Galaxy: Stablecoins, the GENIUS Act, and the Evolution of the Dollar Financial System

Author: Thaddeus Pinakiewicz, Vice President, Galaxy Digital Research; Source: Galaxy Digital; Translated by: Shaw, Jinse FinanceExecutive SummaryIf stablecoins achieve large-scale development under the reserve constraints of the GENIUS Act, it will create sustained demand for short-term US Treasury bonds, slightly lower short-term yields, and directly channel global dollar demand into the US banking system.Galaxy Digital Research's comprehensive model shows that the incremental growth of stablecoins will mainly come from overseas, meaning that the scale of foreign capital inflows into US financial infrastructure will significantly exceed the volume of domestic deposit migration. Counterintuitively, its ultimate net effect will strengthen the dollar system rather than undermine its stability.We expect hundreds of billions of dollars in domestic deposits in the US to flow into stablecoin reserves, while trillions of dollars of overseas capital will also flood into the US banking system. Stablecoins are structurally boosting demand for US Treasury bonds, potentially lowering short-term yields by 3-5 basis points and saving US taxpayers over $3 billion annually. We predict that every $1 of stablecoin minted will drive a $0.31 expansion in US credit creation. Emerging economies with weak financial systems may suffer the most severe capital outflow shocks due to capital flows to compliant stablecoins. It's important to clarify that the banking sector will face operational pressure. Some low-cost deposits will migrate, marginal funding costs will rise, and net interest margins in interest-sensitive business segments will narrow. However, the ultimate result is unlikely to trigger a systemic credit contraction, but rather a redistribution of credit creation structure. Stablecoins will not weaken overall credit supply capacity; they merely redistribute the yield spreads of safe assets to different market participants. Simultaneously, the short-term segment of the US Treasury yield curve, the most interest-sensitive segment, will have a larger and more structurally stable buyer base. The already dominant US dollar will see further reductions in the barriers to holding, transferring, and saving globally. When holding US credit assets becomes as easy as downloading an app, signs of unrest and outflow of domestic deposits from financially vulnerable economies will emerge. This impact may spill over into the United States. Countries with weak currency credibility, fragile banking systems, and strict capital controls will face greater pressure. Once ordinary citizens can easily hold US dollar credit assets, domestic deposits from high-risk regions will accelerate their outflow. The GENIUS Act strengthens the dollar system not only by optimizing its own rules but also by weakening the competitiveness of other alternative currencies. This article argues that the impact of the GENIUS Act goes far beyond the localization and compliance regulation of stablecoins; it concerns a profound transformation of the dollar economy's financing structure: pressure on bank interest rate spreads, increased flexibility in US Treasury issuance, the introduction of incremental foreign capital into the US financial system, and stronger financial competition for weaker sovereign nations. Overall Landscape: The US benefits overall; some banks suffer losses due to reduced interest rate spreads; some overseas banking systems experience deposit outflows; US and global consumers gain easier access to dollar-denominated credit assets. Background: Since the GENIUS Act took effect on July 18, 2025, the market has seen both rational analysis and intense public debate. The US government positions it as a strategic financial policy: to regulate and absorb dollar-denominated stablecoins domestically, expand global dollar demand, and create structural incremental buyers for short-term US Treasury bonds. From this perspective, the act is essentially about improving financial infrastructure, rather than simply regulating speculative technology assets; its core definition is who has the right to issue digital dollars, what assets are used as collateral, and who ultimately finances US government spending. Opposition from the industry is relatively scattered. Traditional banking is focused on a far-reaching core controversy: whether stablecoins compliant with GENIUS should be allowed to pay interest or yield rewards to holders. Banks argue that interest-bearing stablecoins would directly compete with bank demand deposits. Demand deposits have long been a core source of low-cost, high-stickiness funding for banks, supporting traditional lending businesses. The banking industry's core concern centers on funding stability: if a large amount of deposits flow to fully-reserve, US Treasury-backed stablecoin products with yields, banks may face structural pressures of rising long-term funding costs and a loss of deposit base. (The GENIUS Act explicitly prohibits stablecoin issuers from directly paying interest to users, but allows exchanges to provide rewards