A Short Take.
First and foremost, the U.S. Treasury is likely to need to borrow approximately $15 trillion over the next decade. As incredible as that seems, the U.S. Treasury really cares about the price of that debt, and therefore, since they are the seller, they need to attract as many buyers as possible to keep the cost of that debt as low as possible. Basic supply and demand at work. Reliable treasury bond buyers are pulling back, primarily China and, to a certain degree, Japan.
The Genius Act permits private entities to issue their own stablecoins, provided they are fully backed by U.S. treasuries. That will open up a new set of investors for the U.S. Treasury as it issues its required bonds. On the one hand, it’s an interesting solution because the Treasury can access an expanding market that exists outside the banking system.
Stablecoins and Shadow Banking
The Genius Act would enable the issuance of stablecoins worldwide and permit corporations to issue their own digital coins. That means more Treasuries and US dollars will be tied up in what is essentially a shadow banking system outside of the direct control of the Federal Reserve and the Treasury.
That’s interesting.
First, stablecoins enable non-US-based investors without easy access to dollar holdings to acquire dollar assets and US debt. With stablecoins, investors in emerging markets who want to move their holdings from local currency into US dollars can do so much more easily. Of course, if that money comes in, it can also go out. There is a reasonable risk that an external run on US Treasuries would be easier since individual investors outside the United States would hold a greater percentage of US debt.
Within the United States itself, the Genius Act would allow nonbanking corporations to create their own forms of currency. Amazon and Walmart signaled last month that they plan to enter the stablecoin market with their own coins. These new coins will be exchanged between companies in transactions that don’t involve the traditional banking sector.
That’s fascinating.
The movement of a significant degree of money outside the regulated banking system would create an oversight problem. Still, it does provide significant liquidity for those entities and is also an issue for smaller banks that will not be able to participate. The treasury needs to issue a substantial amount of debt without triggering an increase in rates. This may be an impossible task without the Genius Act because traditional investors would be hard-pressed to absorb this new debt.
The Innovator’s Dilemma
The Act enables more capital flows outside US borders and shadow banking within the US. The unknown is how money center banks, such as J.P. Morgan, Bank of America, and Wells Fargo, will respond to this. The intercorporate movement of funds driven by stablecoins will obviate some of their banking services.
Private entities will “create new money,” which was exclusively the purview of the money center banks. On top of that, international money flows will now be digitally dominated. It is the ultimate innovator’s dilemma because unless they cannibalize some of their traditional business, that business will be taken away.
It’s an interesting set of circumstances, and we don’t quite understand the full impact. But, expect much more international capital flows in US dollars, and much more significant shadow banking among large corporate entities that are US-based, doing business with each other, as well as internationally.
