Why the Term ‘Liquidity Engine’ Emerges Now

The word liquidity is often used casually as “good liquidity when lots of money flows,” but in reality it’s far more physical. Questions like whether settlements finish on time, whether interest rates don’t spike when posting collateral to borrow money, and whether banks and funds can breathe in overnight funding markets all constitute liquidity. And this liquidity isn’t explained by one sentence like “the central bank prints money.” Plumbing matters more.

The reason this plumbing has become noisy again recently is one thing: the Federal Reserve has entered a phase where it must maintain plumbing pressure while “pretending not to ease.” The Congressional Research Service summarizes that the Fed reduced its balance sheet from about $8.9 trillion in 2022 to about $6.5 trillion in 2025 during post-pandemic normalization, but also mentions plans to grow the balance sheet again to maintain “ample” bank reserves going forward. It’s a seemingly contradictory statement: “reduce, but eventually grow again.”

This contradiction manifested as reality in December 2025. The Fed announced it would begin ‘Reserve Management Purchases’ buying short-term Treasuries (T-bills) not long after stopping quantitative tightening (QT). The core message was the explanation that “it’s not easing (QE) but technical adjustment,” but this explanation rather reveals the plumbing’s true intentions. It’s closer to a confession that “we have no choice but to restart purchases because if reserves tighten, the ability to control policy rates itself can shake.”

Here the important concept is the ‘ample reserves regime.’ Rather than the old approach of tightly squeezing reserves to control them tightly, this is an operating method that keeps reserves sufficiently ample so that interest rates don’t react sensitively to small fluctuations in reserves. The Fed explains that in this regime, the reserve supply line should meet the demand curve in a “flat section.” Simply put, “plumbing pressure is always ample” is the premise.

Against this background, talk emerges of “another liquidity engine in an era when QE is difficult.” The political cost of the Fed openly sweeping up long-term bonds to support asset prices like in crisis times has grown too large, and simultaneously there’s already experience that when reserves become insufficient, funding markets creak. So markets seek liquidity supply devices that operate outside the Fed, or that the Fed doesn’t directly call ‘monetary policy.’ Emerging as this candidate are stablecoins.

The Kevin Warsh Variable

This is where Kevin Warsh enters. Donald Trump’s announcement nominating Warsh as the next Fed Chair came late January 2026 (separate from Senate confirmation), and the White House officially floated it.

But the reason Warsh’s name goes beyond mere “personnel news” to become a ‘money order’ debate is that he has consistently criticized the Fed’s balance sheet expansion and unconventional policies like QE. Reuters pointed out that how implementable the “regime change” Warsh has spoken of actually is within the Fed organization and institution, and under checks from other policymakers, is itself a big question mark. It specifically notes that the balance sheet is now “intertwined” with interest rate operations, making it harder to reduce at will than thought.

Political noise is also loud. Senate Banking Committee Democrats issued a public statement demanding delay of Warsh’s confirmation process, which also led to Reuters coverage. In other words, even before Warsh can open the “Warsh era,” the starting line is already shaking amid Fed independence and political intervention debates.

When U.S. Department of the Treasury head Scott Bessent’s statements are added here, the atmosphere becomes clearer. Bessent spoke to the effect that “the Fed will move with time” regarding Fed balance sheet issues Warsh has criticized, emphasizing the reality that in an ‘ample reserves regime,’ a large balance sheet is actually necessary. It’s a signal that the ‘reduction’ Warsh has spoken of like a slogan may hit the wall of operational systems.

This structure condenses to one question. If the Fed wants to avoid (or cannot do) the politics of “openly” supplying liquidity, while simultaneously needing to maintain plumbing stability, where will the system pull liquidity from? Warsh makes this question sharper. The stronger the will to reduce the Fed’s role, the higher the value of ‘private liquidity devices’ to fill that gap.

