Abstract Crypto’s ‘killer app’, stablecoins, are looking to transform payments and ensure a deeper dollarization of the global monetary system. Digital representations of USD that settle transactions on public blockchains (rather than bank-based rails), stablecoins are promising to remedy longstanding shortcomings in payments by making access cheaper, faster, and more universal. Anchoring this expansion and exponential potential is the US Treasury market. Home to the world’s preeminent risk-free asset, the Treasury market produces the bonds that ensure stablecoin issuers can make good on the promise that one digital token can be redeemed for one dollar. Treasuries are deemed to carry zero default risk while also being fluidly tradable into dollars at stable prices. These attributes ensure that issuers can always sell Treasuries and pay out on customer claims. That, at least, is the theory. This article looks under the hood to examine the emerging interdependence between the Treasury market and the USD stablecoin ecosystem. It outlines the benefits. Importantly, it explores the risks building within both the stablecoin and the Treasury markets from relying heavily on one another for growth. First, it shows that stablecoins are vulnerable to a Treasury market whose plumbing is increasingly fragile. Trading quality can become degraded periodically, impacting the ability of issuers to liquidate Treasuries easily. Logistically, opening hours of the Treasury market do not neatly map onto the 24/7/365 operating ethos of stablecoins. And institutional risks can expose stablecoins to uncertainties around political events like debt ceiling crises. For the Treasury market, stablecoins also raise concerns. For one, mass redemptions might strain available liquidity (and the reputation) of a market supposed to function as a global safe haven. Further, the policy importance of supporting the growth of USD stablecoins requires the constant production of short-term Treasury bonds to populate growing stablecoin reserves, constraining the Treasury to favor short-term issuance over long-term bonds. In conclusion, this article offers ideas for policymakers developing oversight frameworks for both the Treasury and the stablecoin market. Crucially, by so closely connecting the Treasury market to a new international payment system, policy cannot afford to treat each system as distinct. Rather, both are becoming more fully connected, such that future spillovers from the Treasury market directly impact digital dollar payment mechanisms—while the default risk of stablecoin issuers creates disruptive potential for the seeming invincibility of the US Treasury market.
Yadav et al. (Fri,) studied this question.