A potential future government strategy to manage borrowing costs involves creating a special class of T-bills exclusively for stablecoin issuers. These would carry an artificially low yield, preventing issuers from profiting while providing the government with cheap capital.
Related Insights
The U.S. is approving stablecoins for a strategic reason: they require reserves, which must be U.S. treasuries. This policy creates a massive, new, non-traditional buyer for government debt, helping to finance enormous and growing fiscal deficits with a structural source of demand.
By creating a regulatory framework that requires private stablecoins to be backed 1-to-1 by U.S. Treasuries, the government can prop up demand for its ever-increasing debt. This strategy is less about embracing financial innovation and more about extending the U.S. dollar's lifespan as the global reserve currency.
The US government's backing of stablecoins is a strategic financial maneuver, not just a nod to crypto innovation. By promoting stablecoins backed by US Treasuries, it creates a new, frictionless global distribution channel to sell its debt at attractive rates to a worldwide audience.
To extend the solvency of U.S. debt, create a one-to-one stablecoin backed by treasuries. This would grant global citizens, particularly in countries with unstable currencies, a direct way to save in a dollar-denominated asset. This new demand could lengthen the runway for U.S. fiscal policy.
Framing Bitcoin as a store of value ("digital capital") and stablecoins (backed by US Treasuries) as the transactional currency is a brilliant political strategy. It reassures the US government by creating new, global demand for its debt, thus avoiding an antagonistic relationship.
In a novel attempt to delay a debt crisis, policymakers are pushing for regulations that would force stablecoin issuers to back their digital dollars one-to-one with U.S. Treasuries. This cleverly creates a new, captive international market for government debt, helping to prop up the system.
As foreign central banks' demand for U.S. debt wanes, the rapidly growing stablecoin market has emerged as a major buyer. By backing tokens with U.S. Treasuries, issuers like Tether and Circle have created a powerful new demand vector, surpassing countries like Saudi Arabia and Germany.
For stablecoin companies like Tether seeking legitimacy in the US market, the simplest path is to back their assets with US treasuries. This aligns their interests with the US government, turning a potential adversary into a welcome buyer of national debt, even if it means lower returns compared to riskier assets.
As foreign nations sell off US debt, promoting stablecoins backed by US Treasuries creates a new, decentralized global market of buyers. This shrewdly helps the US manage its debt and extend the life of its reserve currency status for decades.
The high profits enjoyed by stablecoin issuers like Tether and Circle are temporary. Major financial institutions (Visa, JPMorgan) will eventually launch their own stablecoins, not as primary profit centers, but as low-cost tools to acquire and retain customers. This will drive margins down for the entire industry.