Stablecoins as the Bridge to Traditional Finance

6.1 A crypto company holding government bonds

Node read a surprising fact: some of the largest holders of short-term US government bonds weren't banks or governments, but stablecoin issuers.

"A crypto company holds more US government debt than some countries?" said Node.

"Stablecoins are where crypto and traditional finance meet," said Hash. "Every dollar stablecoin has to be backed by something. Increasingly, that something is the same safe assets that banks and money market funds hold. That link means stablecoins carry macro forces into crypto, and crypto forces into traditional finance."

6.2 How fiat-backed stablecoins are backed

Module 9, Chapter 7 explained how fiat-backed stablecoins hold their peg through redemption. Here's what typically sits in their reserves:

Reserve asset	Characteristics
Short-term US government bonds (Treasury bills)	Safe, liquid, and pay interest
Repurchase agreements backed by government bonds	Short-term secured lending
Bank deposits	Immediately available, but exposed to bank failures (Module 9, Chapter 7)
Money market funds	Funds investing in short-term government debt
Other assets, at some issuers	Can include riskier holdings, depending on the issuer and regulation

Issuers publish reserve reports or attestations, with varying levels of detail and independent verification.

Chapter 6 · Stablecoins as the bridge

A one-dollar stablecoin is backed by a reserve bucket of Treasury bills, repo, and bank deposits, linking it to short-term government debt markets. The issuer earns interest on the reserves, while holders earn nothing, a split reinforced by the current US yield ban.

6.3 The stablecoin business model

Stablecoin issuers typically don't pay interest to holders of their tokens. But they earn interest on the reserves backing them.

Example.

	Value
Stablecoins in circulation	$100 billion
Reserves invested in Treasury bills	$100 billion
Treasury bill yield	4.5%
Annual interest income	$4.5 billion

This explains why stablecoin issuance became one of the most profitable businesses in crypto when interest rates rose, and why so many companies want to issue stablecoins.

It also links issuer profits directly to central bank policy (Chapter 2). When rates fall, issuer income falls. When rates rise, it rises.

Interest rate on reserves	Income on $100 billion
0.1% (near-zero rates)	$0.1 billion
2%	$2 billion
4.5%	$4.5 billion

"So when the Fed cuts rates, stablecoin issuers earn less," said Mint.

"Exactly," said Hash. "And some may compete harder for users by sharing more of that income through partners or rewards programmes, where regulations allow."

6.4 Stablecoins and the bond market

Because issuers buy short-term government debt, growing stablecoin supply creates demand for those bonds. Shrinking supply, from redemptions, means issuers sell bonds.

At small scale, this doesn't matter much to the bond market. As stablecoins grow into the hundreds of billions of dollars, researchers and policymakers have begun studying their effects on short-term interest rates and on the stability of funding markets. A sudden mass redemption could force issuers to sell large amounts of bonds quickly, similar to a run on a money market fund (Chapter 7).

6.5 Regulation is bringing stablecoins into the system

Stablecoin regulation has advanced significantly in recent years (Module 1, Chapter 14).

Region	Development
European Union	Stablecoin rules under MiCA began applying in mid-2024, requiring authorisation and reserve standards for issuers serving the EU
United States	The federal GENIUS Act, signed in July 2025, created a framework for payment stablecoins, including requirements for high-quality reserves held one-for-one, and bans issuers from paying yield or interest directly to holders. Its main provisions are scheduled to take effect in early 2027
Other financial centres	Several, including in Asia and the Middle East, have introduced licensing regimes for stablecoin issuers

Regulation tends to bring stablecoins closer to traditional finance: stricter reserves, audits, licensing, and oversight. It also encourages banks, payment companies, and large financial firms to issue or integrate stablecoins.

Check current rules in your jurisdiction, since this area is evolving quickly.

6.6 Beyond trading: payments and settlement

Stablecoins were first used mainly for crypto trading. Their uses have broadened.

Use	Example
Trading and DeFi	Base pairs on exchanges; collateral in lending (Module 9)
Cross-border payments	Faster, cheaper transfers than traditional wires, as in Mint's story in Module 1, Chapter 1
Savings in dollars	People in high-inflation economies holding dollar value (Chapter 11)
Business settlement	Companies settling invoices or treasury transfers on-chain
Payment networks	Card and payment companies integrating stablecoin settlement

Each of these connects stablecoin supply to real economic activity beyond crypto speculation.

6.7 Stablecoin supply as a macro signal

Module 6, Chapter 8 introduced stablecoin supply as a measure of capital entering crypto. Through this module's lens, stablecoin supply also reflects macro conditions:

Stablecoin supply trend	Possible macro reading
Growing quickly	Capital entering crypto, demand for dollar access, or growing payments use
Flat	Balanced flows
Shrinking	Capital leaving crypto, perhaps because safe yields elsewhere are attractive or risk appetite is low

Rising interest rates can create competing effects: they make stablecoin issuance more profitable for issuers, but they also make holding non-interest-paying stablecoins less attractive for users compared with interest-paying alternatives.

6.8 Try it yourself

Find the latest reserve report or attestation from a major fiat-backed stablecoin issuer. Note the total reserves and the share held in government bonds, repurchase agreements, bank deposits, and other assets. Then estimate the issuer's annual interest income, using the current short-term US Treasury yield.

Key takeaways from this chapter

1. Fiat-backed stablecoin reserves are mostly held in short-term government bonds, repurchase agreements, deposits, and money market funds.
2. Issuers earn interest on reserves, typically without paying holders, so their income depends on interest rates.
3. Growing stablecoin supply creates demand for government debt and links crypto to the bond market.
4. Regulation, including the EU's MiCA and a 2025 US federal law, is bringing stablecoins closer to traditional finance.
5. Stablecoins are increasingly used for payments, savings, and business settlement, not just trading.
6. Stablecoin supply reflects both crypto demand and broader macro conditions.