According to analysts at Standard Chartered, legislation regarding stablecoins could ignite a significant increase in the supply of these cryptocurrencies, which are pegged to external assets. This surge in stablecoins could, in turn, drive demand for U.S. Treasury bills and reinforce the position of the U.S. dollar as the dominant global currency.

Geoff Kendrick, a London-based analyst at Standard Chartered, recently noted that stablecoin assetswhich are primarily backed by U.S. Treasury billscould balloon from their current valuation of approximately $230 billion to an astounding $2 trillion by the end of 2028. This potential growth hinges on new legislation that could be signed into law by President Donald Trump this summer, which aims to clarify U.S. regulations surrounding stablecoins.

Kendrick estimates that this legislative change could create an additional $1.6 trillion in demand for Treasury bills, which are short-term securities that mature in a year or less. Issuers of stablecoins would likely purchase these bills to bolster their reserves, potentially absorbing all new Treasury bill issuance that is anticipated during President Trump's second term.

"Rising demand for USD-denominated stablecoin reserves would create additional demand for USD," Kendrick explained in his report. He elaborated that an increase in stablecoin usage could further cement the U.S. dollar's dominance in the digital currency space, especially given the strong network effects associated with digital assets.

Unlike more volatile cryptocurrencies such as Bitcoin, stablecoins are designed to maintain a stable value, typically pegged to the U.S. dollar or other fiat currencies. The market capitalization of stablecoins has surged by about 11% in 2023 and has seen a remarkable 47% increase over the past year. This market is currently dominated by Tether and USD Coin, which are commonly used for trading and as collateral in the burgeoning decentralized finance (DeFi) sector.

As the crypto industry grows more confident in the likelihood of U.S. legislation addressing stablecoins, trading volumes in these digital assets have seen a notable uptick. Significant progress has been made with bills such as the GENIUS Act, which was approved by the Senate Banking Committee in March, and the STABLE Act, which recently passed through the House Financial Services Committee. These legislative measures aim to clarify the existing regulations governing stablecoins.

In his nine-page report released last week, Kendrick emphasized that the stablecoin sector could account for the largest buying flow of any sector across all U.S. Treasuries, projecting a need for $400 billion in Treasury bills annually over the next four years. "In the past four years post-COVID, the only comparable demand came from foreign buyers, but that interest was spread across different types of Treasury securities," he noted.

In addition to impacting Treasury demand, Kendrick asserted that an increase in stablecoin reserves is likely to enhance demand for U.S. dollars as well. This would bolster the dollar's status as the preeminent global currency for transactions, even in the face of rising trade tensions that have recently undermined the dollar's value.

Considering the USD's current role as the major currency used in international trade, if stablecoins make the USD easier to utilize, the demand for USD assets to support these stablecoins is expected to rise, Kendrick stated. He also highlighted that the quest for an alternative currency that offers the same versatility and liquidity as the USD remains a significant challenge in international finance.

Kendrick concluded that if innovation in the stablecoin space remains concentrated on USD-backed stablecoins, it could initially enhance the appeal of USD assets. He emphasized that once further entrenchment of USD dominance occurs, it may be challenging for any competitor to dethrone it.

CNBC's Michael Bloom also contributed to this report.

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