it's official Regulators are going after stable coins the US Treasury Department is reportedly considering sanctioning usdt issuer tether in a move which could send the crypto industry back to the Dark Ages there's just one problem and that's that stable coin issuers like tether hold hundreds of billions of dollars in US Government debt if forced to liquidate this could lead to turmoil in the markets and that's why today we're going to summarize a report that reveals how us Regulators are thinking about these too big to fail crypto companies and whether they'll try and replace them with
dystopian cbdcs watch until the end to find out what it could mean for the crypto Market the report we'll be summarizing today is technically a presentation that was given to US Treasury Department officials by the treasury borrowing advisory committee or teack back in October the summary of the presentation is a hefty 132 pages but we'll be focusing on the part that's about crypto obviously before we dig in though a bit of a background is necessary as most of you will know stable coins are digital crypto tokens that are pegged to Fiat currencies typically the US
dollar these stablecoin tokens exist on Smart contract cryptos like ethereum and are used for everything from Trading to def5 by Magic what you may not know is that stable coins are backed mostly by US Government debt AKA us bonds and this means that when you buy a stable coin us bonds are being bought behind the scenes and this is for several reasons mainly because bonds earn a yield for the holder and they're also very liquid in plain English stable coin issuers back their stable coins with us bonds because they can earn an interest rate on
those Reserves and since these stable coin reserves are in the tens or hundreds of billions this means that stable coin issuers can earn billions of dollars in what is basically passive income as for the liquidity this simply means that us bonds can be bought and sold in large amounts without moving the price and this makes it possible for stable coin issuer like Circle to say sell 00 Million worth of us bonds for $100 million to give to someone who's cashing out of a usdc stable coin if Circle was to try this with a less liquid
asset like say small cap stocks it would not be able to sell $100 million worth of that stock for $100 million and that's just because the sell pressure would cause the price of that stock to go down leaving circle with say $95 million instead of $100 million I'll quickly note that Circle does not back usdc with stocks and that it also keeps a very large cash pile handy to process withdrawals in a timely manner uh you can see our recent interview with Jeremy Alia the CEO of circle overun our more coin Bure channel uh the
link is right over here now this is where things get interesting governments don't like stable coins because they're essentially a form of money that they can't control kind of like crypto of course the difference is that stable coins are centrally controlled by their issuers which can seize or freeze your Holdings unlike an actual crypto in any case the exact reason why governments don't like stable coins depends on the government in question governments in countries with their own National currencies don't like stable coins because almost all are pegged to the US dollar which effectively creates competition
for non-usd currencies in the case of the US government it doesn't like stable coins because they theoretically pose a systemic risk to the financial system imagine a scenario where a stable coin is backed by $1 trillion of us bonds and that's something happened that caused its holders to redeem the tokens for us do this means that the stable coin issuer would have to sell hundreds of billions of dollars of us Bonds in a very short period of time the US bond market is liquid but it's not that liquid this selling would cause the price of
US bonds to fall and that could cause the Financial system itself to implode and that's because us bonds are the main form of collateral within the financial system in other words most investors use us bonds as collateral to borrow more money if us bond prices were to fall investors would borrow less or even default causing a contraction in money supply and crashing well everything if you think this sounds like a Ponzi scheme you're not alone loan a financial system that's based on debt all the way down to its very Foundation is inherently unstable and requires
ever more money printing to keep it from falling over and this is why crypto was created and why it will eventually replace the existing Financial system and by the way if you enjoying this video so far why don't you smash that like button to let us know and subscribe to the channel and ping the notification Bell as well so you don't miss our next video hello hello it's me guys cousin Barry I'm very very sorry to be interrupting this no doubt fascinating video but I want to tell you about the coin Bureau deals page so
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all bleeding day and night to get you these promos and discounts so you're welcome thank you very much go and have a look Pronto I have to come and have a word right now with that bit of background in mind we can dig into the summary of the tback presentation the section about crypto is titled quote digital assets and the treasury market uh for context bonds are also referred to as treasuries uh we'll leave a link to the report in the description page 107 if you need it the presenters I.E the authors note that crypto
adoption has been growing but that so far it's been limited to investment purposes what's fascinating is that the authors specify that cryptocurrency growth quote thus far does not seem to have cannibalized demand for treasuries perhaps we reading a bit too much into it uh but it sounds like the US government is concerned that cryptocurrency could compete with us bonds someday H for reference financial institutions once held gold as their main reserves so not us bonds as digital gold Bitcoin could theoretically play that role too case in point the authors themselves acknowledge that Bitcoin is perceived
to be digital gold this is significant because it wasn't that long ago that the US government dismissed BTC as a speculative asset now we have US government officials referring to BTC as digital gold or be it a speculative digital gold well we'll take what we can get but consider that even this would have been Unthinkable just a few years ago anyways another fascinating thing is that the authors see the crypto industry has fallen into two buckets uh BTC and speculative altcoins and altcoins with actual utility including stable coins they point to the exponential growth of
