Source: Plain Language Blockchain
Original link: https://mp.weixin.qq.com/s/I20xyoys9KJYdzoG6l71kQ
Now, more and more voices believe that "stablecoins are the future of crypto assets".
For example, US Treasury officials, and even possibly central bankers.
But what exactly are stablecoins? Why are they so important? What problems do they solve for investors and the US Treasury?
01 Explaining Stablecoins in Plain Language
Simply put, stablecoins are digital assets (crypto assets) designed to maintain a stable value.
How is this achieved?
By pegging their price to a reference asset, such as fiat currency, commodities like gold, or even a basket of assets.
The goal of stablecoin issuers is to combine the transaction advantages of cryptocurrencies - fast settlement, programmability, global accessibility - with the "price stability" of fiat currencies.
Before diving deeper, let's look at the types of stablecoins in the market:
Fiat-pegged stablecoins: Aim to maintain a 1:1 peg with a national currency (like the US dollar), with common examples being USDT and USDC.
Commodity-backed stablecoins: Pegged to physical assets, such as gold (e.g., PAXG, backed by physical gold reserves).
Crypto-collateralized stablecoins: Backed by volatile cryptocurrencies as collateral, using over-collateralization to address price fluctuations.
Algorithmic stablecoins: Maintain price pegs through supply and demand algorithms, rather than actual physical reserves. (For example, TerraUSD (UST), which spectacularly failed in 2022, is a typical failed algorithmic stablecoin.)
Today, we'll focus on US dollar-pegged stablecoins and the measures taken by the US Treasury and federal regulators around them.
US dollar-pegged stablecoins primarily serve as digital cash within crypto trading platforms and the crypto ecosystem. They play a crucial role in trading, lending, DeFi applications, and cross-border payments.
Stablecoins like USDT and USDC are used by traders to transfer funds between exchanges or to temporarily hold assets during market uncertainty.
Unlike traditional banks, which are limited by business hours, liquidity constraints, and regulatory challenges, US dollar stablecoins offer real-time settlement, global accessibility, and integration with smart contracts.
This makes them almost indispensable in the 24/7 open crypto market.
But how reliable are they?
This brings up the issue of auditing, which is used to verify the underlying assets of stablecoins.
Circle publicly discloses proof documents, confirming that each USDC token is backed 1:1 by liquid US dollar assets, including cash and short-term US Treasury securities. USDC is audited monthly by Grant Thornton LLP, making it considered the gold standard for transparency in the stablecoin sector.
Tether (USDT) has been criticized for lack of transparency and past conflicting information. Although it now publishes quarterly proofs and promises a comprehensive audit, its reserves include less liquid assets like commercial paper. In 2021, Tether was fined $41 million by the US Commodity Futures Trading Commission (CFTC) for false statements about its reserves. Despite this, USDT remains the most traded stablecoin globally, though with a slightly higher reputation risk.
So what happens when investors become concerned about the underlying assets and stability of stablecoins?
Stablecoins can "de-peg", meaning they deviate from the value of their pegged currency.
For example, when Silicon Valley Bank collapsed, USDC dropped from $1 (its dollar peg) to $0.87, as investors worried about USDC's exposure to the bank.
USDC and the Silicon Valley Bank collapse:
As of early March 2023, Circle had about $40 billion in USDC reserves.
$3.3 billion (about 8.25%) was held in cash deposits at Silicon Valley Bank.
When Silicon Valley Bank failed and was taken over by the FDIC, the market feared Circle might not be able to immediately or fully access these funds.
This panic caused USDC to temporarily de-peg, dropping to $0.87 on some exchanges, until the US government intervened to guarantee Silicon Valley Bank deposits, restoring it to $1.
For holders, this meant that if you held $100,000 in USDC, its value briefly dropped to $87,000 until government intervention guaranteed the deposits and restored the peg to $1.
Since then, the stablecoin market has continued to flourish, with its importance and scale growing, and the total market cap of USDT and USDC now reaching $214 billion.
This has not gone unnoticed. With this growth, the US Treasury now views US dollar stablecoins as a strategic extension of dollar influence.
In short, the Treasury needs stablecoins.
02 Why the US Treasury Needs Stablecoins
Simply put, stablecoins can promote global US dollar usage, thereby driving demand for US Treasury bonds.
US dollar-pegged stablecoins (like USDC and USDT) function as digital versions of the dollar, usable globally with just a smartphone and internet connection.
This extends the dollar's influence to regions without robust banking systems.
In fact, stablecoins serve as on-chain, permissionless dollars, enabling global users to store value, conduct cross-border transactions, and hedge against local currency risks.
This widespread demand reinforces the dollar's status as the world's reserve currency.
Circle CEO Jeremy Allaire once stated: "USDC does the job of the dollar overseas better than many banks."
This is good - it helps the dollar be used globally, even benefiting people in remote areas without bank accounts.
But how does this help the US Treasury?
The answer is simple.
To maintain the 1:1 peg, stablecoins must be backed by high-quality liquid assets. For most major issuers, this means primarily holding a specific type of security.
That's right, US Treasury bonds.
