Stablecoins and CBDCs used as tools to mask public debt

Over the past several decades, government debt levels in most advanced economies have reached excesses that would have been politically and economically unthinkable only a generation ago. Borrowing has expanded relentlessly, deficits have become structural rather than cyclical, and fiscal “emergencies” have become a permanent fixture in public finances. Despite these conditions, the expected market discipline has largely failed to appear and the feared reckoning for decades of fiscal excess has not materialized in any direct way.

This has not been a failure of free market forces, nor a sign of renewed fiscal virtue. It has been the product of deliberate policy decisions designed to suppress signals, distort incentives and postpone consequences. Central banks have been absorbing ever-larger portions of government debt, regulatory frameworks have long nudged institutions toward government paper, and savers have been quietly punished through artificially suppressed interest rates and surreptitiously taxed through inflation.

It is clear that governments, their central banks and the financial institutions closely linked to the state apparatus have all accepted that the debt levels are too extreme to ever actually be reined in. They have instead focused all their efforts on manipulating the public perception of the debt crisis and on postponing the inevitable bust for as long as possible. Now a new tool has been added to the state’s arsenal to achieve these aims.

Stablecoins and central bank digital currencies (CBDCs) are increasingly being embraced by governments and promoted as innovations designed to improve payment efficiency and security or expand financial inclusion. Nevertheless, upon closer inspection, it quickly becomes apparent that their most important function may lie elsewhere: They offer heavily indebted governments a new and highly effective way to create artificial demand for their own liabilities and to manage, rather than resolve, the consequences of their self-inflicted debt crisis.

Stablecoins as a new funding source

At first glance, stablecoins appear to be a straightforward private-sector solution to a private-sector problem. They originally emerged as a way to reduce volatility risk when trading in digital markets and they acted as a bridge connecting fiat money and cryptocurrency or other digital assets. There was, and still is, a lot of genuine, organic demand for them, especially in global markets where access to reliable banking is limited or in jurisdictions where capital controls and currency instability pose significant risks. Stablecoin market capitalization exceeded $300 billion in 2025 and Tether and USDC, the two largest stablecoins, collectively account for nearly 90 percent of the market.

It is the mechanics underpinning this apparent stability that have made stablecoins extremely attractive to governments. The dominant stablecoins are backed overwhelmingly by short-term government debt, primarily United States Treasury bills. As of December 31, 2025, Tether alone held over $122 billion in U.S. government debt securities, ranking it among the top 20 global holders, ahead of entire countries like Germany and Israel. Overall, stablecoin issuers today hold hundreds of billions of dollars in U.S. government debt, absorbing a significant share of new T-bill issuance. Still, stablecoin issuers remain small players compared to other bondholders, such as foreign investors and mutual funds.

As long as stablecoins remain popular, inflows into government debt will continue, almost entirely insulated from price signals or macroeconomic and geopolitical concerns.

 

The more traction and popularity they gain, the more issuance expands, forcing issuers to secure additional reserves, which in turn means purchasing more government debt. Each newly minted token represents fresh demand for government liabilities. What makes this arrangement even more attractive from the state’s standpoint is its automatic nature.

Stablecoin issuers are not conducting in-depth assessments of fiscal sustainability or risk-adjusted returns, as buying public debt is not a strategic choice; it is their obligation to do so as demand grows. This ensures that as long as stablecoins remain popular, inflows into government debt will continue, almost entirely insulated from price signals or macroeconomic and geopolitical concerns. Therefore, they offer an extremely convenient and potentially permanent new funding source for the state. They can absorb new issuance quietly, without the market reactions and political consequences of central bank balance sheet expansion.

This dynamic goes a long way in explaining the otherwise perplexing regulatory stance toward stablecoins in jurisdictions such as the U.S. While much of the crypto sector remains under sustained pressure, stablecoins are receiving radically preferential treatment. Especially over the past year, following the passage of the GENIUS Act, a clear regulatory path has been created to legitimize and integrate stablecoins into the financial system.

Given all the benefits outlined above, it is easy to see why any administration would embrace them. If the U.S. gets the rest of the world to use more U.S. dollar-backed stablecoins, it can not only sustain funding for its spending but also prevent the threat of de-dollarization.

As digital asset markets continue to grow, currency dominance in this arena becomes increasingly important. Stablecoins have already become the default settlement layer for crypto trading and cross-border digital commerce, and this layer is already overwhelmingly dollar-denominated. By embracing stablecoins rather than suppressing them, the U.S. effectively ensures that, just like traditional finance and trade, the digital financial ecosystem will grow and expand on dollar rails, not on euro, yuan or commodity-linked alternatives.

CBDCs and programmable repression

While stablecoins represent an indirect and partially outsourced solution to the debt crisis, CBDCs represent the opposite approach, that is, direct and centralized, to address the consequences of the same problem. Despite the claims of the governments that issue them or plan to do so, a CBDC does not merely digitize existing money. It goes much further than that, fundamentally redefining the relationship between the individual, the financial system and the state.

Unlike cash, a CBDC is inherently traceable and specifically designed to be so. And unlike stablecoins, a CBDC represents a direct claim on the central bank itself, and it is potentially programmable with rules governing spending, expiration or restrictions. This extremely centralized and intentionally insular architecture allows for a level of control, monitoring and intervention potential that has no historical precedent and no discernible ways around it. Transactions can be monitored in real time, accounts can be frozen unilaterally and efficiently, while taxation and reporting can be embedded directly into the CBDC’s payment function.

CBDCs can allow financial repression to be implemented with surgical precision.

 

From the perspective of a heavily indebted government, this is clearly irresistible. CBDCs can allow financial repression to be implemented with surgical precision. Savings can be steered toward government bonds through built-in incentives or penalties and capital outflows can be discouraged through purposefully added friction, like additional disclosure requirements. What is most concerning is that CBDCs can make such interventions and manipulations far less visible. This is the dark side of the “direct policy transmission” aspect that CBDC proponents often champion. When policy is embedded in code, its enforcement appears to the public as a technical matter rather than the political choice that it is.

CBDC proponents also often argue that just because dystopian features can be built in, it does not mean that they will be, and that benevolent governments can design them to instead preserve privacy and prioritize neutrality. Technically, that may be true, but realistically, once the infrastructure is there, the temptation (and even the practical necessity) to use it to its full potential will be compelling, especially in times of fiscal stress. History clearly demonstrates that governments rarely leave powerful tools unused, particularly when they grow desperate (and oftentimes even when they are not). There are also real-life examples already that foreshadow what is possible if CBDCs are adopted. China, for instance, has experimented with adding expiration dates to its digital yuan to spur consumption.