for stablecoin holdings on their platforms. Currently, in negotiations for the Clarity Act, which is pending review, the banking industry is lobbying for a complete ban on such incentive mechanisms.) The digital asset industry, however, believes that the claim of deposit outflows is exaggerated. Industry insiders suggest that interest-bearing stablecoins are essentially similar to government money market funds: they are cash-like instruments that invest in short-term public bonds, providing market-based returns with minimal intermediaries. Money market funds have coexisted with the banking industry for decades; even with the occasional risk of net asset value falling below par—the very risk the GENIUS Act aims to prevent through reserve requirements and regulatory oversight—money market funds have never disrupted the community banking system. The crypto industry's view is that prohibiting stablecoins from paying interest is actually protecting banks' existing funding subsidies, rather than maintaining financial system stability. This article does not intend to delve into the complex legislative details of the bill, as various institutions have already provided detailed interpretations. This article only outlines the core structural provisions of the bill as background, focusing on the dimensions most relevant to the market: balance sheets, fund flows, and market incentive mechanisms. The core issue is not about abstractly judging the pros and cons of stablecoins, but about how they reshape the asset and liability allocation structure of the entire financial system. This article focuses on analyzing the potential impact of the bill on US finance and the macroeconomy, while also considering the divergent effects on the global interest landscape. The analysis dimensions include: how the expansion of stablecoins under the GENIUS framework affects short-term US Treasury demand and pricing, the source of incremental funds, whether it represents new capital or a replacement of existing deposits, and the secondary effects on bank financing costs, credit creation, and the financial intermediation landscape. Clarifying this logic requires combining reserve rules, stablecoin growth forecasts, deposit substitution models, and international capital flows, which will be systematically broken down layer by layer below. Impact on the US Treasury Market: Scale and Mechanism of Action To assess the reshaping effect of the GENIUS Act on the US Treasury market, it is essential to first clarify the intrinsic link between the growth of stablecoin scale and the demand for US Treasury bonds. The bill requires stablecoin reserve assets to meet three stringent standards: high creditworthiness, high liquidity, and short duration. In practice, the vast majority of reserve funds will be allocated to short-term US Treasury bonds. Tether, the world's largest offshore stablecoin issuer, currently holds over $120 billion in short-term US Treasury bonds, ranking among the world's largest holders of short-term US Treasury bonds, exceeding the holdings of over 90% of sovereign nations globally. The GENIUS Act formally legalizes and domestically absorbs this model, solidifying the demand for US Treasury bonds into the stablecoin asset class. Previously, stablecoin reserve allocations had explored diversified targets, including commercial paper, gold, and other non-governmental financial instruments; however, the space for such allocations will be significantly reduced in the future. The deeper implication is that the expansion of stablecoin issuance translates into a much higher certainty of increased demand for US Treasury bonds than before. In equilibrium, for every additional $1 of stablecoin issued, approximately $1 of short-term US Treasury bonds needs to be allocated and continuously rolled over until the stablecoin is redeemed. To assess the scale of this impact, three core input conditions are needed: a forecast of stablecoin supply over the next 2–5 years; a clarification of the historical patterns of stablecoin fund flows' impact on the US Treasury market; and the establishment of an analytical framework to convert the total stablecoin issuance into net incremental demand for US Treasury bonds, given the volatile structure of reserve assets. The certainty of stablecoin expansion translating into increased demand for US Treasury bonds is far greater than in the past. Stablecoin Market Growth Forecast Currently, the total market capitalization of stablecoins is in the low range of several hundred billion US dollars, but most institutions predict that the GENIUS Act will create a significantly accelerated institutional environment for stablecoin expansion. Analysts from institutions such as Citigroup, Standard Chartered, Coinbase, and JPMorgan Chase are optimistic about the substantial growth of stablecoins in the coming years, although their analytical frameworks differ significantly. Some focus on transaction volume growth, some emphasize the replacement of existing dollar-denominated instruments, and many more rely on statistical extrapolation based on recent adoption rates. These differences in research methods