The Rails Created by the GENIUS Act

For stablecoins to truly become “liquidity engines,” conditions exist. People must trust and use them, and there must be confidence they’re not money companies can just roll around. And that confidence mostly comes from ’law.’ The U.S. made that law. On July 18, 2025, Trump emphasized signing the GENIUS Act alongside a White House announcement touting it as the federal framework for stablecoin regulation. The White House introduced this law as “the first federal-level stablecoin regulatory system,” fronting keywords like 100% reserve assets, monthly disclosure, consumer protection, and dollar status strengthening.

Looking at the actual law (officially promulgated S.1582, Public Law 119–27), it defines ‘payment stablecoins’ as “digital assets with obligations to redeem/repurchase at fixed value and professing to maintain stable value,” nailing down identity. And it creates the concept of ‘permitted issuers’ so not just anyone can issue them.

The core is reserve asset (reserve) regulations. Permitted issuers must maintain at minimum 1:1 identifiable reserve assets, and those reserve assets are strongly limited to “cash-like” items like cash/central bank deposits/demand deposits, and “very short and safe assets” like U.S. Treasuries with maturities under 93 days, ultra-short repos/reverse repos backed by those Treasuries, and government MMFs (provided underlying assets are again within this range). Moreover, it opened the possibility of holding these reserve assets in ’tokenized form.’ In other words, the rails are designed so “stablecoins grow large, but that money ultimately flows into short-term Treasuries and ultra-short collateral markets.”

Another core is the ’no confusion’ rule. The law prohibits stablecoin names or marketing from giving impressions like “issued/guaranteed by U.S. government” or “legal tender.” Literally “don’t pretend to be government money.” As stablecoins grow, people will get confused, so the moment confusion is created, regulatory knives enter.

An interesting section is the allocation of regulatory authority. The law includes provisions to the effect that payment stablecoins issued by ‘permitted issuers’ are not ‘securities/commodities’ under securities law/commodity trading law, pulling this area toward traditional financial supervision (bank regulation). It’s a political choice not to waste time fighting “is it securities or not,” but to directly manage with reserve assets, redemption, and soundness.

Implementation timing is also a point. The GENIUS Act becomes effective “18 months after enactment date” or “120 days after regulatory authorities finalize implementing regulations,” whichever is earlier. Based on enactment date (July 18, 2025), 18 months later is January 18, 2027. However, if final regulations emerge before mid-2026, actual effect could be pulled forward to late 2026 due to the 120-day rule. The statement ‘2026 effective’ isn’t completely baseless, but it’s not automatic either. The rails are laid, and it depends on when the traffic lights (detailed regulations) turn green.

And once more, there’s a time-bomb clause. The law strongly restricts that starting 3 years after enactment, payment stablecoins for U.S. users can only be sold or provided if made by “permitted issuers.” It means gradually clearing market “unauthorized stablecoins” to force them into legal rails.

The Mechanism by Which Stablecoins Become Liquidity Engines

So how do stablecoins become liquidity engines? The principle is surprisingly simple. “Deposit dollars, receive digital dollar coupons.” These coupons are stablecoins. Users buy and sell with these coupons at exchanges, send them overseas, and sometimes flow them into payment networks. The reverse direction is the same. Return the coupon, and the issuer gives out dollars. The core promise is “always $1 is $1,” and the GENIUS Act secures this promise not through ‘good intentions’ but through ‘mandatory asset composition.’

Here the “engine” operates. When stablecoins increase by $100, it means the issuer stacked an additional $100 worth of reserve assets. But the likely candidates for those reserve assets are short-term Treasuries under 93 days maturity and ultra-short transactions rolling in that collateral market. In other words, stablecoin growth directly connects to “automatic increase in short-term Treasury demand.” If the Fed created liquidity by buying long-term bonds via QE, stablecoins create digital dollar liquidity with the private sector buying short-term bonds. The actors and maturities differ, but from a plumbing perspective, both are ‘pumps connecting bond markets and payment instruments.’

That this isn’t mere schematics is already told by numbers. Looking at Circle’s USDC reserve asset report as of end-December 2025, reserve assets show the “Circle Reserve Fund” composed of U.S. Treasuries (about $14.9 billion) and U.S. Treasury repos (about $50.79 billion) totaling about $66.3 billion, with additional cash-like assets held at regulated financial institutions listed separately. In other words, the structure where capital inflows into Treasury/repo markets as USDC grows is already reality.

