Stablecoins, the penultimate buyer of U.S. Treasuries

Original title: "May 2024: Stablecoins are helping create a buyer of second-to-last resort for US Treasurys"

A long time ago, I was a bond and foreign exchange trader. During the Treasury auctions, I remember a question we would discuss every few months: "What is China's bid?" This was referring to whether the People's Bank of China (PBOC) would be a buyer in this auction. Looking back, I can't even remember if this actually affected any of the auctions I observed, but the takeaway I took from it was that maybe one day the People's Bank of China wouldn't be buying at auctions, and by then the U.S. Treasury might Will get into trouble.

I didn’t think about this issue again until I saw the chart below recently (Translator’s Note: The red bars in the chart are stablecoins, referring to the number of stablecoins used to purchase U.S. Treasury bonds):

Please check here for the source of the chart.

You don’t need to look too hard to see what this means. The crypto world may have inadvertently engineered a system that will potentially strengthen the dollar’s ​​status as a reserve currency. Here’s why.

Bitcoin maximalists often mention:

1. The US government (and most governments) borrows too much and prints too much money.
2. This behavior is stealing wealth from the future.
3. Ultimately, this behavior will lead to hyperinflation and a devaluation of the dollar.
4. When this happens, the dollar will be in free fall.
5. Holding Bitcoin is therefore a hedge against points 1 to 4 above.

I personally think that due to the reserve currency status of the US dollar and some other factors (for example, not many things can match the liquidity of the US dollar market, so if your operation is of a certain scale, the US dollar is difficult to (Avoided), the U.S. dollar behaves strangely relative to other currencies, but I really don't know much about these dynamics, nor am I particularly in-depth.

Also, another macro perspective I learned from business news is:

1. The world is becoming more multipolar/less integrated every day
2. For this reason (and a few others), China (and probably some other governments) is less interested in holding U.S. Treasuries (and therefore buying more gold), which is partly Explains why gold spot prices are at all-time highs while ETF gold holdings are declining.

While I don’t have a good argument for why this macro theme occurs, there are many data points that suggest it is true. However, I think cryptocurrencies cause another interesting thing to happen, which is actually a balance. Fundamentally, demand for U.S. dollars from non-U.S. individuals and businesses far exceeds supply. For non-U.S. individuals, U.S. dollars are often a more stable way to save than local currencies, which are less accessible to local banks. For non-U.S. businesses, about 40% of cross-border trade is still settled in U.S. dollars. Wealthy individuals in most developing countries usually transfer their excess savings to the US/UK/Europe. Cities like London, Vancouver and New York have real estate markets that reflect demand for dollar-denominated assets. Dollars are hard to come by for non-wealthy individuals in developing countries, and the demand has been pent-up for decades. I've talked about this before.

Stablecoins in Emerging Markets

The "digital gold" propaganda of cryptocurrencies (i.e. cryptocurrencies can hedge against inflation, and their permissionless nature allows consumers to protect their wealth from local governments) Confiscation) is more true for stablecoins (cryptocurrencies pegged to a reserve currency like the U.S. dollar) than for Bitcoin. Furthermore, given that the largest proportion of fiat stablecoins are backed by the U.S. dollar, stablecoins are not very useful as an inflation hedge for U.S. citizens.

In a country with a poorly managed currency, a person could theoretically own Bitcoin at some stage for speculative purposes. However, so far, Bitcoin’s instability has made it useless as a store of value because you can’t be sure how much value it will provide you when you actually need to use it. In other words, in emerging markets, ordinary people do not have enough spare savings to withstand the volatility of Bitcoin in case of emergencies. This makes Bitcoin a very expensive and inefficient store of value in the short term. In contrast, before the advent of cryptocurrencies, it was (and still is) fairly common for wealthy people in poor countries to hold foreign currencies (usually dollars, pounds or euros) as a mechanism for saving. As a market maker, I thought (and still think) that a good heuristic for judging a country's economic trajectory is "Where do the rich in this country put their wealth?" Regardless of where the wealth is exported. Wherever (e.g. if your country's move immediately after you become rich is to buy real estate in New York or London), this is a signal that citizens are afraid of having their wealth taken away, either explicitly or indirectly by printing money Take it away.

Governments hate doing this because it puts natural selling pressure on their currencies and puts assets somewhat beyond their reach. However, fiat-backed stablecoins pegged to USD or EUR (real assets under management) are permissionless and are effectively beyond the ability of local governments to prevent you from purchasing them, and are simply digital asset alternatives for real use cases that already exist. Before stablecoins, you had to buy USD from a bank and keep it in a bank account (which had its advantages), but the bank could also refuse to sell it to you;

b ) Charge you a large purchase/holding fee;

c ) Be forced by the government to trade at false exchange rates or limit the amount you can buy or own.

Even in today's environment, if you are in the US you should try going to your local US bank or log into your Chase mobile app and try to buy some Euros and you will see how unsupported this is.

