For decades, the multi-trillion-dollar U.S. Treasury market has been the anchor of the global financial system, its ebbs and flows dictated by central banks, sovereign wealth funds, and traditional money market giants. But a recent paper from the Bank for International Settlements reveals a new hand on the tiller: dollar-backed stablecoins, which have quietly become a force in shaping the price of these vital safe assets.
In effect, these large stablecoin issuers are operating as a new breed of money market fund. They gather vast pools of dollar-based assets and, as the BIS paper shows, lend this cash into the short-term repo market much like their traditional counterparts. Despite these similarities, a fundamental divergence exists in regulatory supervision, which currently varies.
Let’s start with the how & why, similar to most stablecoin issuers Tether holds large reserves, and part of their investment strategy can involve participating in the U.S. repo market which is a vital short-term lending market where participants borrow cash by pledging their securities as collateral, with a promise to repurchase the securities at a later date. In managing their reserves, which are often held in cash-like financial instruments and short-term T-bills, Tether can decide to lend out cash via reverse repurchase agreements, taking U.S. Treasury bonds as collateral instead of other securities.
In the world of TradFi, the basis trade is typically carried out by leveraged players like hedge funds. They often need to borrow cash, through the repo market, to buy Treasury bonds while simultaneously shorting Treasury futures on CME. By participating in the repo market through lending cash via reverse repos, stablecoin issuers can become a source of funding for the entities executing the basis trade.
The Treasury basis trade is an arbitrage strategy deployed by many of the leading traditional financial players like hedge funds, but it is increasingly being facilitated by the investment activities of the largest stablecoin issuers in the world. While some market commentators may be concerned that this basis trade is sabotaging the wider treasury market, understanding how this arbitrage play works in addition to how and why it is employed by stablecoin issuers is a key part of understanding the benefits digital assets can bring to the traditional financial system.
The BIS report notes Tether “may facilitate” these strategies, like MMFs’ cash lending in sponsored repo mirrors the short positions on Treasury futures by hedge funds. What they are saying is that, similar to MMFs, when Tether provides cash to the repo market, they are indirectly helping to finance the activities of hedge funds engaged in the basis trade. While Tether isn’t directly doing the arbitrage, its cash investment activities can provide the necessary liquidity for others to do so.
The basis trade is identified as a “first order concern for regulators” due to the leverage involved and the potential for market disruption if these trades unwind quickly, as has happened during past periods of market stress such as in March 2020. If stablecoin growth and investment practices contribute to the scale or funding of this trade, it links stablecoins directly to this systemic risk.
With stablecoin treasury holdings exceeding $200 billion as of March 2025, as issuers like Tether and Circle are becoming increasingly intertwined with the traditional financial market they become comparable to large foreign investors and money market funds. This risk is amplified by the report’s finding that stablecoin outflows have a disproportionately large impact on Treasury yields two to three times greater than inflows, hinting at the sharp disruption a potential fire sale could cause during a redemption run. If the stablecoin sector grows to $2 trillion by 2028, a proportional increase in 5-day flow variance could lead to a 2-standard deviation flow of approximately $11 billion, with an estimated impact of -6.28 to -7.85 basis points on T-bill yields.
The expanding footprint of stablecoins carries important implications for U.S. Treasury yields, monetary policy transmission, financial stability, and the future of global payments, prompting calls for greater transparency and regulatory attention, which the stablecoin issuers may themselves welcome to build trust in their businesses. Their operations are no longer confined to the crypto but have tangible connections and potential impacts on core markets like the Treasury and repo markets. The hope is that pending legislation such as the GENIUS act will help lay the groundwork necessary to properly integrate this new class of large scale treasury buyers in order to enhance our financial markets and not sabotage them.
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