the total market cap of stable coins and say it's for a number of reasons the first is offshore dollar Holdings people will hold stable coins as a de facto US dollar bank account the second is of course defi wherein stable coins are often borrowed against cryptos like eth to speculate on Al coins and the third is the most significant and that's trading with 80% of all crypto trades involving a stable coin next the authors point out what I mentioned earlier the growth of stable coins has resulted in a quote modest increase in demand for us
treasuries which you'll recall are synonymous to us bonds the authors estimate that stable coin issuers hold $120 billion in US bonds which is a lot lo and behold the authors underscore the fact that if stable coins continue growing they could pose a risk to the financial system and they also reveal that the medium and long-term growth of stable coins will depend on stable coin regulations which will quote determine the fate of stable coins yikes oddly enough the authors don't seem to take issue with the even more exponential growth of tokenized us bonds which they refer
to as quote onchain Safe Haven assets and this suggests that they aren't opposed to stable coins per se they're just opposed to the fact that they're privately controlled and this ties perfectly into the next slide wherein the authors tacitly argue that Central Bank digital currencies or cbdcs are digital currencies not stable coins which they see as analogist to money market funds to be fair stable coins are similar to money market funds but they're not the same in fact stable coins are more similar to cbdcs than they are to money market funds both are centrally controlled
meaning that they can be frozen or seized by the issuer both can be surveilled by the issuer and both are programmable meaning that they can be designed to do things like uh limit your meat purchases but alas that level of control it's not enough if you've watched our video about the financial system the bank for international settlements en Visions you'll know that it involves tokenizing everything you own on a private and permissioned blockchain controlled by the government you'll own nothing and be happy the authors seem to be a fan of this idea because they showcase
how everything from housing to Art could be tokenized it's safe to assume this would not be done on a public and permissionless blockchain and that's just because the authors put crypto into a completely different category and that's digital assets the authors go on to detail the technical aspects of tokenization including how regulation and compliance can be embedded into every single token they speak at length about how incredible this would be specifying that it would be quote independent of cryptocurrencies like Bitcoin not surprisingly they call for a single unified blockchain that would post all these tokenized
assets operated in part by central banks what is surprising is that they say the quiet part out loud quote cbdcs will likely need to replace stable coins as the primary form of digital currency and this begs the question of how exactly this would be done now we suspect the answer would involve a financial crisis that's triggered by a run on a stable coin issuer this would give the US Government enough justification to not only crack down on stable coins but also roll out cbdcs and not just in the US regardless the authors then showcase a
few projects that are tokenized in US bonds the first group involves asset managers like Black Rock which have been tokenizing us Bonds on Smart contract cryptos like ethereum and the second group involves Mega Banks like JP Morgan doing the same on their own private permissioned ledgers the third group is one that you may not have heard about in short the depository trust and Clearing Corporation or dtcc is coordinating tokenized treasury Pilots with various financial institutions and for those unaware the dtcc is kind of like the backend of the traditional Financial system in the US after
looking at the benefits of tokenizing us bonds the authors then do a deep dive into the associated risks and a few stand out the first is the Privacy risk which only applies to tokenized treasuries on public and permissionless blockchains FYI crypto blockchains they're transparent meaning you can see all of the transactions that have taken place on them and this is why we're bullish on crypto privacy as a niche when crypto adoption goes mainstream it will quickly become clear that privacy Solutions are required particularly for wealthy individuals and large institutions for example central banks won't want
everyone to see what cryptos they're holding or how much anyhow the second risk of tokenizing us bonds is leverage risk which would involve using tokenized us bonds as collateral to borrow crypto to do things on chain now imagine a scenario where the US Bond backing this tokenized us Bond was also being used as collateral off chain I wouldn't put it past them and this relates to the third risk of tokenized treasuries which is the most important of all and that's stable coin runs quote runs on stable coins have been a common occurrence in recent years
and the collapse of a major stable coin like tether could lead to a fire sale of short dated treasuries translation the scenario that we outlined earlier could in fact lead to instability across the financial system and this is likely the main reason why us Regulators like the treasury Department are reportedly targeting tether if usdt keeps getting bigger then tether could actually become too big to fail and this basically means the US government would be forced to bail out tether if there was a run on usdt the same way it had to bail out the banks
in the 2008 financial crisis and this pertains to the hypothe itical scenario we mentioned earlier where a global financial crisis could be triggered by a stable coin run in the interim though the US government seems to be more focused on the boogeymen of illicit activity which the authors insist has been growing alongside the growth of the crypto market and this may be true in absolute terms but the percentage of crypto transactions related to illicit activity has of course been Fallen whatever the case this crypto myth makes for the perfect segue to the author's next topic
