Complacency causes problems. Not paying attention to warning signs when they are right in front of you can lead to bad outcomes.
Regarding stablecoins, one might conclude that this message has been heard, as the US Senate just passed the Genius Act, a policy that provides a regulatory framework for stablecoins.
After Circle’s mammoth IPO success, passing such a law was easier. Stablecoins, particularly US dollar stablecoins, are hot right now.
But are they too hot? If they are too hot, problems could arise.
Aaron Brogan of Brogan Law in his newsletter
provides insight into rising complacency in the US dollar stablecoin market.
In short, Aaron Brogan highlighted US dollar stablecoins and their relationship with US Treasuries. Circle’s USDC currently has $60 billion circulating supply, which combined with USDT is about 90% of the stable coin market. Circle’s coins are backed with collateral mostly held in short-term Treasury bills. At present, given the $900 billion daily secondary market for Treasuries, Circle should have no problem meeting redemptions by selling Treasury bills.
But, if the stablecoin market continues to grow as more supportive regulation comes about, and there is a confidence crisis in US Treasuries, the assumption of an easy unwind for dollar stablecoins may not hold.
There is a solution. Legislation that leads to a lower concentration of US dollar stablecoins in the overall stable coin market. Stablecoins will grow, but the growth must be spread among vehicles other than USDC and USDT. Thus, the US should permit US investors to hold stable coins and bonds in Mexico, Europe, Japan, UK, and Brazil along with other countries.
This becomes even more important when we look at the risks of the US dollar and treasury market. Aside from the structural issues like tariff uncertainty, the ratings downgrade of US government bonds, and the increasing debt burden as a percentage of GDP, there is an event coming; on May 26, 2026, Federal Reserve Chair Jerome Powell’s term ends. President Trump will appoint a new chairman, naming the candidate soon, and it is highly probable that the new chairman is going to cut interest rates more aggressively than Chairman Powell ever did.
A key question is how much? Will it be so much that investors don’t feel compensated for the risks of owning the US dollar and treasuries? Severe rate reductions can cause weakness in the US dollar and treasury market. US dollar and bond risk creates a severe headwind for US stablecoin companies like Circle to unwind collateral to meet redemptions.
Even more concerning is the possibility of a vicious cycle. If dollar, deficit, and policy concerns prompt foreigners to take money out of treasuries, US borrowing costs will go up. If US borrowing costs go up, the US fiscal position will worsen; the more money out of US Treasuries, the higher the US borrowing rate. If the borrowing rates continue to go up, there will be more fiscal pressure, and so on, and so on.
Such a vicious circle can really make unwinding USDC or USDT collateral tough.
The US government must realize that a release valve is needed for stable coins; stable coins cannot grow at a high rate, and have the growth driven by two coins, USDC and USDT. The Genius Act which puts some regulatory guard rails around stablecoins is great, but they must do more. If they do not do more and crisis hits, US dollar stable coin investors will have big problems.
If a government can react, but doesn’t react, and a crisis could have been mitigated, it is logical to conclude they own it, or at least part of it.
This blog is for educational and informational purposes only, covering general market trends, industry developments, and asset features. Nothing herein is investment advice, a solicitation, or a recommendation to buy or sell any assets. Etherfuse and its guests may hold stakes in some or all of the assets discussed.
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