are crucial, as they not only affect the overall market size forecast but also alter assessments of its potential impact on the banking industry, demand for US Treasury bonds, and the dollar-based financial intermediation landscape. In its "2030 Stablecoin Outlook" report, Citigroup models stablecoin growth using the substitution of existing assets across various asset classes, including transaction deposits, savings products, money market funds, physical cash, and offshore USD holdings. This method transforms market size calculations into a funding source structure diagram, predicting not only the final size of stablecoins but also which types of USD asset exposures they will replace. When the initial version of the report was released in April, it predicted a stablecoin supply range of $422 billion to $2.3 trillion in 2028 and $500 billion to $3.7 trillion in 2030. In September, Citigroup updated its model, raising its stablecoin growth forecast even without the GENIUS Act, while lowering its estimate of the market's substitution effect. Revised baseline forecast: Stablecoin size $1.2 trillion in 2028, $1.9 trillion in 2030. Not all stablecoin increments have the same economic impact: $1 outflow from real cash has a completely different macroeconomic impact than $1 outflow from commercial bank deposits. The core value of the Citi model lies in its structural decomposition: it distinguishes three sources of funding—substitution of domestic US deposits, migration of funds from money market quasi-products, and new overseas allocation demand—establishing a logical link between growth forecasts and subsequent analysis of the impact on bank financing and credit creation. This will be demonstrated later: the economic implications of each unit of stablecoin growth are not the same; the impact paths of converting real cash into stablecoins and converting commercial bank demand deposits into stablecoins are drastically different. Citi's analytical framework best clearly distinguishes these structural differences. Standard Chartered Bank, in its report "Stablecoins, Dollar Hegemony, and US Short-Term Treasury Bonds," presents the most optimistic forecast of massive growth, including a $2 trillion valuation frequently cited in US Treasury commentaries. The British investment bank's analysis is based on existing growth momentum: even before the GENIUS Act, the supply of stablecoins had maintained an annualized growth rate of approximately 50%. After the act took effect, Standard Chartered expects the annualized growth rate of stablecoins to accelerate to nearly 100%, keeping pace with the continued expansion of trading activity related to cryptocurrency exchanges. In this scenario, the total monthly trading volume of stablecoins will climb from approximately $700 billion currently to approximately $6 trillion by the end of 2028; the share of stablecoins in spot foreign exchange trading will also rise from approximately 1% to nearly 10%. The core assumption of the Standard Chartered model is that the expansion of trading volume requires a linear and proportional increase in stablecoin reserves and trading volume to provide support, and that the overall velocity of stablecoins remains unchanged (the team has subsequently relaxed this assumption appropriately). Based on these assumptions, to match the projected trading growth, the stablecoin reserves need to increase from approximately $230 billion currently to $2 trillion, which means that by 2030, the new issuance of stablecoins will reach approximately $1.6 trillion. The bank's research did not provide pessimistic or optimistic marginal scenarios beyond the baseline forecast. Therefore, the core logic of the Standard Chartered model is not the substitution of existing assets among various financial assets, but rather trading-driven expansion. Coinbase, in its "New Framework for Stablecoin Growth," employs a stochastic model, extrapolating from historical growth rates, and places greater weight on growth phases under policy-friendly presidential terms after 2024. The report views the current environment as a structural inflection point: the implementation of regulatory frameworks, increased institutional acceptance, and product ecosystem integration fundamentally alter the pace of stablecoin adoption. Its baseline scenario forecasts approximately $1.2 trillion in stablecoin reserves by 2028, with a pessimistic-optimistic range of $975 billion to $1.4 trillion. Even in the pessimistic scenario, Coinbase's assessment of stablecoin adoption growth remains the most optimistic, projecting a compound annual growth rate exceeding 100% by 2028. Coinbase did not provide forecasts beyond 2028, but based on extrapolation from its model, we estimate that the total stablecoin supply in 2030 will reach $1.4 trillion to $2.2 trillion under its framework. JPMorgan Chase's model is the most conservative and logically simple among major investment banks' forecasts, serving as a cautious benchmark in the industry. The model assumes a steady monthly expansion of 2%–3% in the stablecoin market, predicting a stablecoin supply of $500 billion to $750 billion in 