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In summary
- The US Treasury Department is concerned about the growth of the stablecoin market and believes they should be replaced by Central Bank Digital Currencies (CBDC).
- The Treasury report noted that stablecoins have acquired $120 billion in T-Bills, with Tether purchasing $81 billion.
- The Treasury expressed concern about the possibility of a stablecoin collapse, which could lead to a fire sale of Treasury bonds, and recommended that the government intervene to replace private stablecoins with a CBDC.
The US Treasury Department is concerned about the growth of the stablecoin market and believes that privately issued stablecoins should eventually be replaced by a Central Bank Digital Currency (CBDC), according to a Treasury report published on Wednesday.
“Similar to how privately issued ‘wildcat’ currencies were replaced by government-backed central currencies in the late 19th century, Central Bank Digital Currencies (CBDCs) will likely need to replace stablecoins as the form main digital currency supporting tokenized transactions,” noted the report, which was prepared by the Treasury Debt Management Office.
Stablecoins dominated much of the 132-page Treasury State of Finances report for the fourth quarter of 2024. Much focus was placed on the significant amount of US Treasury Bonds, also known as T-Bills , which have been acquired by stablecoin issuers such as Tether and Circle.
The Treasury estimates that $120 billion in T-Bills have been purchased to serve as collateral for yield-generating stablecoins. The majority of that sum, almost $81 billion, has been acquired by Tether, the company behind the largest stablecoin in the Cryptocurrency market, USDT.
While many stablecoin advocates have argued that US dollar-backed stablecoins reinforce the dollar’s strength by increasing demand for T-Bills, the Treasury appears unconvinced.
Wednesday’s report focused on the “common occurrence” of stablecoins decoupling or collapsing entirely in recent years, a situation the Treasury believes could lead to disaster if Treasuries become increasingly integrated with the industry. of stablecoins.
Stablecoins are a crucial component of the cryptocurrency industry. By maintaining a stable value, they allow cryptocurrency traders to enter and exit positions without needing to use a fiat currency such as the US dollar. Stablecoins also function as equivalents to the dollar in markets where dollars are difficult to obtain.
The Treasury Department estimates that more than 80% of all cryptocurrency transactions involve a stablecoin. Tether’s USDT is by far the most traded cryptocurrency, generating $53 billion in trading volume in the last 24 hours alone.
And the growing interconnectivity between stablecoins and traditional financial markets through Treasury bonds is a cause for concern, according to the Treasury.
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“A collapse of a major stablecoin like Tether could result in a ‘fire sale’ of its holdings in US Treasuries,” Wednesday’s report noted. “While stablecoins currently represent a marginal segment of the Treasury market, growth over time could expose the Treasury market to greater risk of fire sales due to runs on the stablecoin market.”
Therefore, the report recommended that the US government eventually intervene to replace private stablecoins with a CBDC presumably issued by the Federal Reserve.
Over the past two years, CBDCs have become increasingly controversial in American politics. Several prominent Republican lawmakers have vowed to prevent its development, criticizing a stablecoin issued by the US government as “Big Brother’s digital dollar.”
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Former President Donald Trump, too, has emerged as a vocal critic of CBDCs during his re-election campaign. Despite that stance, Trump’s crypto project, World Liberty Financial, plans to issue its own stablecoin, as Decrypt reported earlier this week.
Trump and his business partners have, for months, framed private stablecoins as an effective means of promoting the purchase of Treasury bonds and, therefore, the dominance of the US dollar globally.
That plan may have its supporters—but it appears the U.S. Treasury is not one of them.
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