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In a striking revelation, Senator Bill Hagerty highlighted on "Squawk Box" that stablecoin issuers are projected to become the largest holders of U.S. treasuries globally by 2030. This development underscores a strategic shift in the financial landscape, where digital assets backed by high-quality, short-term assets like U.S. treasuries or cash are increasingly integral to the global economy. As the Federal Reserve again resumes stealth buying of longer-term treasuries and Moody's becomes the third rating agency to downgrade the U.S. debt rating, we have many questions.
The growth of stablecoin issuers holding U.S. treasuries is not merely a financial trend but a critical component of managing the staggering $36 to $37 trillion U.S. federal deficit. By ensuring that stablecoin reserves are predominantly in U.S. treasuries, the government secures a consistent buyer for its debt, essential for maintaining lower interest rates and affordable borrowing costs. This demand is vital as the U.S. continues to fund its operations and service existing debt.
Moreover, the stability provided by stablecoins backed by U.S. treasuries enhances confidence in the dollar within the digital asset space. This stability is critical as the global financial system explores digital currencies, potentially deterring capital flight and preserving the dollar's status as the world's primary reserve currency.
However, while this strategy creates a robust market for treasuries, it is not a direct solution to paying off the deficit. The approach primarily addresses the demand side of treasuries, not the supply side of the deficit itself. Paying off the deficit would require significant economic growth or reduced government spending, neither of which is guaranteed by the stablecoin mechanism alone.
The regulatory environment is also evolving, with discussions about backing stablecoins with high-quality assets suggesting stricter oversight. This oversight could stabilize the market and limit issuers' flexibility, balancing innovation and financial security.
In essence, the rise of stablecoin issuers as major treasury holders is a double-edged sword. It supports the U.S. government's borrowing needs and stabilizes the digital financial ecosystem but does not address the underlying fiscal challenges needed to solve the debt crisis. We hope this is not just some grand "shell game" to prop up the U.S. dollar and national debt. As the world watches this experiment unfold, the long-term implications for global finance and U.S. economic policy remain to be seen.