2028; extrapolating to 2030, the size ranges from approximately $630 billion to $1.05 trillion. Finally, BPI (Bank Policy Institute) presents an extremely optimistic (from a crypto industry perspective) potential funding demand of $4 trillion to $6 trillion to extrapolate the potential impact of interest-bearing stablecoins under the GENIUS Act. BPI's forecast references a report from the US Treasury Lending Advisory Committee (TBAC) in April 2025, which uses a very broad definition of the potential market, essentially assuming that all interest-free demand deposits could be replaced by stablecoins. This translates to a landmark risk deposit size of approximately $6.6 trillion—more than 50% higher than even the most optimistic overall forecasts for the crypto industry, roughly equivalent to one-third of total U.S. banking deposits. The BPI report's more extreme projections are based on the Baumol-Tobin Model. This model is a simplified analytical framework that describes how consumers optimally allocate their transaction reserves between interest-bearing savings. Applying this model mechanically can extrapolate much larger outflow estimates: if stablecoins were allowed to pay interest directly to token holders, the potential outflow could reach as high as approximately $4 trillion. Such figures have directional reference value in stress scenario calculations, but should be viewed with caution. The Baumol-Tobin Model relies heavily on pre-existing assumptions; its empirical support is uneven when used as a precise forecasting tool rather than merely a model demonstrating the principles of money demand. Using the Baumol-Tobin model directly as a quantitative forecasting tool for stablecoins is unreliable because many of its core assumptions are difficult to hold in reality: stablecoins are not only used as a medium of exchange, but also as collateral, a store of value in cross-border transactions, and a savings asset; transaction costs are neither fixed nor stable, but dynamically change with on-chain fees, network congestion, and market structure; furthermore, stablecoin yields are not pure risk-free interest rates in the traditional sense, but are subject to interest rate risk and liquidity risk. The BPI report deliberately constructs a scenario of extreme shocks and maximum stress, with the aim of merely defining the upper limit of potential stress on the banking system. While empirical studies in modern microeconomics and structural economics published in top economics journals acknowledge the logic behind the model, they also point out that once cash withdrawal and payment technologies, the broadening marginal access effect, and precautionary and random cash holding motives are incorporated into the modeling, the real interest rate elasticity will be significantly lower than the Baumol-Tobin model's benchmark of 0.5. Even BPI itself acknowledges that random cash management models like the Miller-Orr model inherently have lower interest rate sensitivity than the Baumol-Tobin model. Therefore, this extreme scenario is not applicable as a benchmark expectation; it is merely an artificially set limit of pressure assumption used to indicate the upper limit of potential risks in the banking system. In summary, BPI's projections are too broad and difficult to consider as reliable predictions that fit reality. The assumption that all incremental stablecoins come solely from US bank deposits and that all interest-free demand deposits will be converted to interest-bearing digital dollars is inherently unreasonable. This viewpoint ignores both other domestic funding sources and the massive international demand that has historically supported the widespread adoption of stablecoins. Objectively speaking, the US Treasury did not use the full $6.6 trillion figure as its baseline expectation; its actual market size benchmark was based on Standard Chartered Bank's forecast of $2 trillion for 2028, with $6.6 trillion used only as an illustrative extreme scenario. Combining various analytical frameworks, the market presents a reasonable range, not a single definitive conclusion. Even the lower limit of the forecast implies that stablecoins will continue to expand on top of their already high growth rate, with an annualized supply growth rate remaining around 40%; while the most aggressive models predict that the growth rate will further surge to over 100% annualized. Based on comprehensive calculations, the estimated total outstanding amount of stablecoins in 2028 is approximately: Pessimistic scenario: Approximately $420 billion - $970 billion Baseline scenario: Approximately $625 billion - $1.2 trillion Optimistic scenario: Approximately $750 billion - $2.5 trillion alt="bZvdRQbitSdlehNh6blZXP7410JU0LZ4bZcm0kcG.jpeg">Balance Sheet, Leverage Ratio, and Comprehensive Model Calculation ResultsModern banking does not follow a simple deposit-creating-loan mechanism; the actual operating logic is that loans generate deposits, while being constrained by capital adequacy ratios and regulatory requirements. From the perspective of leverage operation, the $1 stablecoin reserve recorded as a bank liability is not