Stablecoins, Treasuries, and the Genesis Block Warning

Supporters of stablecoin regulation in the US establishment have long argued that giving stablecoins clear legal status would boost demand for US Treasury bonds. Some have even suggested that, in the near future, stablecoin issuers could become the largest holders of Treasuries. Just the other day, "crypto czar" David Sacks echoed this idea:

“If we provide legal clarity, we’ll create massive demand for Treasuries almost overnight.”

But wait a minute. If the American GENIUS bill requires stablecoin issuers to fully back their coins with either Treasuries or dollars, why is everyone so sure they’ll choose Treasuries?

When a client mints stablecoins, they give the issuer dollars – not bonds. When a client redeems stablecoins, they expect to get dollars – not bonds. So why would issuers swap those dollars for Treasuries? Where is the real demand supposed to come from?

There are really only two reasons:

• Either the government pressures issuers (even informally),
• Or issuers chase higher yields.

Either way, we end up with fractional reserves – exactly the thing cryptocurrency was meant to help us move away from. Remember the famous Times headline embedded in Bitcoin’s genesis block? That message will become relevant for stablecoin issuers who start loading up on bonds.

So pay close attention to what actually backs your stablecoins. If you’re concerned, remember: overcollateralized stablecoins like LUSD, sUSD, DAI, MIM and others are always available for exchange at rabbit.io.