The Genius Act passed the Senate and got a lot of people clapping hands and “high fiving”. Yes, this is a great piece of legislation for crypto and the future of finance. But some of the comments are off the mark, a bit concerning,
Secretary Bessent was ecstatic that there will be more demand for US Treasuries. US dollar stable, as per the Genius Act, must be backed 1 to 1 by US treasuries. Thus, the more demand for US dollar stablecoins, the more demand for US treasuries.
Further to this idea, an analyst predicted “stablecoin issuers will be the largest holders of US Treasuries in the world in years to come”.
Right now, the largest holders of US treasuries are sovereign nations, with Japan and China being the biggest, because US treasuries are used to manage their dollar reserves.
But there is a risk that demand from central banks to hold US dollar reserves is declining. The OMFIF-Official Monetary and Financials Institutions Forum released a report that says one in three central banks managing a total of $5 trillion US dollars, plan to increase exposure to gold over the next one to two years. Gold will substitute for the US dollar in terms of reserve management.
A survey of 75 central banks was carried out between March and May. The survey asked where central banks are looking to increase currency holdings over the next twelve to twenty-four months. The Euro was number one and the Renminbi was number two. The dollar ranked behind the Yen, Australian dollar, Canadian dollar, and UK sterling. In this survey, on a 12–24-month basis, central banks don’t like the US dollar.
Dollar optimists, like Secretary Bessent, would say a decline in demand from central banks is no big deal. Stablecoin issuers will buy US treasuries to back the coins. Stablecoin buyers will fill the demand lost from central banks.
Substituting solid, long-term reserve-oriented buyers with US stablecoin buyers may not be a good thing. Central banks move in and out of reserves slowly; stable coins are held by commercial and retail interests and are more transactional in nature. It is not a stretch to say that the holding period for stable coin may not be as long-term as demand from central banks for reserve holdings. If the holding period of stable coins is short, there might be more frequent selling pressure on US treasuries.
If there were some sort of crisis of confidence in the US dollar, the selling of US dollar stablecoin may be more aggressive, volatile than sovereign reserve selling. If stable coins really do become the largest owner of treasuries, and there is a crisis of confidence in the US dollar, we have a problem.
There is a solution. If you are going to have stablecoins, let there more than just US dollars. There should be yen, euro, peso, UK gilt and others. In this case, if there is rising concern regarding the US dollar or US treasuries, the holder of the stablecoin can merely trade USDC for another stable coin. The US treasury collateral does not have to be sold. If the US treasury collateral does not have to be sold, there will be less pressure on the US treasury market.
The Genius Act is a great first step. But if it leads to a shift in the demand composition for US treasuries from longer-term to short-term holders, volatility will increase and there may be financial pain ahead.
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