannot do.
What are some of the things that jumped out to you? Great question. So there are three things that I thought were notable in the bill.
One is something that I alluded to earlier, which is that the bill only allows for payment stablecoin and not yield bearing stablecoins, which makes them more akin to transactional deposits than money funds or interest bearing deposits. That being said, the bill only explicitly addresses the ban on stablecoin issuers from offering yield and not necessarily the affiliates of the issuer, crypto exchanges or any other trading venues from paying rewards or yield to the holders of stablecoins. So there's a little bit of a gray area in terms of whether stablecoin holders will truly earn yield or not.
That's one. The other notable part of the bill is that stablecoins are required to be backed one by one by high quality liquid assets. And the bill defines these assets as coins and currency, deposits, treasuries that mature in less than 93 days, repo and money funds.
These guidelines are even more restrictive than an SEC registered 207 money market fund, which when you think about it kind of makes sense for a market that's trading 24-7. You need to have the ability to access your liquidity or monetize your reserve portfolio very quickly, which leads me to the third interesting thing about this bill. The bill maintains its neutrality with respect to the Fed's balance sheet, which is to say that they left their views unclear and vague whether or not non-bank stablecoin issuers will have access to the Fed's balance sheet.
And this is important because access to the Fed's balance sheet is something that both banks and money funds have and is critical when it comes to addressing run risks. And that was, you know, very distinctly missed out of the bill. That's helpful.
We've been getting a lot of questions on whether the growing demand of stablecoins could become a meaningful source of treasure demand or help fund the deficit. What's your take on this? A two part answer.
One is that it depends on how large this market becomes. You know, today, stablecoins sit around $230 billion. And there are reports out there that the market could hit $2 trillion in a few years time.
Personally, I think that number is a little bit too optimistic. I think a more realistic path might be somewhere between $500 to $750 billion. So essentially doubling or tripling in size over the next couple of years.
And the reason I say that is if I look at the financial system right now and how much of that touches stablecoins, it's minimal. It's very small. And I think the reality is that, you know, the infrastructure and the ecosystem for stablecoins is just not fully developed yet.
And for that to be developed, it does take time. You know, the rails need to be built to on ramps, to off ramps and the distribution. So, you know, it doesn't happen overnight.
Furthermore, I think there's still a lot of unanswered questions out there from governance, from compliance, from a risk management perspective, like all that takes time to answer. But perhaps more importantly, when we think about, you know, user adoption or the liquidity investors, whether you're a retail or institutional that may be interested in using this as a way to manage cash, they are generally conservative investors. You know, they care more about the return of principal than return on principal.
And so part of that is, you know, trust. Trust is a huge component of this. And so, you know, they are likely not going to jump into payment stablecoins immediately as a cash alternative just because it's out there.
And as a result, if we're right about the more moderate growth of the stablecoin market, then this should only provide more incremental demand for treasuries. The other part of this answer is where does stablecoin demand comes from? Because if it's coming from money funds or if it's coming from bank deposits that are already buying treasuries right now, it doesn't really change the aggregate net demand for treasuries.
It only changes the ownership of those treasuries. But if it's coming from other places like, you know, the unbanked or from international users that want to hold U.S. dollars as opposed to the local currency, then, yes, you could see an increase in net demand for treasuries. But regardless, I think, you know, the way that we think about it is that, you know, the demand for treasuries from the stablecoin perspective will probably be more incremental and marginal in nature as opposed to, you know, explosive in the way some reports are describing it.
Great. So this kind of brings me to my next question for you. How should we be thinking about stablecoin use cases today?
And then also, how might stablecoins reshape the current financial system? So stablecoins are effectively the digital version of a U.S. dollar. It's the bridge between the crypto world and the traditional financial markets.
And so not surprisingly, you know, as far as the use case is concerned, the primary use case is that they're being used to trade in and out of the crypto ecosystem. There is a subset of users, and I would say that this is more at the international level where they use stablecoins as a way to hedge against inflation or devaluation in the local currency. Beyond that, I would say the other use cases are still developing, and I think the biggest one that we are all watching is that whether stablecoins could be used as a form of payment in the traditional sense in our everyday life, making it as ubiquitous as paying something with our credit card for things or electronically sending cash to someone or some merchant.
And you might have seen news that Amazon and Walmart are exploring issuing their own stablecoins or using stablecoins in their payments network. Global payment giants such as PayPal, Stripe, Visa, Massacar, they're kind of all doing the same thing. In fact, PayPal already has a stablecoin called PayPal USD.
And within that, I think the part that has the greatest value or potential is using stablecoins for cross-border payments. So imagine if you are a corporate treasurer managing large international cash flows or a small business paying suppliers abroad, you know, or just a regular person trying to send money to your family overseas. The current process right now takes a long time and it's expensive because along the way, you're basically accruing a bunch of fees as your bank works through, you know, the foreign corresponding bank and the SWIFT network, etc.
With stablecoins, you can do the exact same thing at a fraction of the cost and at a fraction of the time. So, you know, there are real cost savings and operational efficiency to be gained by using stablecoins as a form of payment. The functionality is there.
I think we just have to see whether the economy adopts to it or not. So let's just switch gears for a second. While we can compare stablecoins to money market funds to some degree, what about tokenized money market funds?
Are they different? Do they pose any competition? Great question.
So with tokenized money funds, you're basically buying a digital share of a money market fund. They're like regular money funds in terms of yield and liquidity, but just the ownership is reported digitally. BlackRock and Franklin Templeton were kind of the first ones in this space.
But more recently, there has been news that Goldman and Pony have partnered together to offer the technology of tokenization to more money fund families, including Fidelity, Federated, GSM, Dreyfus. In itself, this is pretty significant news in the sense that those fund families that I just mentioned make up 46% of the money fund industry from an AUM perspective. But beyond that, I think what's most notable is that it opens up another use case for money funds beyond the utility of a cash management vehicle.
So not only does the digital wrapper offer faster settlement and better transparency, but it also opens the door for using tokenized money funds as collateral when you need it. So when you're trading futures and swaps and exchanges. So ultimately, I think it enhances the competitiveness of money funds versus stable coins and will also help bridge the gap between traditional finance and digital assets.
Got it. That's a big development there. With the Clarity Act still making its way through Congress, could this legislation also give boosts to the stable coin space?
Absolutely. I think so. The Clarity Act is a market structure bill in that it establishes a regulatory framework for digital assets to operate in the US.
Now what does that mean exactly? Well, broadly, it means that it will give clarification in terms of what role the SEC or the CFTC has in governing and overseeing the space. So it will define kind of whether digital assets are securities or commodities.
It will also establish a framework for intermediaries like exchanges and brokers and dealers in the crypto space and give them guidelines in terms of what they can or cannot do. And as part of that, also incorporate safeguards to protect users of those digital assets. So all of this is kind of needed for people to feel more comfortable engaging in the space to engage in digital assets.
And so if it passes, you know, we do think it will set a foundation for stable coins and more broadly digital assets to become much more mainstream in the financial markets. Super helpful. Any last thoughts before we go?
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Morgan, Jason Coe, all rights reserved. This episode was recorded on July 31st, 2025.