Kelly Evans: Stablecoins to the rescue

CNBC

14 hours ago

Can I just say I find it highly amusing that crypto stablecoins are now being cited as a "helpful" source of demand for government debt?
Let's unpack this. Bitcoin and the rest of crypto are on the rise to supposedly save us us from the financial profligacy of untrustworthy governments. But now, crypto stablecoins are becoming one of the biggest of government bonds on the planet--thus enabling the very deficits that fuel continued crypto demand.
Stablecoins are basically just dollars that don't have to leave the crypto ecosystem, which can be incredibly annoying to enter and exit from the traditional banking system. They're much more an institutional than a retail product here in the U.S., although they're also in high public demand in foreign markets with unstable currencies and high foreign exchange fees.
But in order for a stablecoin to be used like a real dollar, it has to have a "stable" value of exactly a dollar. It would be kind of like if your bank had to back every dollar you deposit with exactly one dollar worth of assets. Stablecoins used to be a little more loosey-goosey with that, until "TerraUSD" collapsed in 2022 and caused a run that led the two leading stablecoins--Tether, and Circle's USDC (or U.S. dollar coin)--to "break the buck."
Now, Congress is actively considering legislation that would formalize much stricter regulation of stablecoins--namely, with the GENIUS (Guiding and Establishing National Innovation for U.S. Stablecoins) Act that passed the Senate with a 68-30 vote last month, and is now being actively considered in the House as part of their "Crypto Week." It would require every dollar of stablecoins to be backed with a dollar of ultra-safe assets like U.S. Treasury bills.
If and when it passes, the crypto world gets a big win--a blessing of approval on a key piece of infrastructure. Little wonder Bitcoin et al have been shooting higher in recent weeks. But it has the probably even more important side benefit of enshrining a major source of future demand for U.S. Treasuries.
Stablecoins are currently thought to hold just shy of $200 billion or so in short-term Treasury bills. By some estimates, that could now explode to $1.5 trillion within the next couple years, and hit $3 to $4 trillion a decade from now. For context, there is about $6 trillion in Treasury bills outstanding, and in the wake of the GOP's budget bill, which raised the debt ceiling, Treasury is now expected to further ratchet up bill supply.
This may all help explain why the administration, which had previously criticized former Treasury Secretary Janet Yellen for over-relying on short-term bills to fund President Biden's deficits, is now pursuing a similar strategy. "A thriving stablecoin ecosystem will drive demand...for U.S. Treasuries," Treasury Secretary Bessent wrote on X last month. "This newfound demand could lower government borrowing costs and help rein in the national debt."
But will it backfire? As Ben Emons of Fed Watch Advisors wrote yesterday, "the anticipated demand from stablecoins has depressed the short-term premium, incentivizing the rolling of deficits with T-bills." However, he added, "this game has fiscal consequences, which are reflected in long-term yields as a rising risk." (Emphasis mine.)
In other words, stablecoin demand for Treasury bills could help finance the deficit more cheaply in the short-term, but enable deficits that keep -term yields--which underpin actual mortgage and business loan rates--on the higher side. To avoid this outcome, the administration will still have to push hard to curb deficits, lower inflation, and boost growth prospects.
So yes, rather ironically, stablecoins are here to the rescue--unless they just exacerbate our larger borrowing problems. And if you're worried about that, I've got some Bitcoin to sell you.
See you at 1 p.m!
Kelly
Twitter: @KellyCNBC
Instagram: @realkellyevans