economically equivalent to the $1 retail deposit funds used for loan portfolio allocation. When deposits shift from ordinary retail accounts to centralized reserve accounts held by stablecoin issuers, the asset structure of banks will change even if the total size of their liabilities remains unchanged. Regional and community banks, whose profit models heavily rely on net interest margins from deposit-taking and lending, are far more sensitive to shocks than large, diversified institutions that earn fees from capital markets, consulting, and asset management. Combining Standard Chartered's global funding distribution assumptions with Citibank's detailed US funding substitution framework, we estimate that approximately 30%–40% of new stablecoin funding under the GENIUS Act originates from US bank deposits; the remainder is divided into 30%–40% from overseas inflows and 20%–30% from domestic non-deposit sources such as physical cash and money market funds. This range already includes the scenario of interest-bearing stablecoins. Under this funding structure, the scale of new overseas deposits could be up to twice the outflow of domestic deposits, meaning that the overall financing scale of banks will still grow, but the liability structure and cost pattern will be restructured. Taking into account the geographical distribution of funding sources, the regulatory differences between centralized reserve deposits and retail deposits, and the structural transformation of deposit liabilities into reserve-backed assets, we arrive at reasonable outcome ranges for various scenarios. The comprehensive model calculations conclude as follows: Pessimistic Scenario: The stock of compliant stablecoins will be approximately $630 billion in 2028 and reach $860 billion in 2030, primarily driven by moderate adoption within the United States. Approximately $400 billion will flow out of US commercial bank deposits, partially offset by $160 billion in overseas allocations and the conversion of real-economy cash. In the US Treasury market, the 3-month Treasury yield will face slight downward pressure of 1.5–2.2 basis points; during periods of market pressure, the decline could reach as high as 5 basis points. Credit creation remained largely flat overall, with foreign funds only filling domestic liquidity gaps and not generating incremental expansion. For every $100 billion of stablecoins issued, US credit contracted by $3 billion, a net contraction of $15 billion. Overall, this represents a manageable balance sheet restructuring, without systemic credit tightening. Baseline Scenario: Stablecoin stock expands to $1 trillion by 2028 and $1.5 trillion by 2030; approximately $550 billion comes from domestic deposit migration, $500 billion from overseas inflows, and another $200 billion from real-economy cash conversions. Continued rigid demand for US Treasury bonds pushes the 3-month short-term bond yield down by 3-5 basis points, with a maximum decline of 10 basis points during periods of market stress, potentially saving US taxpayers up to $3 billion in financing costs annually. For every $100 billion of stablecoins issued, US credit expands by $32 billion, resulting in a net increase of $400 billion in new credit. Foreign capital inflows fully cover and over-offset the impact of outflows from US retail deposits. Optimistic Scenario: With the implementation of a profit-sharing mechanism and accelerated global adoption, the stablecoin market size will reach $2.1 trillion in 2028 and $3.3 trillion in 2030. Despite a $1.2 trillion outflow from domestic deposits, the US banking system will still see a net inflow of $1.8 trillion, of which $1.3 trillion will be foreign capital entering the US market. US Treasury yields will decline sharply, tightening significantly, typically by 7-11 basis points, and potentially by up to 25 basis points under extreme stress scenarios, significantly reducing US government financing costs and saving the federal treasury over $5 billion in interest payments annually. Every $100 billion of stablecoins issued drives $41 billion in US credit expansion, resulting in a net increase of $1.2 trillion in new credit, effectively strengthening credit supply capacity and deepening the liquidity of the entire financial system. The stablecoin yield-paying mechanism does not pose an existential threat to the US banking industry. Even under the most aggressive assumption of rapid adoption, the main impact of the GENIUS Act is a redistribution of interest rate spreads, not the demise of credit supply capacity. Banks facing deposit competition still possess pricing power, mature balance sheet management tools, and diversified revenue streams. The banking system as a whole remains well-capitalized and liquid, sufficient to meet the needs of the real economy and support steady credit growth. Second-order effect and interest distribution patternFirst-order effect — reshaping of US Treasury demand and deposit fund flows — will further transmit outwards, having a deeper structural impact on fiscal policy, financial stability, and the competitive landscape of the US and its domestic and foreign financial systems.