KEY POINTS
- The report said stablecoins are a form of 'private currency' and don't meet NQA requirements
- The report also said stablecoins will likely need to be replaced with CBDCs as was the case with 'wildcat' currencies
- It also highlighted that the collapse of a stablecoin giant such as Tether will result in a fire sale of short-dated T-bills
- The Treasury called for stablecoins to be regulated in the same way as narrow banks and money market funds
The U.S. Treasury Department has released a report on the growth of the digital asset industry, particularly the stablecoin market. However, the Treasury said stablecoins, particularly those issued by private companies, will be replaced by central bank digital currencies (CBDCs).
The report suggested that CBDCs would be more secure and stable than private stablecoins like Tether.
In its Office of Debt Management Fiscal Year 2024 Q4 Report released Wednesday, the Treasury noted there has been a "modest increase in demand for short-dated Treasuries" due to stablecoins.
Key Highlights of Treasury's Views on Stablecoins
The report discussed several aspects of blockchain technology, digital assets, and tokenization, but there was a focus on stablecoins, digital assets usually pegged to fiat to maintain stability.
- A major role in cryptocurrency markets – The report noted stablecoins "play an integral role intermediating transactions in digital asset markets, with more than 80% of all crypto transactions utilizing a stablecoin at one point in a transaction."
- Huge investments in Treasuries – It also emphasized that a huge portion of the stablecoin collateral "is directly invested in Treasuries," with investments estimated to have reached $120 billion.
- A "private currency" – The report called stablecoins "private" forms of currencies, adding that historical data shows such currencies do not meet "NQA (No Questions Asked) requirements" and thus can lead to "financial instability and as such is highly undesirable."
- A scenario similar to "wildcat" currencies – The report went on to note that just as how privately-used "wildcat" currencies were replaced by government-backed central currencies back in the late 1800s, CBDCs "will likely need to replace stablecoins" as the primary form of digital asset that underpins tokenized transactions.
- Hinting on a stablecoin giant's fall – According to the Treasury report, there has been an apparent run risk in the digital asset in recent years, "and a collapse of a major stablecoin like Tether (USDT) could lead to a fire sale of short-dated Treasuries."
- Call for stablecoin regulation – The Treasury then called for stablecoins to be regulated just as narrow banks or money market funds "to prevent contagion of stress in stablecoin markets to broader financial markets and the Treasury market."
- A reminder of Terra's collapse – Finally, the report pointed to the shocking collapse of the Terra-Luna ecosystem in 2022 that wiped out billions from the crypto market overnight, saying that the said incident raised "concerns over unregulated algorithmic stablecoins with inadequate collateralization."
Embattled Tether Dominates Stablecoin Realm
The Treasury's serious tone in its report that put a lot of attention on stablecoins comes as Tether, the issuer of the world's largest stablecoin by market value, is under fire following a story by The Wall Street Journal alleging that the company is being investigated by the U.S. Justice Department for possible violations of anti-money laundering and sanctions laws. The company has since denied it is at the center of a DOJ probe.
Tether was also the subject of a Times Square billboard ad that accused the stablecoin titan of thriving "in the shadows, refusing to be audited and constantly dodging fraud investigations."
Despite the recent issues Tether faces, the stablecoin market continues to grow. As of late Wednesday, the market value exceeded $177.2 billion. USDT remains on top of the ranks ($120.4 billion), followed by USDC ($35 billion), and USDS ($5.6 billion).
