- The US Treasury Department suggests transitioning from private stablecoins to a government-controlled CBDC, likening current stablecoins to the “wildcat” currencies phased out in the 19th century.
- Treasury officials warn that a major stablecoin collapse, like Tether’s, could trigger a “fire-sale” of US Treasuries, potentially destabilising the T-bill market due to increased risk exposure.
- A committee member proposed a permissioned blockchain overseen by a government authority to manage risks associated with tokenised T-bills, aiming to balance innovation with financial stability.
The rapid growth of stablecoins has raised concerns within the US Treasury Department, which now suggests moving away from private stablecoins to a state-controlled digital currency, or central bank digital currency (CBDC), something I’m sure they would absolutely love for the sake of transparency, am I right?
In a report from the Treasury’s Office of Debt Management, the department draws parallels between today’s stablecoins and the privately issued “wildcat” currencies of the 19th century, hinting at the potential for government-issued digital currencies to take their place.
Related: Bitcoin Could Hit $200K by Tapping Into Gold’s Market, Says Bitwise’s Hougan
No to Stablecoins, Yes to CBDCs
Stablecoins, pegged to assets like the US dollar, are critical tools in the cryptocurrency market as they allow seamless and efficient transactions and a way of readjusting portfolios when things go south in the crypto market.
However, stablecoin issuers like Tether and Circle have increasingly integrated with traditional finance, buying an estimated US$120B (AU$182.5B) in US Treasury bills to back their digital assets. Tether alone holds about US$81B (AU$123B) of these Treasury securities, making stablecoins significant players in a traditionally government-centred market.
What would happen if crypto’s leading stablecoin fails?
A collapse of a major stablecoin like Tether could result in a ‘fire-sale’ of their U.S. Treasuries holdings. While stablecoins currently represent a marginal segment of the T-bills market, growth over time may expose the T-bills market to increased risk of fire sales due to runs in the stablecoin market.
Treasury’s Office of Debt ManagementRelated: Consumer Watchdog Flags Tether for Lack of Transparency in US Dollar Reserves Audit
The Rise of Tokenisation
Similarly, the Bank for International Settlements (BIS) has also warned about the risks associated with the growing trend of tokenisation in traditional finance. They argue tokenisation might offer benefits such as reduced costs and efficient transactions but represents a significant investment and coordination effort by companies, let alone the fact that the industry might face heavy regulatory challenges.
One of the most popular types of tokenised debt, T-bills, could bring “operational improvements and innovation” to the Treasury market. According to the minutes from the US Treasury, one committee member noted that as stablecoins increasingly use T-bills or Treasury-backed repurchase agreements as collateral, their growth has spurred a moderate rise in demand for short-term Treasury securities.
However, the use of t-bills would also require careful management to prevent financial instability. One committee member proposed developing a controlled, permissioned blockchain overseen by a trusted government authority to address these concerns.
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