Bitcoin Grows as Stablecoins Absorb U.S. Debt

Summary

In this Bitcoin Layer podcast, Nick Batia and Damian Shot delve into the evolving landscape of US Treasuries, stablecoins, and Bitcoin's role in the global financial system. They discuss how foreign demand for US Treasuries is waning due to low yields, rising inflation, and fiscal issues, with stablecoins, especially Tether, stepping in to fill the gap. Tether's growing status as a global reserve asset poses a geopolitical challenge to the US, as it operates outside the control of American financial institutions. The conversation also touches on the Genius Act, Bitcoin's network growth, and how stablecoin flows impact the broader digital currency ecosystem, emphasizing Bitcoin's emerging role as a contrast to traditional fiat systems.

Takeaways

• 😀 Foreign demand for U.S. treasuries has been declining due to capital losses on prior investments and concerns about U.S. fiscal policy and inflation.
• 😀 Despite declining foreign interest in U.S. treasuries, U.S. banks are expected to step in as buyers due to regulatory changes, balancing out the demand-supply dynamics.
• 😀 The stability of the U.S. Treasury asset class is essential to the broader financial system, with volatility spiking in 2022 but then stabilizing, which supported risk assets like stocks and Bitcoin.
• 😀 The Genius Act could be seen as a political response to the growing influence of Tether, positioning it as a 'world reserve asset' that competes with traditional financial assets.
• 😀 Tether (USDT) is emerging as a global reserve currency due to its digital nature, ability to hold U.S. treasuries, and its increasing use in the Eurodollar system.
• 😀 The rise of stable coins, including Tether, has implications for the U.S. financial system and could challenge U.S. control over dollar-based assets, though it's not a threat to the dollar itself.
• 😀 The increasing presence of stable coins like Tether could eventually reach a $1.4 trillion market cap by 2030, which could influence financial markets and the broader dollar ecosystem.
• 😀 Stable coins don't directly compete with deposits, and the U.S. government might be trying to prevent stable coins from disrupting traditional deposit-based banking.
• 😀 Bitcoin benefits from the rise of stable coins, as their growth pushes more people into digital currency adoption, making Bitcoin more integrated into the digital finance world.
• 😀 Tether's minting and its presence in the Bitcoin ecosystem are crucial indicators of new dollar flows into the digital currency space, acting as an immediate source of capital for Bitcoin.
• 😀 The emergence of Bitcoin as a world reserve asset is driven by the failure of the dollar system's stability, and Bitcoin’s growth continues due to the contrast with fiat money.

Q & A

Why are foreign countries decreasing their demand for US treasuries?

Foreign countries are decreasing their demand for US treasuries due to capital losses from past purchases made at low interest rates (1-2%), while current yields are higher (around 4%). Additionally, concerns about the growing US debt, inflation, and the overall fiscal situation contribute to the decline in demand.

How has the US government's fiscal situation impacted foreign demand for treasuries?

The growing US debt and structural inflation (which has risen since the pandemic) have made treasuries less attractive to foreign investors. As a result, foreign demand for US treasuries is declining, although they are still buying other forms of US dollar assets.

Why is the stability of the US Treasury asset class so important?

The stability of US Treasuries is crucial because they are considered a reliable, low-risk asset. Despite some volatility in the market, the overall stability of Treasuries supports the broader financial system, and their price has remained relatively flat due to the continued demand from US banks and other investors.

What is the Genius Act and how does it relate to Tether?

The Genius Act is a legislative proposal that may serve as a political response to Tether's emergence as a global reserve asset. The act reflects concerns about Tether’s growing influence in the global financial system, particularly as it buys up US treasuries and becomes a significant player in the dollar-based system.

How is Tether becoming a world reserve asset?

Tether is becoming a world reserve asset due to its digital nature and its connection to the US dollar system via treasuries. Although not an official reserve currency, Tether is increasingly being seen as an alternative form of dollar, especially in the offshore dollar system, and it is gaining traction as a reserve asset due to its accessibility and liquidity.

What role does Tether play in the US Treasury market?

Tether has become one of the largest buyers of US treasuries, with its purchases reflecting the demand for stable, dollar-linked assets outside traditional financial systems. While Tether’s involvement in treasuries can increase their demand, it also presents a challenge to US financial institutions as they lack control over Tether’s activities.

What is the potential impact of stablecoins like Tether on the global financial system?

Stablecoins like Tether can reshape the global financial system by providing a new way to hold and transfer dollars in a non-deposit environment. They could influence how dollars are stored and utilized, potentially leading to a shift in the hierarchy of money types, such as deposits, treasury bills, and stablecoins.

How could the Genius Act affect the financial system and stablecoins?

The Genius Act could regulate stablecoins like Tether to ensure they do not compete with traditional deposit systems or undermine the stability of the US financial system. This regulation may create a more structured environment for stablecoins but could also limit their potential to disrupt financial markets.

How might the emergence of Tether and other stablecoins affect Bitcoin?

The rise of Tether and stablecoins will likely benefit Bitcoin by facilitating greater adoption of digital currencies. As more people use stablecoins, it will help expand the digital currency ecosystem, thereby increasing demand and recognition for Bitcoin as an alternative store of value and reserve asset.

Why is it important to track stablecoin inflows, especially Tether?

Tracking stablecoin inflows, particularly Tether, is important because it indicates the influx of new dollars into the digital ecosystem, directly impacting Bitcoin's liquidity and market dynamics. Tether serves as a more immediate source of funding for Bitcoin compared to traditional US dollar assets like M2 or Treasury bills.