Stablecoins, DeFi, and Credit Creation

The Rise of Stablecoins

Stablecoin adoption is now reaccelerating after an 18-month period where the global stablecoin asset base retraced significantly. Our view at Galaxy Ventures is that stablecoin reacceleration has three main secular drivers: (i) stablecoin adoption as a savings instrument, (ii) stablecoin adoption as a payments instrument, and (iii) DeFi as a source of above-market yields, which sucks in digital dollars. As a result, stablecoins are now on a crash-course for $300B in supply by end of 2025 and eventually $1T by 2030.

Stablecoin AUM growing to $1T will open new opportunities and create new distortions in financial markets. Some distortions we can predict today, such as the pending substitution of bank deposits in emerging markets toward developed markets and from regional banks to Globally Systematically Important Banks (GSIBs). However, there are other changes that we can’t envision today. Stablecoins and DeFi are primitives, not peripheral innovations, and they can fundamentally alter credit intermediation in the future in brand new ways.

Three Trends Driving Adoption: Savings, Payments, and DeFi Yield

Three adjacent trends are driving stablecoin adoption: their use as a savings instruments, use as a payments instrument, and DeFi as a source of above-market yields.

Trend 1: Stablecoins as a Savings Instrument

Stablecoins are increasingly being used as a savings instrument, particularly in emerging markets (EM). National currencies are structurally weak in economies like Argentina, Turkey, and Nigeria, where inflationary pressures and currency devaluation create organic demand for USD. Historically, dollar access has been limited in many emerging markets and has been a source of financial stress, as described by the IMF. Capital controls like Argentina’s Cepo Cambiario further limit USD access.

Stablecoins bypass these constraints, offering individuals and businesses direct access to USD-backed liquidity easily and over the internet. Surveyed consumer preferences show that access to USD is one of the top reasons to use crypto among EM users. In a study conducted by Castle Island Ventures, two of the top five use cases were “Save money in dollars” and “Convert my local currency to dollars” with 47% and 39% of users respectively reporting this as a reason to use stablecoins.

While it’s difficult to know the scale of stablecoin-based savings in emerging markets, we do know that the trend is growing fast. Stablecoin-settled card businesses like Rain (portfolio company), Reap, RedotPay (portfolio company), GnosisPay, and Exa are indexed to this trend, letting consumers spend their savings with local merchants on the Visa and Mastercard networks.

Specifically regarding the Argentinian market, FinTech/crypto app Lemoncash published in its Crypto Report 2024 that its $125M USD of ‘deposits’ accounts for 30% of Argentina’s centralized crypto app market share, following Binance at 34% and beating Belo, Bitso, and Prex. This figure implies $417M of AUM in Argentine crypto apps specifically, but the true amount of stablecoin AUM in Argentina is likely at least 2-3x higher from stablecoin balances in non-custodial wallets like MetaMask and Phantom. While these amounts may seem small, $416M USD represents 1.1% of the Argentinian M1 Money Supply and $1B represents 2.6% and growing. Then consider that Argentina is only one of the emerging market economies to which this global phenomenon applies. This EM consumer stablecoin demand could scale horizontally across markets.

Trend 2: Stablecoins as a Payments Instrument

Stablecoins have also become a viable alternative payments rail, competing in particular with SWIFT for cross-border use cases. Domestic payments systems tend to operate real-time intra-country, but stablecoins have a clear value proposition in comparison to traditional cross-border transactions that take >1 business day. As Simon Taylor notes in his post, stablecoins could function more like a meta-platform connecting payments systems over time.

Artemis published a report showing that B2B payments use cases contributed $3B of monthly payment value ($36B annualized) among 31 companies surveyed. Discussions with custodians who process much of this payment flow lead Galaxy to believe the figure is $100B+ annualized among the full set of non-crypto market participants.

Crucially, Artemis’s report finds that B2B payment volume experienced 4x Y/Y growth in Feb ’24 to Feb ’25, proving the growth at scale that continued AUM growth requires. No study of stablecoins’ velocity of money have been conducted, so we cannot tie total payment value to AUM figures, but the growth rate in payment volume indicates a corresponding AUM growth due to this trend.

Trend 3: DeFi as a source of above-market yields

Finally, DeFi has been producing structurally above-market dollar-denominated yields for the better part of the last 5 years, giving consumers with decent technical savvy the ability to earn 5 – 10% returns with negligible risk profiles. This has been and will continue to drive adoption of stablecoins.