This clause “can hold reserve assets as government MMFs” creates another connection. The Circle Reserve Fund (government MMF) managed by BlackRock shows fund size around $63.6 billion as of February 11, 2026, with weighted average maturity (WAM) maintained very short at 14 days. It’s confirmed here too that stablecoin reserve assets are designed to stack in ultra-short safe assets.

Tether is rougher and bigger. Tether announced in Q4 2025-related disclosure in January 2026 that USDT circulation exceeded $186 billion at year-end 2025, reserve assets around $193 billion level, direct U.S. Treasury holdings at $122 billion, and U.S. Treasury exposure including repos exceeded $141 billion. If all this is true (considering it’s Tether’s announcement), Tether is already a ‘mega short-term Treasury demand source.’ And this demand grows when dollars are needed in markets “regardless of what the Fed does.”

This is the primary engine. The path “global dollar demand → stablecoin issuance → short-term Treasury/repo purchases.” But the real fun comes from the secondary engine. Stablecoins are also payment infrastructure. They run 24 hours, care less about borders, and can be automated with code. Due to these characteristics, stablecoins started as “lubricant for crypto asset markets,” but now the question emerges “will existing payment networks absorb stablecoin rails?”

Visa is symbolic. Visa is working to connect stablecoins to existing merchant payment ecosystems, and in December 2025, Reuters reported some U.S. banks started a pilot settling payments with Circle’s USDC on the Visa network. While noting it’s not yet at the level of “merchants receiving stablecoin payments at scale,” it mentions stablecoin settlement volume has risen to around $4.5 billion on an annualized basis and is growing. These are numbers too entrenched for traditional payment companies to directly experiment with to remain just “coin market talk.”

But don’t be mistaken. The main use of stablecoins so far remains overwhelmingly “inter-exchange fund movement” and “crypto asset trading.” An October 2025 Reuters report cited BCG estimates that nearly 90% of stablecoin transactions are crypto asset trading-related, with actual goods/services payments only 6%. The plumbing has grown, but most of the water flowing through that plumbing is still ‘inside the coin market.’

Nevertheless, the reason talk of “money order changing” emerges is that the GENIUS Act transformed this plumbing from a ‘gray tube neither illegal nor legal’ into ‘permitted official pipes.’ The White House openly states that stablecoins can increase U.S. Treasury demand to strengthen the dollar’s reserve currency status. In other words, the U.S. government itself brought out the picture “stablecoins = short-term Treasury demand + dollar influence expansion” as part of national strategy.

Here it connects with the Warsh variable. Even if Warsh wants to aggressively reduce the Fed’s balance sheet, we saw earlier that this isn’t easy in an ample reserves regime. But the era of the Fed repeatedly hitting QE every crisis is also politically burdensome. In this gap, stablecoins can become “a device that increases dollar liquidity even without the Fed.” However, that liquidity isn’t the central bank’s infinite ammunition, but ‘commercial liquidity’ that grows only when private demand enters. The more Warsh strengthens the direction of reducing Fed direct intervention (or appears to), the more likely markets are to seriously utilize such commercial liquidity rails.

The problem is side effects. First, bank deposits may drain. The European Central Bank has warned that stablecoins can absorb bank deposits to weaken funding bases, and if large-scale redemptions occur, Treasury holdings (as large as scale has grown) can emerge as fire sales to amplify market shocks. Such warnings aren’t messages that “the bigger stablecoins grow, the safer they are,” but rather “the bigger they grow, the more systemically important they become, so risks also grow.”

Second, ‘digital dollarization’ may accelerate in emerging countries. Reuters reporting citing Standard Chartered estimates presented a scenario where increased dollar stablecoin adoption could drain $1 trillion from emerging country bank deposits over 3 years. Scale estimates are assumptions, but directionality is intuitive. The more unstable local currencies are, the more attractive “dollars carried outside bank accounts” looks.

