A Federal Reserve rate hike can lift income for some stablecoin issuers while increasing costs or collateral risk for some Bitcoin borrowers—but through different channels. Issuers may earn more when reserves generate higher yields and the token itself pays no interest. Borrowers may face higher borrowing costs where rates are variable, or greater liquidation risk if Bitcoin collateral falls. Neither effect is automatic: reserve portfolios, token design, loan terms, and market prices determine what happens.
How do Fed rate hikes affect stablecoins?
Many reserve-backed stablecoins are designed to hold a steady value against a currency, such as the U.S. dollar, rather than pay interest to token holders. Their issuers may invest reserve assets in interest-bearing instruments. When yields on those assets rise, the gap between reserve income and operating costs can widen.
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Higher reserve yields can lift issuer income
Federal Reserve Governor Christopher Waller described the mechanism in a February 12, 2025 speech: “Higher interest rates generally mean higher rates of return on reserve assets, which generates revenue for the issuer.” The benefit depends on what reserves are invested in, what the issuer pays in expenses, and whether it shares any income with holders. If an issuer passes more yield to users, that may support demand for its token but reduce the issuer’s profit.
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Higher yields can also make non-interest-bearing tokens less attractive
The other side of the mechanism is demand. Waller also cautioned that higher rates “have the potential to make non-interest bearing assets less attractive for consumers to hold.” If holders can earn more elsewhere, some may be less willing to keep funds in a token that pays no yield. An issuer’s potential gain on reserves therefore does not guarantee that its token will gain users or that its profits will rise.
Reserve portfolios differ by issuer
Stablecoins do not all hold the same assets. A Federal Reserve note published December 17, 2025 reported these examples from issuer disclosures:
| Issuer and token | Reserve composition reported | Disclosure date |
|---|---|---|
| Tether (USDT) | 64.15% U.S. Treasuries; 10.47% repurchase agreements; 5.89% secured loans; 13.91% money-market funds; 3.69% bank deposits; 1.89% other | June 30, 2025 |
| Circle (USDC) | 33.59% Treasuries; 50.79% repurchase agreements; 14.24% bank deposits; 1.38% other | August 23, 2025 |
These are dated snapshots, not universal or current allocations. The Fed note says the Circle and Gemini figures exclude timing and settlement differences, with remaining assets renormalized. A rate change will affect issuers differently depending on the assets they hold and how quickly those assets reprice or mature.
Can stablecoins increase demand for Treasury bills?
They can contribute to demand when issuers use customer funds to buy Treasury bills, but gross purchases are not necessarily net new demand for Treasuries. The answer depends partly on where buyers get the money: stablecoin purchases may replace bank deposits, other liquid assets, or existing Treasury holdings.
In a November 7, 2025 speech, Federal Reserve Governor Stephen Miran argued that stablecoins were increasing demand for Treasury bills and other liquid dollar assets. A Federal Reserve Bank of Kansas City analysis by Stefan A. Jacewitz, published August 8, 2025, stresses the offset: if stablecoin buyers reduce other Treasury purchases or sell Treasuries to fund their tokens, that can offset some or all of issuer purchases.
The Kansas City analysis put the stablecoin market at about $250 billion at the time of publication. It reported Circle held about $20 billion in Treasury bills—roughly 43% of its assets—as of January 2025. Extrapolating that Circle-like Treasury share to issuers broadly produced an illustrative estimate of around $125 billion in Treasury bills, less than 2% of roughly $6 trillion outstanding. That figure is an extrapolation, not a direct disclosure of all issuers’ reserve holdings. For comparison, the same analysis estimated that insurance companies held about $650 billion in Treasury debt and mutual funds about $4.5 trillion in December 2024.
A 2026 IMF working paper estimated that a five-day stablecoin inflow of $3.5 billion, described as two standard deviations, was associated with a 0.423-basis-point decrease in one-month Treasury yields and a 0.498-basis-point decrease in three-month yields under a specification using a 1% market-capitalization shock. These are model estimates from that paper, not a forecast of what a Fed rate hike will do or a guaranteed causal effect.
Independent reader supportYour contribution helps us test, update, and keep practical guides available for everyone.Why can higher rates hurt Bitcoin borrowers?
“Bitcoin borrower” can describe different positions: a person borrowing against Bitcoin, someone borrowing funds to buy Bitcoin, or a leveraged trader using crypto collateral. Their risks are not identical, and the reviewed Federal Reserve sources do not establish a representative current Bitcoin-loan rate or a uniform pass-through from the federal funds rate to those loans.
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Some crypto borrowing rates may respond to broader monetary conditions, but decentralized protocols can also adjust rates to attract deposits or encourage repayment. A Fed hike does not directly set a decentralized protocol’s rate, and the effect on any borrower depends on the platform, supply and demand, and whether the loan rate is fixed or variable. A borrower with a variable-rate loan may be exposed to repricing; a fixed-rate borrower may instead face the change when refinancing or taking out a new loan.
Falling collateral can trigger liquidation even if the rate does not change
For an overcollateralized loan, the borrower pledges assets worth more than the loan. If Bitcoin’s market value drops, the collateral becomes smaller relative to the debt. Once it breaches a platform’s threshold, the platform may automatically liquidate collateral to cover the loan. Federal Reserve research describes how liquidations can add selling pressure and contribute to further liquidations.
This is a separate channel from interest expense. A rate hike could coincide with a Bitcoin price decline, but the sources do not establish that every hike causes one. The borrower’s exposure turns on the initial loan-to-value ratio, Bitcoin’s volatility, the liquidation threshold, and the options to add collateral or repay before liquidation.
Quick Recap
What to check when comparing the exposures
- For a stablecoin: identify the issuer’s reserve assets and disclosure date, whether the token passes yield to holders, and how its reserves may reprice when rates change.
- For stablecoin-related Treasury demand: consider what asset buyers give up to acquire tokens, not just what issuers purchase.
- For a Bitcoin-backed loan: check whether the rate is fixed or variable, the loan-to-value ratio, the liquidation threshold, and the practical time and method for adding collateral or repaying.
- For either exposure: account for issuer, platform, counterparty, and redemption arrangements; a change in market rates alone does not describe the full risk.
Sources
- Federal Reserve Board: Christopher Waller, “Speech by Governor Waller on stablecoins,” February 12, 2025.
- Federal Reserve Board: Stephen Miran, “Speech by Governor Miran on stablecoins and monetary policy,” November 7, 2025.
- Federal Reserve Bank of Kansas City: Stefan A. Jacewitz, “Stablecoins Could Increase Treasury Demand, but Only by Reducing Demand for Other Assets,” August 8, 2025.
- Federal Reserve Board: “Banks in the Age of Stablecoins: Some Possible Implications for Deposits, Credit, and Financial Intermediation,” December 17, 2025.
- Federal Reserve Board: “Primary and Secondary Markets for Stablecoins,” February 23, 2024.
- Federal Reserve Bank of New York: Azar et al., “The Financial Stability Implications of Digital Assets,” Economic Policy Review, November 2024.
- Federal Reserve Board: Lael Brainard, “Speech by Vice Chair Brainard on crypto-assets and decentralized finance through a financial stability lens,” July 8, 2022.
- Federal Reserve Bank of New York: Lee and Tou, “Stablecoin Disintermediation,” Staff Report No. 1185, February 2026.
- International Monetary Fund: “Stablecoin Shocks,” Working Paper WP/26/44, 2026.
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