DeFi is itself a capital ecosystem and one of its remarkable traits has been the ways in which the base layer “risk-free” rates like Aave and Maker mirror the broader crypto capital markets. I showed in my 2021 paper “DeFi’s Risk-Free Rate” that Aave, Compound, and Maker supply rates were reactive to the basis trade and other demand for leverage. As new trades or opportunities come onto the scene – like yield farming on Yearn or Compound in 2020, basis trading in 2021, or Ethena in 2024 – DeFi’s base yields have traded up in response as consumers demand secured loans to allocate to new projects and uses. Insofar as blockchains continue to produce new ideas, DeFi base yields should strictly beat US Treasury yields (especially true with the launch of tokenized Money Market Funds providing a base layer yield).

Because DeFi’s “native language” is stablecoins and not US dollars, any “arbitrage” which is trying to provide low-cost USD capital to satisfy the demands of this particular micro-market has the dial effect of expanding the supply of stablecoins. Closing the interest rate spread between Aave and US Treasuries requires the expansion of stablecoins into DeFi. As expected, periods with a positive rate differential between Aave and USTs show growing total value locked (TVL) and period with a negative rate differential show falling TVL (to a tee):

The Bank Deposit Problem

Galaxy believes that the secular adoption of stablecoins for savings, payments, and access to yield is a megatrend. Stablecoin adoption threatens to disintermediate traditional banks by allowing consumers to directly access dollar-denominated savings accounts and cross-border payments without relying on banking infrastructure, reducing the deposit bases they use to stimulate credit creation and generate Net Interest Margin.

Bank Deposit Substitution

With a stablecoin, the historical model is that every $1 is really $0.80 of Treasury Bills and $0.20 of deposits in the stablecoin issuer’s bank accounts. Now, Circle has $8B in cash ($0.125) and $53B in ultra short-term USTs or Treasury Repurchase Agreements ($0.875) against $61B of USDC. (We will cover Repo later.) Circle holds its cash deposits primarily with Bank of New York Mellon, in addition to New York Community Bank, Cross River Bank, and other leading US-based financial institutions.

Picture in your mind the Argentinian user again. The user has $20,000 USD worth of Argentine Pesos deposited with the country’s largest bank, Banco de la Nación Argentina (BNA). User decides to acquire $20,000 USDC to avoid inflation of the ARS currency.^[1] Now – with USDC – that user’s $20,000 of ARS at BNA is actually $17,500 of short-term loans to the US Government or Repo and $2,500 of bank deposits split between BNY Mellon, NYCB, and Cross River.

As consumers and businesses move savings from traditional bank accounts into stablecoin accounts like USDC or USDT, they are effectively transferring their deposits from regional/commercial banks to US Treasury securities plus deposits at major financial institutions. The implications are profound: while consumers maintain dollar-denominated purchasing power through their stablecoin holdings (and through card integrations like Rain and RedotPay), the actual bank deposits and Treasury securities backing these tokens become concentrated rather than distributed across the traditional banking system, reducing the deposit base available to commercial and regional banks for lending while simultaneously making stablecoin issuers significant players in government debt markets.

Enforced Credit Contraction

One of the key social functions of bank deposits is to lend into the economy. Fractional reserve – the practice by which banks create money – allows banks to lend multiples of their deposit base. The aggregate multiplier in a region depends on factors like local banking regulations, FX and reserves volatility, and the quality of local lending opportunities. The M1 / M0 ratio (bank-created money divided by central bank reserves and cash) tells us the “money multiplier” of a banking system:

Continuing with our Argentinian example, a $20k deposit substitution into USDC turns $24k of local Argentinian credit creation into $17,500 of USTs/Repo and $8,250^[2] of US credit creation. This impact is imperceptible at 1% of M1 Supply but likely perceptible at 10% of M1. At some point, regional banking regulators will be forced to consider shutting off this spigot, lest they let credit creation and financial stability get corrupted.

Overallocation of Credit to the US Government

For the US Government, this is fantastic news. Already today, stablecoins issuers collectively are the 12th largest buyer of US Treasury bills and growing at the rate of stablecoin AUM. In the not-so-distant future stablecoins may be a top 5 buyer of USTs.

