Eliza Wong
The recent US Stablecoin Act has mandated that all dollar-denominated stablecoins must be fully backed by US dollars or short-term US Treasury bonds with maturities of less than 93 days. While this appears to strengthen stability, it masks a dangerous reliance on the US debt system that could have global repercussions. Ye Kai (叶开), founder of Huaxia Digital Capital, shared critical insights at the 25th CIFIT Phoenix Network Evening Dialogue in Xiamen, highlighting both the immediate benefits and hidden risks of this framework.
The Mechanism: How Dollar Stablecoins Indirectly Support US Debt
Dollar stablecoins like USDT and USDC have grown into a multi-trillion-dollar market, largely because they offer the promise of price stability tied to the US dollar. However, the new US Stablecoin Act fundamentally changes how these stablecoins are backed. Instead of relying solely on cash reserves, issuers can now hold short-term US Treasury bonds. This shift, while improving yield potential for issuers, effectively turns global stablecoin users into indirect holders of US debt.
The US Debt Recycling Cycle and Its Vulnerabilities
For decades, the US has maintained a cycle of printing dollars, buying global goods, and issuing Treasury bonds to recapture dollar liquidity. With mounting pressure on US debt sustainability, finding new buyers has become critical. By allowing stablecoins to hold Treasuries, the US has decentralized debt ownership from central banks to billions of individual and institutional users worldwide. This may ease issuance pressure in the short term, but as Ye Kai notes, it introduces unprecedented systemic risk.
The Hidden Risk: Instant Collapse Scenarios
One of the most significant dangers of linking stablecoins to Treasuries is the potential for a rapid, large-scale sell-off. Unlike institutional holders, retail users and decentralized entities can move assets within seconds, leading to a liquidity crisis that could overwhelm traditional financial safeguards.
Chain-Based Liquidity and the Threat of Flash Withdrawals
Blockchain technology enables near-instant transactions. In a crisis situation—such as a loss of confidence in US debt or a geopolitical event—users could withdraw en masse from stablecoins, forcing issuers to liquidate Treasury holdings quickly. This would exacerbate selling pressure on bonds, potentially leading to a collapse in both the stablecoin and Treasury markets. The US government and Federal Reserve would have limited ability to intervene in time, given the decentralized and global nature of the holders.
A Chinese Alternative: Commodity-Backed RMB Stablecoins
Ye Kai proposes that China should not seek to replace the dollar but instead build a parallel system based on its manufacturing strength and commodity resources. By backing a digital yuan with physical assets like industrial metals or energy reserves, China could create a stablecoin that derives value from real economic output rather than financialized debt.
Advantages of a Commodity-Backed System
– Reduces exposure to financial market volatility.- Aligns with China’s role as the world’s manufacturing hub.- Provides a hedge against dollar devaluation and US debt instability.- Could gain adoption in emerging markets and bilateral trade agreements.
Gold-Backed Stablecoins: A Neutral Alternative
Gold has long been considered a safe-haven asset, and gold-backed stablecoins offer a compelling middle ground between fiat-backed and algorithmic stablecoins. These instruments are inherently apolitical, easily standardized, and supported by central bank accumulation trends.
Why Gold Could Succeed as a Reserve Asset
Gold is universally recognized, easily auditable, and not tied to any single government. In a period of monetary uncertainty, gold-backed tokens could serve as a neutral medium of exchange, especially in regions affected by currency inflation or sanctions. Ye Kai believes that gold-backed stablecoins could emerge sooner than many expect, given regulatory openness in places like Hong Kong and rising demand for non-dollar payment options.
Global Implications: Currency Sovereignty at Risk
Small and developing nations are particularly vulnerable to dollar stablecoin dominance. As seen in countries like Argentina, hyperinflation can lead citizens to abandon local currency in favor of USDT or other dollar proxies. This effectively erodes monetary sovereignty and limits these countries’ ability to conduct independent monetary policy.
How Nations and Businesses Should Prepare
Ye Kai urges businesses and governments to accelerate their adoption of blockchain-based financial infrastructure. Tokenizing real-world assets, building decentralized finance (DeFi) systems, and exploring non-dollar settlement options will be essential to maintaining economic independence.
Conclusion: Navigating the New Era of Digital Finance
The rise of dollar stablecoins backed by US Treasuries represents both an opportunity and a significant threat. While they provide liquidity and ease of use, their dependence on the US debt cycle introduces fragility into the global financial system. Alternatives like commodity-backed or gold-pegged stablecoins may offer more sustainable paths forward. For investors, businesses, and policymakers, the key takeaway is clear: adapt quickly to digital asset trends or risk being left behind in a rapidly evolving financial landscape. Now is the time to explore blockchain-based solutions and diversify away from overreliance on any single reserve asset.