and that's explaining why public and permissionless blockchains should not be used for tokenized treasuries they say a lot that's fully false like crypto not being fast enough and that decentralization creates vulnerabilities in truth the opposite is the case crypto is fast enough and decentralization creates resiliency the only reason the authors mention these things is so that they can justify the real reason they hate crypto blockchains they can't be controlled news flash the government wants to control everything and because crypto can't be controlled many governments have opted to try regulating it out of existence or into
compliance the authors lament the fact that these regulations are fragmented without realizing that other countries have an incentive to embrace crypto due to its various benefits funnily enough the authors themselves acknowledge the benefits that stable coins have brought to the US government near the end of this section of the report or rather the uh presentation they note that stable coin issuers will create structural demand for US Government debt by constantly buying us bonds but in the same breath they warn that the increase in US bonds held by stable coin issuers would increase the potential side
effects of a stable coin run they Ponder the possibility of introducing regulations that would make it harder for stable coin holders to cash out as quickly to mitigate these effects believe it or not but the authors advocate for the continued growth of tokenized treasuries on crypto blockchains purely because they're convinced that everyone would buy them when crypto crashes they also say another quiet part out loud if us bonds are tokenized on crypto chains more people will buy them the authors conclude by reiterating that crypto is small but is growing fast that the growth of tokenized
assets should occur on quote unified blockchains controlled by governments and central banks that cbdcs could and should replace stable coins and that the risk of these Innovations should be mitigated fortunately they say that the size of stable coins and tokenized treasuries is small for now unfortunately this presumably means that the US government knows it can crack down on stable coin issuers with minimal disruptions to the financial system and that the time to do so is running out and this brings me to the big question and that's what this means for the crypto Market the answer
depends on what the treasury Department decides to do about stable coins it turns out that the headlines weren't lying for once the treasury Department wants stable coins out and cbdcs in the thing is that the treasury Department isn't the only party involved and this is where things get interesting yet again if you watched our summary of the binance settlement you'll know we kind of speculated that big players like black rock for example negotiated a deal behind the scenes to minimize crypto Market disruption and this is because black Rock's mission is to well make money and
it knows that there's lots of money to be made in crypto if binance had been completely shut down the way that the US government wanted this would have meant less profit for Black Rock and other asset managers who are involved in crypto if you need more concrete evidence uh look no further than the numerous reports of asset managers like Fidelity lobbying anti-crypto Regulators like the SEC to do proc crypto things like approv prove spot ETFs heck even SEC chairman Gary Gensler himself admitted in testimony that the SEC listens to these big players it stands to
reason that Larry thinkink has the treasury Department on speed dial too especially when you consider how involved asset managers are in US Bond markets and elsewhere and this is where things get even more interesting because usdc issuer circle is backed by Black Rock and black Rock manages usdc reserves and again Black Rock understands very well that a takedown of tether would nuke the crypto Market the same way that a takedown of binance could have done as such it's not far fit to assume that there are similar negotiations behind the scenes to ensure there's a smooth
transition if a Crackdown did happen specifically Black Rock could be trying to find a way to transis the entire crypto industry away from usdt and to usdc in case it wasn't clear enough usdt is used primarily for crypto trading and per the treasury Department's own report 80% of crypto trades happen against stable coins mostly usdt the problem there is that usdt is even more integrated into the infrastructure of the crypto Market than binance was whereas binance is just a hub for for trading and liquidity usdt is the liquidity it is literally the lifeblood of the
crypto market and it reaches into every corner of crypto onchain and offchain attempting to forcefully transision the crypto industry away from usdt would therefore be very disruptive uh you wouldn't be able to do it without breaking something somewhere in the market and if something does break then it could put pressure on the US Bond markets per the treasury Department's own admission and this means the treasury Department and asset managers like Black Rock are stuck between a rock and a hard place if they crack down on a large stable coin issuer like tether it will pressure
the bond markets which will create issues for Janet Yellen and it will crash the crypto markets creating issues for Larry meanwhile tether has been quietly diversifying its business behind the scenes expanding into areas like Bitcoin mining and AI almost as if it knows the big players are trying to figure out how to get rid of usdt as things stand today though uh this is not possible to do and that's very good news for crypto not only that but if the US government or asset managers were to try and manufacture some crisis of confidence in usdt
it would have the same negative effects on them and this means that tether could could very well be too big to fail but let's just say some powerful entities don't care how their actions affect others and some powerful entities want cbdcs rolled out a financial crisis triggered by the collapse of a massive stable coin sometime in the future would be one way to justify such a course of action let's remember that one and that's all for today's video if you learn something new be sure to smash that like button to let us know and if
you want to keep learning consider subscribing to the channel and pinging the notification Bell as well and if you want to help others learn about stable coins then be sure to share this video with them as always thank you very much for watching and I'll see you in the next one this is Nick out [Music]
