The US Department of the Treasury has released a major report! Be cautious in using Stable Coin, CBDC is the future

The impact of stablecoin on the US Treasury market has triggered follow

The US Department of the Treasury recently released a 132-page report that analyzes the impact of digital assets such as BTC and stablecoins on the broader financial environment. The report points out that with the rise of stablecoins, there has been an increase in demand for short-term US government bonds.

The Ministry of Finance said, "The growth of stablecoins has led to a moderate increase in demand for short-term government bonds." Although the digital asset market is still relatively small compared to traditional assets, it has grown significantly in recent years.

Source: US Department of the Treasury With the rise of stablecoins, there has been an increased demand for short-term US Treasury bonds.

The report specifically mentions that the world's largest Stable Coin Tether holds a large amount of US Treasury bonds, with the amount of bonds it holds even exceeding those of countries such as the United Arab Emirates, Australia, and Spain. According to the Treasury's estimate, there are currently about $120 billion in Stable Coin collateral assets invested in US Treasury bonds, with Tether accounting for nearly $81 billion. Stable Coin plays a key role in the digital asset ecosystem, with about 80% of cryptocurrency transactions involving Stable Coin.

Stablecoin hides risks and needs stronger regulation

However, the Ministry of Finance is concerned about the rapid growth of Stable Coins, especially those privately issued Stable Coins that lack strict regulation. The report warns that Stable Coins may face 'depeg' risks, meaning that they may temporarily lose their peg to the US dollar during cryptocurrency market fluctuations. Historical events such as the collapse of TerraUSD and occasional depegging of Tether have highlighted the potential instability of the Stable Coin market.

Image source: US Treasury Stablecoin has previously faced depeg issues, causing chaos in the financial market.

The Ministry of Finance is concerned that if a major Stable Coin such as Tether collapses, it may lead to a massive dumping of US Treasury bonds it holds, causing a 'fire-sale dumping' and disrupting the broader bond market at a critical moment. The report suggests that the regulation of Stable Coins should be analogous to narrow banks or money market funds, ensuring that they maintain strong Collateral, primarily short-term bonds, to avoid Liquidity tightening.

Image source: US Department of Treasury. The report suggests that the regulation of stablecoins should be analogous to narrow banks or coin market funds to avoid liquidity tightening.

tokenization brings efficiency and transparency, but also requires caution

The report also emphasized the potential impact of tokenization on the government bond market. Tokenization refers to the process of representing assets in a digital way on-chain. The Ministry of Finance believes that tokenization is expected to improve transaction efficiency through real-time settlement (atomic settlement), reduce the risks of settlement latency, such as counterparty default and financial backlog. In addition, tokenization can expand the investor base and promote market stability by allowing retail investors and international participants with limited funds to have fractional ownership of government bonds.

Image source: US Department of the Treasury tokenization can bring advantages

However, the Ministry of Finance also reminds that although tokenization brings efficiency and transparency, it needs to be promoted cautiously to ensure that it does not trigger new financial risks. The report points out that regulatory agencies need to closely monitor the tokenization process to ensure that it provides investors with broader participation opportunities without compromising market integrity.

Image source: US Department of the Treasury risks and challenges of tokenization

The Ministry of Finance proposes to promote CBDC to replace private stablecoins.

Most notably, the Ministry of Finance suggests in the report that Central Bank Digital Currency (CBDC) supported by the government should ultimately replace private issuance of Stablecoin. The report states: "Similar to how government-backed central coin replaced privately issued 'wildcat' coins in the late 19th century, Central Bank Digital Currency (CBDC) may need to replace Stablecoin as the primary form of digital currency supporting tokenized transactions."

The Ministry of Finance emphasizes that the future of Stablecoin largely depends on regulatory and policy decisions in the coming years. Proof of History, the failure to meet regulatory requirements for 'private coin' may lead to financial instability, which is extremely undesirable. In order to avoid potential market risks, the government should consider intervening by issuing CBDC to replace private Stablecoins.

Source: US Department of the Treasury. The report suggests that the government should consider intervening and replacing private stablecoins with the issuance of CBDC.

However, CBDC has increasingly become a controversial focal point in American politics. Some Republican lawmakers openly oppose the development of CBDC, viewing it as "Big Brother's digital dollar." Former President Trump also held a critical attitude towards CBDC during his re-election campaign. Nevertheless, Trump's Cryptocurrency project World Liberty Financial plans to issuance its own Stable Coin, indicating that private Stable Coins still have their supporters.

Industry Perspectives and Future Outlook

Despite warnings from the Ministry of Finance about the risks of stablecoins, some in the industry remain optimistic about their prospects. Jeremy Allaire, CEO of Circle, recently predicted that stablecoins will become an important part of the global financial system, not just in the US Treasury market.

He believes that with technological advancement, Stable Coins are expected to account for 5% to 10% of the global 100 trillion Money Supply in the next ten years, indicating that the market size of Stable Coins could reach 10 trillion dollars.

However, the Ministry of Finance is cautious about this and emphasizes the need to create and develop Stable Coin products correctly under appropriate regulatory guidance. The report emphasizes that without strict regulation, Stable Coin may become a destructive force in the government bond market, especially in the event of sudden changes in investor sentiment and large-scale redemptions.

Overall, the Ministry of Finance's report reflects the government's complex attitude towards the digital asset market. On the one hand, it recognizes the potential benefits brought by tokenization and Stable Coin, such as improving efficiency, expanding investor participation, and enhancing market transparency; on the other hand, it also remains vigilant about possible financial risks and advocates ensuring market stability through prudent regulation and the advancement of CBDC.

Further Reading Global Central Bank follow! BTC has high potential, could it become a new global reserve asset? TradFi reshuffle? Stable Coin outbreak shakes the market, how will it reshape the payment industry? Refuting the ECB report! Experts: BTC potential is underestimated, CBDC is not the only way out