Citigroup: Dollar stablecoins "reflect rather than reinforce" the dollar's status, and non-dollar stablecoins are an important indicator of "de-dollarization"

Will the demand for U.S. Treasury bonds not significantly increase in the short term due to the growth of stablecoins?

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

Growth of Stablecoins Difficult to Substantially Drive Demand for U.S. Treasuries

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

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

Citigroup's analysis suggests that the answer is conditionally "both yes and no." The key behind this lies in the source of funds: if newly issued stablecoins come from the transfer of existing bank deposits or money market funds, it will not actually generate net new demand for U.S. Treasuries.

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

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

The source of growth for stablecoins is crucial. If the growth comes from the transfer of funds from other U.S. 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 (by 2030) size of the stablecoin market will reach $1.6 trillion. Among these, $240 billion from the reallocation of U.S. cash, $109 billion from the reallocation of global M0, and $273 billion from the reallocation of deposits held by foreigners will constitute the real incremental demand for U.S. Treasuries.

Non-U.S. Stablecoins Become Important Indicators of De-Dollarization

Citigroup believes that the dominant status of the U.S. dollar as a reserve will continue to exist, regardless of stablecoins. In terms of reserve diversification, the euro is the only potential long-term competitor.

Based on current trends, Citigroup expects that the U.S. dollar will maintain its dominant reserve currency status until 2070. Even under aggressive assumptions (a 12.5% annual decline in the dollar's share and a 5% annual increase in the euro), this status will continue until 2046 Citigroup emphasizes that the relative 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, euro stablecoins account for only a small portion of dollar stablecoins, despite the dollar's share in foreign exchange reserves being about 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 of the dollar and its network effects mean that dollar-based stablecoins are likely to continue to dominate the market. The relative popularity and issuance volume of non-dollar stablecoins will be interesting indicators for tracking the trend of de-dollarization.