This Time is Different (Volume 246.5.B)Do we really not see the crisis ahead with Stablecoin operators owning a cartoonish amount of U.S. Treasuries?
Good morning: There’s something wonderfully deceptive about financial engineering. It always sounds brilliant at the start. As a forensic accountant, it’s not hard to dig into a 10-K and spot the game: how companies structure themselves, who benefits, and whether they care about shareholder value or just the illusion of it. But at the federal level? It’s national. Institutionalized. Insider benefits on steroids, politically aligned incentives, and moral hazard baked into the foundation. Last night, I went down the rabbit hole on the GENIUS Act. And I came out convinced of this… We’re trying to hardwire systemic fragility into the U.S. financial system and call it innovation. This Is a WHOLE New Ball Game The U.S. Senate passed what was supposed to be a landmark in crypto regulation, requiring stablecoin issuers to back every digital dollar with something “safe.” (The House needs to proceed with it now) This would be actual U.S. dollars or short-term Treasury bills. Under Section 4(a)(1)(A)(iii) of the GENIUS Act, permitted stablecoin issuers must hold T-bills with 93-day or shorter maturities. One-to-one. Clean, conservative, and risk-free. I hope that we don’t experience a power outage in the next few years because this system relies on power and inertia. This is How Our Financial System Works NowWhat sounded like a fix to the chaos of algorithmic stablecoins has done something remarkable. It would wire a $200 billion digital panic switch directly into the most systemically important financial market on Earth. As the GENIUS Act moves into the House, major stablecoin issuers, well… Tether and Circle, have become two of the largest non-government holders of short-term U.S. debt. Tether now holds more Treasuries than Germany. Add Circle’s reserves, and they’re starting to surpass the holdings of sovereign funds. These entities are not banks. They do not hold capital buffers. The FDIC does not insure them. They cannot borrow from the Federal Reserve. They are, in every meaningful sense, shadow banks. They are unregulated financial institutions offering quasi-money instruments backed by government debt. In trying to “stabilize” crypto, we would be turning digital dollar issuers into major players in the plumbing of the global financial system. There are zero safeguards compared to traditional banks. So, what are the risks? That’s the easy part… What Happens When Redemptions StartAre our regulators thinking forward? Imagine something cracks, perhaps a hack, a regulatory enforcement action, or just the usual crypto chaos. Or just the electricity goes out… Here’s what will happen… Panic spreads. Trust vanishes. That’s how banking works. Always has… 600+ years of it… dating back to Italy… What will happen when this goes wrong? Users will no longer want digital dollars. They will want real ones. Instantly. But the issuers don’t hold cash. And we’re still on a fractional reserve system, so there will likely be a Silicon Valley Bank-style run on the dollar… But the stablecoin operators hold Treasuries. So they sell. And not gradually. Not in an orderly unwind. They sell immediately and in size. If multiple issuers are forced to unload billions in Treasuries at once, they will flood the market with the very instruments the government relies on for stable funding. That’s not a hypothetical. That’s what happened in March 2020. During the COVID-19 pandemic, a global dash for cash triggered a massive firesale of Treasuries. Between March 9 and March 18, 2020, Treasury yields spiked at the exact moment equity markets were collapsing. That’s not supposed to happen. Treasuries are supposed to be a safe haven. But liquidity vanished. Bid-ask spreads exploded. Dealers pulled back. Even the deepest markets for U.S. government debt froze. It took over $1 trillion in emergency purchases by the Federal Reserve to restore the system's basic functioning. And those sales weren’t triggered by digital assets. They came from traditional actors… hedge funds, foreign governments, and bond ETFs. Now add crypto to the mix. Today, stablecoins hold more Treasury debt than most central banks. They operate with zero regulatory capital and no official backstop. A coordinated redemption could force a fire sale on a scale the system has already proven it cannot handle. Why This Doesn’t Just Happen OnceHere’s how the chain reaction works:
This feedback loop is not speculative. It mirrors the mechanics of every money-market fund crisis in the last 30 years. BIS research shows that stablecoin outflows raise Treasury yields two to three times faster than inflows reduce them. A $3.5 billion redemption can move yields by up to 8 basis points. Now scale that up to the $204 billion that stablecoins currently hold. The math is chilling. If this spiral begins, the Federal Reserve won’t be saving stablecoins. It will be saving the Treasury market. Again. It will open liquidity facilities. It will buy T-bills in size. It will backstop the system, not to rescue crypto, but to protect the U.S. government’s ability to fund itself and prevent Treasury dysfunction from seizing the rest of the financial markets. The headlines will scream about a “crypto bailout.” However, what will happen is the Fed stepping in to clean up a mess created by allowing unregulated digital cash providers to become critical players in sovereign debt markets. This has basically been every crisis we’ve had since the late 1990s… This Wasn’t an AccidentSome might call this an unintended consequence. But that’s not quite true. The Bank for International Settlements (BIS) has been sounding the alarm for years, warning that stablecoins, especially those backed by safe assets, pose tail risks of fire sales and procyclical deleveraging. (It’s always the safe assets that cause a crisis.) SEC officials and Fed researchers have expressed similar concerns. On March 7, Treasury Secretary Scott Bessent even called stablecoins strategic infrastructure to preserve dollar dominance, a polite way of saying that crypto is now a vehicle for U.S. debt monetization. We didn’t just allow this to happen. We designed it. We legitimized shadow banks. We hardwired them into the most sensitive corner of public finance. And we cheered as they pumped demand for Treasuries without ever asking what would happen when that demand reverses. The reserves are already in the system. The plumbing is already built. The scale is already systemic. The only thing missing is the spark. When it comes to the first major stablecoin cracks and redemptions cascade, we will learn again that safe assets are only safe when no one is selling. This is a sovereign debt story. It’s a Fed story. And it’s a warning. Don’t shoot the messenger. I can see this one from two to three years out… And it’s a doozy… It's a good thing the money printer is already warmed up. Follow our signal… when it breaks… it’s gonna break… Till then… We just keep dancing…... Continue reading this post for free in the Substack app
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