Original author: Lorenzo Valente
Original translation: Luffy, Foresight News
In ARK’s Big Ideas 2025 report, we provide investors with deep insights into the crypto asset space, including stablecoins. Since January of this year, stablecoin supply has surged 20% to $247 billion, exceeding 1% of the US M2 money supply. Tether and Circle continue to dominate the market with $150 billion and $61 billion respectively, with a combined market share of more than 85%.
We believe that stablecoins could become one of the most important strategic assets of the US government in the next 5-10 years. Why? The proportion of foreign holdings of US debt has fallen sharply over the past 15 years, and this trend is likely to continue given evolving geopolitical pressures. At the same time, the Federal Reserve is unlikely to increase its purchases of US debt as it continues to pursue quantitative tightening.
We believe the stablecoin market will see exponential growth, with supply expected to grow 5-10 times over the next five years. This expansion could push demand for U.S. Treasuries to levels once supported by sovereign states. In addition, stablecoins are reaching regions and populations that are not served by the traditional banking system, offsetting the current wave of de-dollarization.
We present the arguments and analysis for stablecoins in six parts:
Shows that the holdings of major U.S. debt holders have been declining throughout history;
Argument that macroeconomic dynamics (including geopolitical changes) have made these countries less interested in investing in U.S. debt;
Describe how stubborn inflation reduces the likelihood of large-scale Fed bond purchases in the near term;
Explain how stablecoins can fill the demand vacuum left by major holders of U.S. debt historically;
Explain how stablecoins backed by US debt can promote trade like a Trojan horse and return US dollars to US debt;
Argue that stablecoins have significantly enhanced the dollar’s global dominance.
The U.S. government is losing its biggest bond buyer
In 2011, of the $10.1 trillion in outstanding U.S. debt, China, Japan, and Canada held 12.9%, 8.7%, and 1.43%, respectively, for a total of 23%. As of November 2024, of the $36 trillion in outstanding U.S. debt, the three countries holdings have fallen to 2.14%, 3.05%, and 0.95%, respectively, for a total of about 6%, as shown in the following table and chart:
Data source: ARK, as of May 15, 2025
It is worth reiterating that in just about 13 years, the holdings of the largest creditors of U.S. debt have dropped sharply from 23% to 6%, as shown below:
Data source: ARK, as of May 15, 2025
what happened?
Historically, China has accumulated dollars and purchased U.S. debt through huge trade surpluses every year. Its main motivation may be to control the RMB exchange rate against the dollar and maintain export competitiveness, which is crucial to Chinas economic growth. But in the past five years, Chinas trade imbalance has narrowed, and its demand for U.S. debt has also declined. U.S.-China trade data shows that the trade deficit was $419.2 billion in 2018 and fell to $295.4 billion in 2024, shrinking by more than 29% in just six years.
Geopolitical changes have accelerated this trend. Sanctions in response to the war in Ukraine have forced Russia to rely more on alternative trading partners, especially China. Today, 92% of Russian-Chinese trade is settled in rubles and yuan, a clear sign of de-dollarization. As trade tensions escalate, including national security sanctions related to the race for general artificial intelligence, Chinese policymakers are under pressure to reduce their reliance on U.S. financial services and securities.
On April 2, 2025, Donald Trump held a “Liberation Day” ceremony, announcing sweeping tariffs to address trade imbalances and support domestic industry:
Global: 10% tariff on all US imports;
China: Tariffs on Chinese goods increased to 145%, including a 125% reciprocal tariff and a 20% surcharge related to fentanyl policy;
Canada and Mexico: A 25% tariff is imposed on goods imported from the two countries, with energy products such as crude oil and natural gas reduced to 10%.
Unless China devalues its currency, as it did during Trump’s first term, the tariffs will make Chinese exports to the U.S. significantly more expensive, giving China another reason to focus on other trading partners, such as ASEAN, the Middle East, and the BRICS. In these markets, China is increasingly settling trade in renminbi, local currencies, or commodities. For example, the Shanghai International Energy Exchange settles oil transactions in renminbi, and China has become the largest trading partner of many fast-growing economies, such as Brazil, Argentina, Australia, and South Africa.
Japan also faces its own economic and demographic problems, prompting the Bank of Japan (BOJ) to take a more hawkish approach to inflationary pressures and a tightening labor market. In January 2025, the Bank of Japan raised its short-term interest rate by 25 basis points to 0.50%, the highest level since 2007, and hinted that further rate hikes may be in the cards if inflation approaches or exceeds the 2% target.
Over the past 30 years, the widening interest rate gap between Japan and the United States has spawned a large-scale carry trade: investors borrow at ultra-low yen rates and invest in higher-yielding U.S. dollar-denominated U.S. bonds. According to Charles Schwab data, the scale of carry trades has reached $1 trillion, while Deutsche Bank says it has reached $20 trillion. Although investors can hedge exchange rate risks through foreign exchange swaps, rising hedging costs are eroding net income advantages.
