The US Treasury Has Some Thoughts on Stablecoins, and the Issuers of Those Dollar-Denominated Tokens Probably Didn't Love What They Heard

The US Treasury Department has some thoughts regarding stablecoins and the issuers of those dollar-denominated tokens probably didn't love what they heard.

The U.S. Treasury Department has some thoughts regarding stablecoins and the issuers of those dollar-denominated tokens probably didn’t love what they heard.

On October 29, Treasury released its inaugural National Strategy for Financial Inclusion report, which makes only passing reference to digital assets, and even then it was only to previous reports that largely focused on the risks of adding tokens to one’s portfolio. More recent Treasury reports have underscored these risks, including the role that stablecoins like Tether’s USDT play in facilitating crime and terrorism.

A far more consequential report summarizing a meeting of Treasury’s Borrowing Advisory Committee (TBAC) was issued on October 30. TBAC is comprised of senior execs from banks, broker-dealers, asset managers, hedge funds and insurance companies, who meet quarterly with Treasury officials to comment on various financial developments. (TBAC doesn’t currently include anyone from Cantor Fitzgerald (NASDAQ:ZCFITX), the relevance of which is discussed below.)

The TBAC meeting’s minutes cited an attending member who “observed that because most stablecoin collateral reportedly consists of either Treasury bills or Treasury-backed repurchase agreement transactions, the growth in stablecoins has likely resulted in a modest increase in demand for short-dated Treasury securities.”

In its previous quarterly ‘attestations’ of its reserve assets, Tether claimed to have around $100 billion worth of T-bills (including repurchase agreements) backing the now $121 billion in issued USDT. These T-bills are said to be custodied by Cantor Fitzgerald, a claim that Cantor CEO Howard Lutnick has publicly endorsed.

Among the crypto crowd, there are growing concerns that these T-bills could be seized by the federal government should reports of criminal charges being prepared against Tether prove accurate. That would be a boon for the issuer of the USDC stablecoin, Tether’s U.S.-based rival, Circle, which has urged the government to go after Tether’s T-bills.

The full TBAC presentation goes into even more detail on stablecoins, noting the growth of the stablecoin market from a total market cap of $5 billion in 2019 to around $166 billion today. The document warns that a Tether collapse “could lead to a fire sale of short-dated Treasuries.”

The presentation also cites a claim from a 2022 report that “over 80% of all crypto transactions now use a stablecoin as one leg of the transaction.” While Treasury expects the stablecoin market to continue growing, it notes ominously that a “’private currency’ that does not meet NQA [no questions asked] requirements leads to financial instability and as such is highly undesirable.”

A wildcat in the stable

That NQA reference refers to a lack of due diligence and was taken from a 2021 University of Chicago Law Review paper titled Taming Wildcat Stablecoins. The paper unfavorably compares stablecoins to the ‘wildcat banking’ era of the mid-nineteenth century that saw state-chartered banks issue their own currencies that ultimately failed and left countless individuals holding worthless paper.

The paper recalls that the so-called ‘private money’ era “was regularly subject to panics, collapses in value, and ultimately required the government to step in and issue a single unified form of money,” aka the dollar.

Similar panics were experienced during the 2008 financial meltdown, which saw the failure of some money market funds (MMF) that were backed by assets other than short-dated T-bills, including the sketchy commercial paper that Tether used to hold among its reserves.

The TBAC document goes on to suggest that “medium-term regulatory and policy choices will determine the fate” of this latest iteration of private currency. However, “history indicates that stablecoins cannot function as private money, and will ultimately need to be strictly regulated like government money market funds are today to hold risk-free collateral,” aka short-term T-bills.

Treasury officials have previously sought additional powers from Congress to go after “offshore dollar-denominated stablecoin providers,” despite the awareness that asking a do-nothing Congress to actually do something was always going to be an uphill slog.

Referencing plans to tokenize various real-world assets (RWA)—including T-bills—on distributed ledger/blockchain technology, the TBAC document warns that these ledgers “will also need to be developed under the auspices of Central Banks and the foundation of trust they provide.”

The warnings get even more explicit by saying that “in a similar manner to how privately-issued ‘wildcat’ currencies were replaced by government-backed central currencies in the late-1800s, Central Bank Digital Currencies (CBDC) will likely need to replace stablecoins as the primary form of digital currency underpinning tokenized transactions.”

The U.S. government has sent mixed