New proposed legislation like the Genius Act requires that all the T-Bill backing are either in the form of Treasury Repo Agreements or short-term treasuries less than 90-day duration. Both will create substantial increases in liquidity in key parts of the US financial plumbing.

At sufficient scale (e.g. $1T), this could have significant impacts on the yield curve, where <90-day USTs will have a large, price insensitive buyer that creates distortions in the interest rate curve upon which the USG finances itself. That said, Treasury Repurchase (Repo) actually does not increase the demand for short-term US Treasuries; it contributes to pools of available liquidity for secured overnight borrowing. This liquidity in the Repo market is primarily borrowed by major US banks, hedge funds, pension funds, and asset managers. Circle – for example – actually contributes a majority of its reserves to lending overnight against US T-Bill collateral. The size of this market is $4T, so even at $500B of stablecoin reserves allocated to Repo, stablecoins a meaningful player. All of this liquidity directed to US Treasury and US Bank borrowing benefits US capital markets at the expense of global markets.

One hypothesis is that as stablecoins grow to >$1T, issuers will be forced to replicate bank loan portfolios, including portfolios of commercial credit and mortgage-backed securities, so to avoid becoming too large of a consumer of any one financial product. This outcome may be inevitable as the GENIUS Act gives a pathway for banks to issue “tokenized deposits.”

New Asset Management Channel

This all creates a new and exciting asset management channel. In many ways, the trend mirrors the already-in-progress transition from bank lending to non-bank financial institutional (NBFI) lending after Basel III, the regulation that limited the scope of bank lending and leverage following the Great Financial Crisis.

Stablecoins drain money from the banking system and really drain money from specific pockets of the banking system like emerging market banks and developed market regional banks. We’ve already seen the rise of Tether as a non-bank lender (beyond US Treasuries) as laid out in Galaxy’s Crypto Lending report and other stablecoin issuers may become similarly important lenders over time. If stablecoin issuers decide to outsource the credit investing to specialized firms, they instantly will become massive fund LPs and will open up a new channel of asset allocator (like insurance companies). Massive asset managers like Blackstone, Apollo, KKR, and Blackrock scaled on the back of the transition from bank lending to NBFI lending.

Efficient Frontier of On-Chain Yield

Finally, it’s not just the underlying bank deposits that will be lent. Each stablecoin is both a claim on underlying dollars and an on-chain unit of value itself. USDC can be lent on-chain and consumers will come to demand yield denominated in USDC, like with Aave-USDC, Morpho-USDC, Ethena USDe, Maker’s sUSDS, Superform’s superUSDC, and more.

“Vaults” will provide on-chain yield opportunities to consumers at attractive rates of return, opening up another asset management channel. In 2024, Ethena (portfolio company) in our view opened the Overton Window for dollar-denominated yields on-chain by plugging in the basis trade to USDe. In the future, new vaults will emerge that track different on and off-chain investment strategies which compete for the USDC/T holdings in apps like MetaMask, Phantom, RedotPay, DolarApp, DeBlock, and more. We will subsequently create an “Efficient Frontier of On-Chain Yield”, and it’s not crazy to think that some of these on-chain vaults will be dedicated to providing credit to the same regions like Argentina and Turkey, exactly the geographies whose banks risk losing this capability at scale:

Conclusion

The convergence of stablecoins, DeFi, and traditional finance represents more than a technological evolution – it signals a restructuring of global credit intermediation that mirrors and accelerates the post-2008 shift from bank to non-bank lending. As stablecoins approach $1 trillion in assets under management by 2030, driven by their adoption as savings instruments in emerging markets, efficient cross-border payment rails, and access to above-market DeFi yields, they will systematically drain deposits from traditional banks while concentrating assets in US Treasury securities and major US financial institutions.

This transition creates both opportunities and risks: stablecoin issuers will emerge as significant players in government debt markets and potentially new credit intermediaries, while regional banks – particularly in emerging markets – face credit contraction as deposits migrate to stablecoin accounts. The ultimate outcome is a new asset management and banking paradigm where stablecoins become a bridge to an efficient frontier of digital dollar investments. Just as shadow banking filled the void left by regulated banks after the financial crisis, stablecoins, and DeFi protocols are positioning themselves to become dominant credit intermediaries of the digital age, with profound implications for monetary policy, financial stability, and the future architecture of global finance.