The sudden and dramatic unwinding of carry trades in the summer of 2024 suggests that many investors may not have fully hedged their risks. If the Bank of Japan continues to raise interest rates, the carry trade will become less attractive, and Japanese government bonds will become more attractive to local investors, accelerating the outflow of funds from U.S. Treasuries.
Fed unlikely to buy U.S. Treasuries
From February 2020 to April 2022, the Feds balance sheet expanded from $4 trillion to $9 trillion, stabilizing at around $7.3 trillion in June 2024. Today, quantitative tightening suggests that the Fed is more likely to be a seller of U.S. Treasuries than a buyer.
Data source: ARK, as of May 28, 2025
The Fed has shrunk its balance sheet through quantitative tightening, allowing maturing bonds to be rolled over without reinvesting them. When the Fed sells Treasury bonds (or does not reinvest the proceeds from maturing bonds), the open market must absorb the supply of Treasury bonds, which, all else being equal, tends to push bond prices lower and yields higher.
The Fed is unlikely to restart its purchases of U.S. Treasuries in 2025. On February 12, Chairman Powell reiterated that we still have a long way to go in reducing the central banks bond holdings, and explained that there were no signs of liquidity deteriorating enough to slow the quantitative tightening process. As of late February, the Fed allowed about $25 billion in U.S. Treasuries and $35 billion in mortgage-backed bonds to mature each month.
At the same time, the Congressional Budget Office predicts that the deficit will reach $1.9 trillion, close to 6.4% of GDP, in fiscal year 2025. In the next decade, the cumulative deficit may reach $20 trillion, which means that the US Treasury will need to issue at least about $2 trillion in short-term, medium-term and long-term bonds each year to finance government spending.
Despite the Trump administration’s efforts to keep long-term Treasury yields low, rates are more likely to move higher without a significant decline in inflation and real growth or new sources of demand for Treasury bonds. With demand from the largest holder of Treasury bonds continuing to fall and the tariff war pushing trading partners to significantly reduce their reliance on Treasury bonds, the increase in supply could overwhelm bond investors.
Can Tether and Circle take over the baton from China and Japan and boost demand for U.S. Treasuries?
Over the past few years, despite the Biden administration’s negative attitude toward digital assets, the stablecoin market has continued to soar. Against the backdrop of the volatile crypto market, stablecoin issuers have quietly become one of the world’s largest holders of U.S. debt, as shown below:
Data source: ARK, as of May 15, 2025
On January 31, 2025, Tethers annual audit report disclosed astonishing financial results for 2024: $13.7 billion in profit for the whole year, and $6 billion in the fourth quarter alone. In addition, the company issued $23 billion in stablecoins USDT in the fourth quarter, and the annual issuance volume reached $45 billion. As of the latest transparency report in March 2025, Tether currently holds $98 billion in U.S. Treasury bonds.
Meanwhile, as of late January, the second largest stablecoin issuer, Circle, held over $22 billion in U.S. Treasuries. Tether and Circle together are the 18th largest holders of U.S. Treasuries, behind South Korea but ahead of Germany. Looking more closely at 2024, Tether is the seventh largest buyer of U.S. Treasuries (after the UK and Singapore), while the largest sellers are China and Japan.
Data source: Ardoino 2025, as of May 15, 2025
At the current pace of issuance, we think they are on track to surpass four or five countries by the end of the year.
In ARKs Big Ideas 2025, we estimate that the total supply of stablecoins could reach $1.4 trillion by 2030. If Tether and Circle maintain their current market share and U.S. debt allocation, they could hold more than $660 billion in U.S. debt in total, close to Chinas current $772 billion holdings, and only behind China and Japan.
Source: ARK, data as of December 31, 2024
Clearly, Tether, Circle, and the broader stablecoin industry could create one of the largest sources of demand for U.S. Treasuries in the coming years, and could potentially replace China and Japan as the largest holders by 2030. If so, then the stablecoin industry could make an important contribution to the goal of lowering long-term U.S. interest rates.
Stablecoins can offset the impact of de-dollarization
The de-dollarization movement has two goals:
Removing the dollar from its role as the world’s reserve currency, especially as a denominated currency;
Prevent trade surplus funds from flowing into U.S. Treasuries.
While efforts to replace dollar-denominated trade have made some progress in emerging markets, they have had limited success elsewhere. The war in Ukraine and sanctions against Russia have accelerated Moscow’s push for the BRICS (Brazil, Russia, India, China, South Africa) to bypass the SWIFT network and adopt alternative currencies and systems.
The grouping was expanded to BRICS+ (incorporating Ethiopia, Iran, Saudi Arabia, and the UAE) in an apparent effort to strengthen the alliance and promote a new financial order.
In 2024, Putin launched the proposed BRICS international payment framework to further promote non-dollar transactions, but the initiative did not receive an enthusiastic response from other member states, and its feasibility and implementation were also questioned.
