US Treasury Supports CBDC to Replace Stablecoins: Here’s Why?

The US Treasury Department report highlights that the stablecoin market is explosively acquiring too many T-bills, urging its replacement with a CBDC. 

The Wednesday, Oct. 30 report by the Treasury reveals concerns regarding the surge in privately issued stablecoins. The report supports their eventual replacement by the state central bank digital currency (CBDC). 

The report contextualizes the late-1800s scenario to mirror when privately issued wildcat currencies were phased out and replaced by government-backed central currencies.  

The Office of Debt Management report indicates that Central Bank Digital Currencies (CBDC) potentially will need to replace the stablecoins. CBDC would become the primary form of cryptocurrency that underpins tokenized transactions. 

Why Is the Treasury Opposed to Stablecoins?

The 132-page report allocates substantial coverage to stablecoins with a particular focus on the huge US Treasuries (T-bills) acquired by the stablecoin issuers – Circle and Tether. The report estimates that nearly $120 billion worth of treasuries is now acquired as collateral to the yield-bearing stablecoin. 

The report indicates that USDT stablecoin issuer Tether has acquired the majority of the T-bills, nearly $81 billion. The huge sum arises from the fact that Tether is behind the issuance of the global largest stablecoin with a market capitalization of $120.497 billion. 

The Treasury seems unconvinced by the perspective that the dollar-backed stablecoins boost the US dollar’s strength by fueling demand for the T-bills. The report decries the common occurrence witnessed as stablecoins depegging. Also, the stablecoins have collapsed entirely, a scenario the Treasury considers could translate to a disaster if they integrate with T-bills. 

Stablecoins are an essential component of the digital asset industry. The capability to hold a steady value enables crypto traders to enter and exit their trade positions without contact with fiat currency. 

Stablecoins function similarly to dollar equivalents, whereas fiat is hard to come by. The Treasury indicates that over 80% of the digital assets transactions feature stablecoin. As such, Tether’s USDT is the widely traded crypto, resulting in a $39 billion volume in the past 24 hours. 

The Treasury expressed concerns about the strengthening interconnectivity of traditional financial markets and stablecoin via T-bills. 

The report indicates that the collapse of a stablecoin of Tether’s magnitude would cause a fire-sale of the Treasuries holdings. The report acknowledges that while stablecoins represent a marginal portion of the T-bills segment, their explosive growth could expose the entire market to fire sales. 

Criticism Towards CBDC

The report suggests the US government should step up in replacing the privately-issued stablecoins with the Fed-issued CBDC. However, the CBDC has become controversial in the US political agenda. Leading Republican lawmakers have vowed to oppose such development, profiling the government-issued stablecoin as the ‘Big Brother’s digital dollar.’

Among the vocal CBDC critics is the Grand Old Party (GOP) nominee Donald Trump while seeking his re-election. His criticism emerges as Trump’s crypto initiative, World Liberty Financial, seeks entry into the stablecoin, as earlier revealed this week. 

For months, Trump has profiled private stablecoins as an effective channel for furthering T-bills acquisition. The process bolsters the US dollar as the global currency. 

The plan by the World Liberty team appears to conflict with the recommendations of the US Treasury to replace the privately issued stablecoins. It creates an interesting scenario for Trump to secure victory in the Nov. 5 presidential election. 

Besides the Treasury report, several lawmakers have expressed intention to vote on legislation on stablecoins in 2025. Such can create a remarkable scenario if Trump is re-elected and controls the White House as Congress determines the legality of the product his business partners seek to offer. 

Stablecoins will offer World Liberty access to immense profits despite the potential for legal and regulatory challenges. Just like banks, stablecoin issuers earn revenue from reinvesting the customer deposits within yield-bearing products such as Treasury bills.  For instance, Tether realized $5.2B profit by mid-2024 from the USDT product.