We exchange U.S. dollars for stablecoins, and the stablecoin company uses the money to buy U.S. Treasuries and earn interest. Is that a guaranteed profit?
There’s no such thing as a guaranteed profit in the real world!
What if U.S. Treasuries keep falling in value while users redeem stablecoins on a massive scale? This is a classic and fundamental question in risk analysis of stablecoins (such as USDC issued by Circle, or other stablecoins whose core reserves are U.S. Treasuries).
The short answer is: under normal conditions with ample liquidity, issuers (such as Circle) won’t face any material losses. But under extreme market stress (a run), if they are forced to sell U.S. Treasuries on the market below face value, they could indeed incur paper or realized losses.
Below is a detailed breakdown of how this works, the potential risks, and the safeguards in place:
I. Core mechanism: Why doesn't a drop in Treasury prices necessarily mean a loss?
To understand this issue, it is essential to distinguish between Treasury price volatility, credit risk, and holding to maturity:
1. Extremely low credit risk:
U.S. Treasuries are risk-free assets backed by the credit of the U.S. government. They essentially carry no credit risk of issuer default or failure to repay.
2. Primarily short-term Treasuries (T-Bills):
Reserve assets like Circle's (held through the Circle Reserve Fund or in very short-term Treasuries and overnight repurchase agreements) are allocated predominantly to ultra-short-term U.S. Treasuries, typically with maturities of less than three months. These very short-term bonds are far less sensitive to changes in market interest rates (duration risk), so even when rates rise or markets fluctuate in the short term, their prices fall only slightly.
3. Holding to maturity (par value at maturity):
Suppose an issuer buys a short-term Treasury bill with a face value of $100. If market interest rates rise and its market price falls to $99, the U.S. government will still repay the $100 principal at maturity, as long as the issuer does not need to sell it on the open market and instead holds it to maturity. Therefore, under normal circumstances, there is no loss.
II. Under what circumstances can losses occur? (Liquidity crisis and bank runs)
The real risk is not that Treasuries themselves will become worthless, but the time lag and pressure of a bank run:
Large-scale panic redemptions:
If an extreme black swan event occurs in the market, everyone may try to convert their stablecoins back into cash at the same time. If the issuer's available cash (cash buffer) is insufficient to meet the massive wave of redemptions, it will be forced to sell its Treasuries early on the secondary market (liquidation).
Fire-sale loss:
If market liquidity dries up, or Treasury prices temporarily fall due to macroeconomic factors (such as runaway inflation, a debt ceiling crisis, or a brief market sell-off), an issuer that sells Treasuries at a discount to raise cash quickly will incur a realized loss.
Reserve shortfall:
If the cash actually received from selling Treasuries is less than the total value of stablecoins in circulation (for example, selling bonds backing $100 million in coins brings in only $98 million), the issuer becomes insolvent, causing the stablecoin to de-peg—commonly known as a shortfall.
III. How do issuers guard against these losses?
To prevent losses caused by Treasury price fluctuations or waves of redemptions, major issuers typically adopt the following safeguards:
1. Tiered asset structure (liquidity buffer):
Reserve assets are not invested entirely in Treasuries; a certain proportion is kept in cash or highly liquid overnight reverse repurchase agreements. When users redeem their stablecoins, the issuer uses cash first, giving it time to move funds around or wait for Treasuries to mature naturally, and avoiding being forced to sell bonds at a loss.
2. Excess reserves or proprietary capital (capital buffer):
An issuer's operating funds or surplus accumulated from interest income can absorb some minor market fluctuations and transaction costs.
3. Strict regulatory and transparency requirements:
Relevant stablecoin legislation being advanced in the U.S., such as the GENIUS Act and similar frameworks, requires issuers to hold high-quality, low-risk liquid assets (such as short-term Treasuries and cash) and regularly publish third-party accountant attestations of their assets. These measures help maintain market confidence and reduce the likelihood of panic-driven runs.
💡 Summary
Under normal market fluctuations: A slight drop in the market price of Treasuries affects only their book value. As long as the issuer does not sell them and holds them to maturity, there is no actual loss.
In an extreme bank run: If a wave of redemptions is triggered and cash runs out, the issuer may be forced to sell U.S. Treasuries at a discount to raise cash. This could indeed result in losses and trigger a de-peg crisis. (Historically, USDC briefly de-pegged during the 2023 Silicon Valley Bank incident because some of its cash was held at the failed bank, triggering panic redemptions.)
Therefore, Treasuries themselves are extremely safe. But for stablecoins backed by Treasuries, the greatest challenge during an extreme liquidity-driven run is not whether Treasuries will fail, but whether the issuer can survive the gap between running out of cash and converting Treasuries into cash.