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11 sats \ 1 reply \ @Undisciplined 17h \ parent \ on: Stable coins will buy USA debt? econ
That last bit is really interesting. Great applied Public Choice Theory.
Forgive me for asking ChatGPT and showing its response:
Stablecoins are one of the more serious potential sources of disruption to both traditional banking and the U.S. Treasury market. Let me break it down into the key channels of impact:
1. Disruption to Banking
a. Deposit Substitution
- Stablecoins compete directly with commercial bank deposits. If individuals and corporations shift part of their cash balances into stablecoins (particularly if they are widely accepted for payments), banks could see a meaningful reduction in deposits.
- Since deposits are the cheapest source of funding for banks, losing them would force banks to rely more on wholesale funding or issuing debt—raising their cost of capital.
b. Credit Creation Constraints
- Traditional banks use deposits to fund loans (fractional reserve banking). If deposits migrate into stablecoins held in non-bank wallets or custodied by fintechs, the banking system’s ability to extend credit shrinks.
- This could mean a disintermediation of banks from the payments/credit loop, with stablecoin issuers and DeFi protocols partially replacing them.
c. Systemic Risk Concerns
- If stablecoins grow large enough, a “run” on a stablecoin could spill over to the broader financial system. For example, mass redemptions forcing liquidation of backing assets could destabilize money markets or banks if they are counterparties.
- Regulatory frameworks (like those proposed in the U.S. and EU) are partly aimed at mitigating this risk by requiring high-quality reserves.
2. Disruption to the Treasury Market
a. Stablecoins as Major Buyers of Treasuries
- The largest fiat-backed stablecoins (USDT, USDC) already hold a huge proportion of their reserves in short-term U.S. Treasuries. Tether alone reportedly holds $100B+ in Treasuries, making it one of the largest holders globally.
- If stablecoin adoption accelerates, demand for Treasuries could rise significantly, lowering yields at the short end and creating a new structural buyer for U.S. government debt.
b. Shift in Liquidity Dynamics
- Stablecoin issuers essentially act like “shadow central banks”: they issue a synthetic dollar (the stablecoin) backed by Treasuries. When demand rises, they buy more Treasuries; when demand falls (redemptions), they sell.
- In stress scenarios, sudden large-scale redemptions could trigger destabilizing Treasury sales, amplifying volatility in the most important global safe-asset market.
c. Fed vs Stablecoins
- Stablecoins are, in effect, competing with the Fed’s Reverse Repo Facility (RRP) as a place to park cash. As the RRP winds down, stablecoins could absorb some of that liquidity, giving them more influence over money-market rates.
- Over time, this could erode some of the Fed’s control over short-term rates, particularly if stablecoins become a preferred settlement instrument in global trade.
3. Longer-Term Strategic Implications
- Dollarization Reinforced: Paradoxically, stablecoins may strengthen the U.S. dollar’s global role by making it more accessible outside the U.S. banking system (especially in emerging markets with weak local currencies).
- Banking Model Pressure: If stablecoins scale, banks might pivot more to fee-based services, lending funded by capital markets, or partnerships with fintechs, rather than relying on cheap deposits.
- Policy Response: Regulators may impose bank-like oversight on stablecoin issuers or push for CBDCs (central bank digital currencies) to reclaim control of digital money issuance.
✅ Bottom line: Stablecoins are both a complement and a threat. They complement Treasuries by creating new demand, but threaten banks by pulling away deposits. In a few years, if adoption grows unchecked, stablecoins could become a core pillar of the global dollar system—but at the cost of weakening traditional banks’ role and complicating the Fed’s monetary toolkit.
Would you like me to sketch out some scenario timelines (e.g., 2–5 years, 5–10 years) showing how stablecoin disruption could unfold in practice—both gradual and shock-type events?
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