What is Treasury bill backing?

Holding short-dated government debt as the reserve behind a stablecoin or tokenized fund, in place of bank deposits.

This is the dominant reserve model for large fiat-backed stablecoins, and it is a response to a specific event. Cash in a bank is an unsecured claim on that bank, and in March 2023 a stablecoin holding part of its reserves at Silicon Valley Bank lost its peg for a weekend when the bank failed. Short government debt does not carry that exposure.

What people assume is that "backed by Treasuries" means the reserve is cash. It is not. It is a portfolio with a maturity profile, a custodian, and a market price.

How it works

A Treasury bill is government debt maturing in a year or less, sold at a discount to face value and redeemed at par. Three properties make it attractive as a stablecoin reserve. It matures soon, so cash arrives on a schedule without anyone selling anything. It trades in one of the deepest markets in the world, so it can be sold quickly if redemptions outrun maturities. And it is a claim on a government rather than on a commercial bank.

The reserve earns interest, and that interest is the business. In a conventional fiat-backed design the issuer keeps it as revenue. In a yield bearing stablecoin some or all of it is passed to holders, either as a distribution or by letting the token's redemption value rise.

Three things vary between issuers and are worth reading rather than assuming: the maturity profile, since shorter is more conservative; the split between bills held directly, repurchase agreements, and money market fund shares; and who holds the assets in custody. All of these appear in the issuer's periodic reserve report or attestation, which is the source to read rather than a marketing page.

Example

Illustrative arithmetic on a $10 billion reserve. If the average yield across the portfolio is 4 percent, the reserve generates roughly $400 million a year. An issuer keeping that revenue funds its operations and margin from it. An issuer passing 90 percent through to holders leaves them with about 3.6 percent and keeps roughly $40 million.

Now suppose redemptions of $2 billion arrive in a week. Maturing bills cover part of it and the rest must be sold. Selling a bill before maturity means accepting the market price, which if rates have risen since purchase is below what the issuer paid. That difference is where a loss appears in an otherwise conservative portfolio.

Why it matters when you buy

Almost every crypto purchase touches a stablecoin somewhere, whether as the quote asset in a trading pair or as the thing you park proceeds in. What sits behind that token is the difference between a short pause and a permanent loss if the issuer is stressed. The guide on stablecoins covers the models, and the guide on stablecoin yield risks covers what happens when yield is added.

Related terms

• fiat backed stablecoin: the design this backs
• yield bearing stablecoin: where the interest goes to holders
• tokenized treasury: the bills themselves as a token
• attestation: how reserves are reported
• depeg: what reserve failure looks like
• redemption: the right the reserve exists to meet

Questions

Is a Treasury-backed stablecoin risk free?

No. The bills carry very little credit risk, and the risks that remain are the issuer's solvency and governance, the custodian, the redemption terms, and whether you can actually redeem or only sell on an exchange.

Why not just hold cash in a bank?

Bank deposits above insurance limits are unsecured claims on that bank, and a single failure can freeze a reserve. Short government debt spreads the exposure to a sovereign and stays sellable through a bank crisis.

How do I check what backs a stablecoin I hold?

Read the issuer's most recent reserve report rather than the landing page. Look at the maturity breakdown, the proportion in bank deposits, the custodian named, and the date the figures were taken.