Third, the ‘run’ problem. Stablecoins essentially hinge on the promise “always convert to $1,” and the moment this promise shakes, people rush to exits en masse. Bank for International Settlements research summarizes that stablecoins promise ‘par convertibility to sovereign currency units,’ and for that promise, the nature of held reserve assets (cash-like, Treasuries, deposits, etc.) and reserve asset information disclosure are decisive for peg stability. Cases where reserve asset disclosure operated as shocks during the 2023 U.S. bank turmoil are also mentioned in the same context.

So the U.S. government also long ago concluded “stablecoins must be regulated like banks to prevent runs.” A 2021 U.S. Department of the Treasury press release introduced that legislation is needed to limit stablecoin issuers to deposit-taking institutions (banks) with deposit insurance applied for user protection and run prevention. While the GENIUS Act didn’t go as far as ‘all issuers as banks,’ it instead turned direction toward “creating bank-level safety through law” by forcing reserve assets into ultra-short safe assets and laying out tight disclosure, audit, and naming regulations.

Fourth, the cycle problem. This is where the statement “stablecoins are liquidity engines” shakes most. BIS empirical research reports that stablecoin market cap tends to decrease after monetary policy tightening shocks. In other words, stablecoins aren’t counter-cyclical liquidity supplied by central banks during crises, but have strong characteristics of shrinking and growing depending on risk appetite and market sentiment. They’re engines, but engines that run better on sunny days.

Ultimately, summarizing “the moment money order changes” in one sentence goes like this: On top of Fed-created reserve-centered settlement/funding plumbing, stablecoin plumbing that grows by eating short-term Treasuries was incorporated as ’legal rails,’ creating one more path for dollar liquidity to flow. And the Warsh variable can be a catalyst raising this path’s value. The more the Fed says (or appears to say) it will pump less directly, the bigger the presence of private pumps. However, these pumps aren’t central banks. They run “conditionally” not “unconditionally” during crises, so regulation and trust become fuel.

References

• Congressional Research Service, “The Federal Reserve’s Balance Sheet” (Updated Dec 15, 2025)
• Federal Reserve Bank of New York, Reserve Management Purchases operation notice (Dec 10, 2025)
• Federal Reserve, ‘ample reserves’ regime explanation (FEDS Notes)
• Reuters, Fed T-bill purchase restart and liquidity management coverage (Dec 2025)
• White House, GENIUS Act signing fact sheet (Jul 18, 2025)
• Congress.gov, GENIUS Act full text (S.1582 / Public Law 119–27): effective date, reserve assets, naming/marketing, securities/commodities definition provisions
• White House, Kevin Warsh nomination announcement post (Jan 2026)
• Reuters, Warsh’s ‘regime change’ implementation difficulty and Fed structural constraint analysis (Jan 31, 2026)
• United States Senate Committee on Banking, Housing, and Urban Affairs, Warsh confirmation delay request statement (Feb 2026)
• Circle, USDC Reserve Report (as of Dec 31, 2025; announced Jan 30, 2026)
• BlackRock, Circle Reserve Fund (government MMF) disclosure page (as of Feb 11, 2026)
• Tether, Q4 2025-related notice: U.S. Treasury exposure, circulation, etc. (Jan 30, 2026)
• Visa’s stablecoin settlement experiments and market status (Reuters coverage, Jan 14, 2026)
• Banking sector stablecoin review and transaction nature (Reuters coverage, Oct 10, 2025)
• European Central Bank deposit outflow/Treasury fire sale risk warning (Reuters coverage, Nov 24, 2025)
• Standard Chartered forecast-based emerging country deposit outflow possibility (Reuters coverage, Oct 7, 2025)
• Bank for International Settlements Working Paper: Stablecoins and monetary policy shocks (Oct 2024)
• Bank for International Settlements Working Paper: Information disclosure and stablecoin runs (2024)
• U.S. Department of the Treasury, 2021 stablecoin report (President’s Working Group) summary press release: necessity of bank-level regulation for run prevention