Author: Paul D. Ryan, former Speaker of the House of Representatives in the United States, member of the Paradigm Policy Committee
America’s economic and social experiment is at a crucial crossroads, particularly evident in the national debt. The country is heading towards a predictable but avoidable debt crisis. Without action, the economy will stagnate, leaving the government’s commitments to healthcare and retirement security unfulfilled. Even more concerning is the risk posed by cuts to defense spending.
As the fiscal challenges become increasingly apparent and viable solutions remain out of reach, the crisis may begin with failed government debt auctions, forcing significant budget adjustments. As the economy contracts, the dollar will face significant credit shocks, further jeopardizing economic growth prospects. The obvious answer is to address the root causes of these issues. Welfare programs are driving factors of debt that require reform, but politicians lack the courage to do what needs to be done. Consequently, the nation is on a dangerous path. What can we do?
Consider stablecoins seriously. According to data from the US Treasury and the cryptocurrency analysis website DeFiLlama, dollar-backed stablecoins are becoming significant net buyers of US government debt. If we consider the issuer of fiat-backed stablecoins as a country, it ranks just below the top 10 holders of US Treasury bonds – smaller than Hong Kong, but larger than Saudi Arabia. If this industry continues to grow, stablecoins could become one of the largest buyers of US government debt.
The emergence of stablecoins as a mechanism to promote the dollar is timely. The dollar’s status as the primary international reserve currency has greatly benefited the United States. Its advantages include providing cheap and reliable financing for fiscal expenditures and exerting significant influence on the global financial system. Due to the dollar’s dominant position, most financial activities ultimately flow through US banks. As the global economy becomes more digitalized and multipolar, the dollar’s dominance is increasingly under threat.
China understands what is happening. Beijing’s financial authorities have made digital currency a cornerstone of the country’s international development strategy and diplomatic policy. The Chinese government is leveraging investments in physical and digital infrastructure in emerging markets, along with financial engineering, to embed the Renminbi in a network it can control to exert influence. The US cannot ignore its largest international competitor tapping into the potential demand for secure and convenient digital currencies. The framework for understanding how the dollar gains power needs to be updated as the world changes.
An example illustrates the drivers of the dollar’s dominance. Suppose a Japanese company sells products or services to customers in Wisconsin. How does the company handle the dollars it receives? Since the early 1970s, the company could invest in the vast and liquid US Treasury market. The most attractive aspect is that US Treasuries are backed by the world’s most dynamic economy. After all, US government debt is a claim on future output of the US economy.
Apart from the issue of growing US government debt, Uncle Sam’s ability to consistently sell debt at low rates in international markets demonstrates an important fact: the demand for dollars from other countries is insatiable. However, signs indicate that this situation may be changing, and changing rapidly.
Countries like China and Saudi Arabia, historically large buyers of US debt, are gradually exiting the market. They are increasingly seeking payment settlement methods outside the dollar system. Meanwhile, the US government faces an increasing risk of failed debt auctions, a terrifying future that would disrupt markets and severely damage America’s reputation.
If other countries successfully enhance the influence of their own currencies while selling off US Treasury bonds, the US will need to find new ways to boost the attractiveness of the dollar. Dollar-backed stablecoins are one of the answers.
Most stablecoin holders come from economically weaker and underdeveloped countries, whose institutions are seeking “higher quality” funding. As described by former chairman of the Commodity Futures Trading Commission, Timothy G. Massad, in a recent research paper at the Brookings Institution, stablecoins are similar to Eurodollars, offshore dollar-denominated liabilities that helped drive dollar dominance during the Cold War.
Promoting dollar-backed stablecoins will follow a familiar path and bring significant short-term benefits. This will sustainably increase demand for US debt, reduce the risk of failed debt auctions and debt crises. Unlike China’s digital financial infrastructure, dollar-backed stablecoins issued on public, permissionless blockchains embody America’s longstanding values of freedom and openness.
A sound, predictable regulatory framework for stablecoins has bipartisan support in Congress and will help significantly expand the use of digital dollars at critical moments. In an election year, considering all the impending political ugliness, we need a victory like this to solidify confidence in the financial markets.