Meanwhile, bilateral trade deals in local currencies are increasingly common among BRICS and other emerging economies, such as the latest agreement between India, China, Brazil and Malaysia. Russia’s response to war-related sanctions marked the end of the petrodollar agreement that cemented the dollar’s position as the main currency for global oil sales about 50 years ago. According to Oilprice.com, by the end of 2023, 20% of global oil transactions will be settled in other currencies, but these proceeds are often converted back to dollars.
Although many attempts to de-dollarize have had limited success, there is one harsh reality that cannot be ignored: the United States is no longer the world’s largest economy in terms of GDP alone. With the addition of Saudi Arabia, the United Arab Emirates, Egypt, Iran, and Ethiopia, the combined GDP of the BRICS+ group will reach $29.8 trillion in 2024, slightly ahead of the United States’ $29.2 trillion.
Over the past two decades, the trend has been clear: the BRICS+ economies have grown significantly faster than the G7, and all signs suggest that this change is likely to continue.
Stablecoins have a unique position in the evolving global financial landscape. They are the most liquid, efficient and user-friendly wrappers for short-term U.S. Treasuries, effectively addressing the two major obstacles to de-dollarization: maintaining the dollars dominance in global transactions while ensuring continued demand for U.S. Treasuries.
In other words, every time a citizen of Argentina, Turkey, or Nigeria buys a stablecoin like USDT or USDC, they both reinforce the dollar as the preferred denominated currency and create demand for short-term U.S. Treasuries. Stablecoins have thus become a Trojan Horse for U.S. Treasuries, ensuring continued (or even increased) demand for them from users around the world.
Although the petrodollar agreement officially ended last year, similar tacit agreements are actually being formed and may be equally critical in the coming decades. If someone wants to buy Bitcoin, Ethereum or other digital assets outside the United States, the US dollar is still the currency required for most transactions on the worlds most liquid exchanges. This financial moat has existed for more than five years: US dollar stablecoins (especially USDT) have been the main trading pairs on major Asian exchanges such as Binance, OKX, Upbit, Bybit and Bithumb.
Take Binance, the worlds largest crypto exchange, for example. Its reserve certificate shows that out of the $166 billion in token balances, customers hold over $34 billion in USDT and $6 billion in USDC. Cryptocurrency transactions such as BTC, ETH, and SOL denominated in U.S. dollars have created huge demand for USDC and USDT overseas.
Stablecoins are emerging as the Internet’s native dollar infrastructure
As of October 2024, Tether reported that over 330 million on-chain wallets and accounts hold USDT, of which 86 million are held on centralized exchanges such as Binance and OKX. In total, approximately 416 million wallets interact with USDT in some way.
Tether currently holds 70% of the total stablecoin market share. Given its reported ~400 million addresses, a reasonable estimate is that the number of addresses holding stablecoins worldwide is close to 570 million.
However, individuals and businesses often use multiple wallets, and many addresses belong to exchanges or institutions that pool funds from many users into a single address. According to the Chainalysis 2024 report, about 30%-40% of addresses belong to individual users, which means that the number of individuals holding stablecoins worldwide is between 170 million and 230 million, an estimate that is consistent with other available data. For example, we know that about 40 million wallets are active each month, and an estimated 600 million people worldwide hold cryptocurrencies.
In this context, an interesting statistic is comparing the number of stablecoin holders to traditional USD holders (including USD in paper/cash and bank accounts):
Paper dollars: As of 2022, there are approximately $2.3 trillion in US dollars in circulation, with an estimated 50% held overseas. Based on an average of $1,000 per capita, approximately 1 billion people around the world hold physical US dollar cash.
Electronic Dollar: The Bank for International Settlements (BIS) reports that cross-border dollar liabilities amount to $12 trillion, including interbank transactions. Assuming a quarter of this is held by households, that’s $3.2 trillion in individual dollar deposits. Based on an average balance of $5,000, about 640 million people around the world hold dollar bank deposits.
Assuming that half of the individuals holding digital dollars also hold cash dollars, the overlap is approximately 320 million people.
Data source: ARK, as of December 31, 2024
In just over five years, stablecoins have reached approximately 200 million users worldwide, accounting for 15-20% of the total number of non-US resident dollar holders. Considering that the US dollar has been in circulation for centuries, this is an amazing achievement.
Given USDT’s strong presence in emerging markets and its position as the largest stablecoin in terms of supply, we can assume that USDT holders constitute a large proportion of net new USD holders, with low overlap with paper USD and USD accounts.
Despite being misunderstood and criticized, stablecoins have undergone a dramatic transformation after the collapse of FTX and LUNA. In fact, the Trump administration, the new cryptocurrency czar and many lawmakers are praising stablecoins as strategic assets that effectively strengthen the global dominance of the US dollar by creating a sustained demand for US Treasuries. As a result, Tether, Circle and the entire stablecoin industry may evolve into one of the most reliable and resilient financial allies of the US government, while consolidating the global trade position of the US dollar and ensuring long-term support for US Treasuries.