According to Tether's May 1st press release: "Tether... has reached a historic high in total US Treasury exposure, approaching $120 billion, including indirect Treasury exposure through money market funds and reverse repurchase agreements."
This puts Tether among the top US Treasury bond holders:
In fact, Tether holds more Treasury bonds than Germany and the UAE. How did they reach this scale so quickly?
Last year, Tether was among the top 10 US Treasury buyers, adding $33.1 billion in holdings, becoming the seventh-largest net buyer, just behind the UK and ahead of Canada.
Don't forget USDC. Although smaller in market cap, USDC reports that over 75% of its reserves are invested in US government debt of three months or less (short-term Treasuries), with the remainder held in cash at major banks.
The combined demand from these issuers is now comparable to some mid-sized sovereign nations.
In a world of rising deficits and increased bond issuance, this demand is a welcome "lifeline" for Washington.
This new Treasury demand from non-sovereign entities is reshaping traditional debt markets:
Stablecoin reserves act as balance sheets seeking yields, tending to invest in safe assets like short-term Treasuries.
Unlike traditional banks, these issuers are not constrained by Basel capital requirements or deposit insurance rules that limit balance sheet size.
For example, Tether reports net profits exceeding $13 billion in 2024, primarily from interest on its government bond portfolio (with the company having only about 100 employees)
Although this demand is crucial for the US Treasury selling large amounts of debt, it also brings concentrated risks and raises questions about transparency, redemption processes, and systemic risks.
We have seen this in the USDC and Silicon Valley Bank incident, where despite quickly recovering the peg after federal government intervention, the event showed how confidence can quickly evaporate.
If USDT or USDC experience a redemption run, it could force the rapid liquidation of hundreds of billions of dollars in government bonds. This would impact global repo markets and short-term financing instruments.
Therefore, regulators—from the Treasury to the Financial Stability Oversight Council—view stablecoins as not just a technological and financial innovation, but as emerging systemically important institutions.
By anchoring US Treasuries, stablecoins have become buyers and amplifiers of US dollar dominance. In this process, they have... well, harnessed the full force of US fiscal and regulatory power.
This brings us to the GENIUS Act.
03 The GENIUS Act: Washington Joins the Discussion
Recognizing that stablecoins are no longer a marginal crypto concept but major participants in global liquidity and debt markets, policymakers have intervened with their so-called "responsible innovation".
This is the GENIUS Act.
The full name of the act is the Guiding and Ensuring National Innovation for US Stablecoins Act, proposed by Senators Bill Hagerty (Republican-Tennessee) and Kirsten Gillibrand (Democrat-New York), a bipartisan legislative proposal.
Some key provisions of the act:
Federal Licensing: Issuers with circulation over $10 billion must obtain federal licensing and be subject to regulation.
Full Reserve Backing: Stablecoins must be 1:1 supported by high-quality liquid assets (such as US Treasuries and cash).
Mandatory Audits: Issuers must undergo regular independent audits and publicly disclose reserve data (Tether, take note).
Dual-Track Regulation: Smaller issuers with circulation under $10 billion can operate under state-level regulation, maintaining ecosystem openness to startups.
CBDC Alternative: The act explicitly supports private sector US dollar stablecoins as an alternative to Central Bank Digital Currency (CBDC).
What is the current legislative progress of the act?
The GENIUS Act passed the US Senate last week (May 19) with a bipartisan vote of 66 to 32. But of course, not everyone supports it.
Senator Elizabeth Warren became one of the most vocal and strident critics of the act, warning that the GENIUS Act may lack sufficient consumer protection measures and could overly benefit private crypto interests.
Warren has long advocated that if the US is to issue digital dollars, they should be issued and controlled by the public sector, possibly in the form of a Central Bank Digital Currency (CBDC), to better ensure consumer protection, financial stability, and minimize environmental impact.
However, CBDC gives the government and banks absolute monitoring and control over every cent you have, down to each transaction.
They even have the ability to reject any or all transactions, and to freeze or seize all of your funds.
In any case, I believe a CBDC is unlikely to be created and used in the US in the short term.
Back to the GENIUS Act.
The act will next be submitted to the House of Representatives, and although it received strong bipartisan support in the Senate, its path in the House seems more complex.
Some House Republicans have proposed competing versions of stablecoin legislation, with key disagreements around state-level regulatory authority, the role of the Federal Reserve, and the allocation of control between federal and state agencies.
Meanwhile, some House Democrats, in line with Senator Warren, believe the act may favor crypto insiders and lack the consumer protection measures needed to prevent abuse or systemic risks.
Therefore, while the GENIUS Act has momentum, it is far from a done deal. More debate, negotiation, and possible amendments are expected before it reaches the President's desk.
Washington is essentially saying: Okay, stablecoins have established themselves—we urgently need them to support future unlimited US debt issuance—but we will ensure they are safe, robust, and structured.
04 Summary
In any case, I also believe stablecoins will exist long-term, and the GENIUS Act will ultimately be signed into law and provide a structure for stablecoins—which will only further consolidate their position on the US Treasury holdings ranking.
I anticipate that in the near future, USDT and/or USDC will top this list. The largest US Treasury holders in the world.