Basically, everyone around the world wants a relatively stable currency to denominate their savings that has a predictable exchange rate relative to the goods and services they buy every day. For most people today (2024), the dollar and euro are more stable than their national currencies. Stablecoins backed by dollars (or pounds, euros, take your pick) are a permissionless approach. The loudest voices in crypto have no incentive to tell you this because USDC isn’t going to make them rich. Ironically, stablecoins actually help address runaway hyperinflation, while Bitcoin simply lets users trade hyperinflation in their own currencies for the volatility of cryptocurrencies. That doesn't mean Bitcoin doesn't have uses, it just means that if you really need to dip into your savings at a time you can't predict, Bitcoin is a terrible way to save money.

The Weirdest Unintended Consequence

Stablecoins are turning retail investors/citizens/savers around the world into implicit buyers of U.S. Treasuries. Here’s why:

1. Stablecoins allow people outside the U.S. to hold U.S. dollars in a permissionless way that their governments can’t control and their banks will never easily provide, and (in some cases Below) Earn interest in USD. The poorer you are, the harder it is to get dollars. And that's just the beginning - stablecoins are only starting to be used for non-crypto use cases, such as replacing SWIFT transactions and other cross-border SME payments (which is what Bridge does). I can only imagine that as stablecoin usage expands offline, demand will continue to rise.

2. A well-managed stablecoin must basically hold the most stable + liquid securities, which are basically US Treasury bonds. For example, as of February 2024, most USDC holds U.S. Treasury bonds + repurchase + cash:

#3. Therefore, the demand for Treasury bonds is due to the stable currency itself. Demand grows linearly.

4. This basically means that approximately 90% of the demand for stablecoins will lead to demand for Treasury bonds in some way.

In a weird way, it’s almost easier to buy a stablecoin that’s a layer on top of a Treasury bond than it is to buy the underlying Treasury bond itself. The stablecoin’s 3x growth would make it a top-five holder of U.S. Treasuries. So it’s not crazy that the growth of cryptocurrencies will help support the U.S. dollar as the reserve currency in the next generation.

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Impact of continuation or acceleration of these trends

If these trends remain unchanged, We can think of some potential impacts.

First, given that stablecoins are largely backed by Treasury bonds -- there are some interesting contagion scenarios that we haven't experienced before. For example, a hyperinflationary event feared by crypto evangelists could destabilize stablecoins and impact the broader cryptocurrency market if retail holders attempt to redeem en masse.

Similarly, we may have a "dollar break" event, where since stablecoins can be traded 24/7, but since the underlying treasuries are not traded 24/7, stablecoin managers cannot produce real dollars fast enough (this This may manifest as decoupling, leading to stablecoins trading at discounts in panic, such as USDC trading at 85c during the SVB crisis). Such an event could impact not only the cryptocurrency market but also the money market fund category.

It’s hard to say how this will play out, as the use of stablecoins in general and institutional adoption of cryptocurrencies in particular grows, so will the mechanisms for transferring assets between assets. In a crisis, correlations between assets tend to be much higher than what we think of in peacetime, and at the current scale, when we find out how it's happening, it's already happening.

Second, Treasury bills held in the form of stablecoins are widely distributed to retail investors, with stablecoin “managers” monetizing part of the margin, in a weaponized manner compared to Treasury bills held by foreign central banks Treasury bills are much less likely to be used. As stablecoins grow and hold more U.S. Treasuries, there is less chance that they will be sold off en masse in times of conflict and negatively impact the U.S. government’s ability to raise funds due to retail investors/savers everywhere Investors are unlikely to express their preference by selling stablecoins (even if they are against USD), because their currencies are also likely to fluctuate, and because for stablecoin managers, earning yield is what makes them money. way (e.g., Tether made $1 billion in 2023 on Treasury yields), so they have no intrinsic incentive to sell unless redemptions occur.

Put another way, Sino-US decoupling and related capital flow structural adjustments are generally considered to be detrimental to the dominance of the US dollar. However, the emergence of stablecoins bucks this trend and could ultimately strengthen the dominance of the U.S. dollar and Treasuries. This is all about liquidity and network effects, as fiat-backed stablecoins grow, their liquidity will increase (as will USD liquidity), and as more and more As individuals hold U.S. dollars (or U.S. dollar biosimilars), the U.S. dollar's position will also become more difficult to shake.

Third, “flight to quality” trades in times of conflict tend to favor reserve currencies (primarily the U.S. dollar in recent decades), but historically this shift has been most pronounced among institutional investors ( This is partly because most market activity is institutional and partly because bonds are difficult for retail investors to access). In a world where retail investors around the world have easy access to U.S. dollars (via USDC/USDT), it’s not crazy to see retail investors “flight to prime currencies” trading. Global retail investors will switch from a) cryptocurrencies and b) national currencies to USDC because this For the first time ever they could do so.

Finally, there are also risks in emerging economies ceding monetary policy/sovereignty to their own individual savers. Capital controls are a tool often used by governments to combat currency devaluation, which is even harder to do if your citizens can directly buy USD/CAD/USD/USD-Australia (USDC/USDT). This means that if fiat-backed stablecoins continue to be adopted by more and more people, governments will eventually start to build some tools in their toolkits that can at least track the adoption and use of stablecoins by their citizens, thereby making it possible for them to Capital controls remain in effect.

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