(Bloomberg) — They’re becoming the financial world’s strangest bedfellows: supposedly safe securities issued by the U.S. Treasury and the notoriously less safe world of cryptocurrencies.
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Issuers of stablecoins meant to track the dollar one-for-one have become notable players in the Treasury market as they seek the safest and most liquid assets to back the value of their tokens.
For cryptocurrency proponents, it’s a development worth noting as the industry seeks to forge friendlier relations with the U.S. government. Tether Holdings Ltd., issuer of the largest stablecoin, said it could “help support U.S. and global financial stability” as U.S. debt issuance increases and foreign purchases decline. The industry could even “avoid a U.S. debt crisis,” according to Paul Ryan, the former speaker of the House of Representatives who is an adviser to the cryptocurrency company Paradigm, in a June op-ed in The Wall Street Journal.
But as with many other crypto-related topics, there’s some truth to it – and a lot of questionable hype. At least for now.
“Sure, it’s hype,” said Joseph Gagnon, a senior fellow at the Peterson Institute for International Economics who previously worked at the Federal Reserve. For example, the roughly $81 billion in Treasuries held directly by Tether “is not insignificant,” he said. “But it’s just not huge compared to the trillions of dollars in the Treasury market. I don’t see it as a big deal.”
For now, stablecoins are far from the most important in U.S. debt markets, accounting for only about 1% of all Treasury purchases. The $6.19 trillion money market mutual fund sector remains the largest buyer of Treasuries. As of late June, such funds held about $2.4 trillion in government debt, according to Crane Data. And demand for them is likely to increase as new regulatory requirements that take effect in October impose mandatory liquidity fees on some funds during times of financial stress.
There are also traditional finance companies that dwarf the Tethers of the world: Warren Buffett’s Berkshire Hathaway Inc. increased its holdings of Treasuries to $234 billion in the second quarter, nearly triple Tether’s holdings and accounting for about 4% of Treasuries’ purchases. The total market cap of stablecoins is currently about $167 billion, of which Tether accounts for about $117 billion, according to data tracker CoinGecko.
Whether stablecoin issuers will become major whales capable of influencing the Treasury market depends largely on how quickly the cryptocurrency market itself continues to grow, and whether the U.S. Congress ever passes legislation affecting them.
Stablecoins are most commonly used as a proxy for the dollar in cryptocurrency markets. Traders place their assets in these tokens when they want to limit their exposure to volatile cryptocurrency markets, or use them to invest in decentralized finance platforms that lack the on-ramps and off-ramps of fiat currencies.
Remittances and hedging against the weakening of traditional currencies are also popular use cases – and a growing business. There is already significant demand for stablecoins in emerging economies, according to an analysis conducted by the Centre for Economics and Business Research and BVNK between April and June this year. Businesses and consumers in 17 emerging markets were willing to pay an average premium of 4.7% over the standard dollar price to access stablecoins, the CEBR said, with that figure rising to 30% in countries like Argentina. By 2027, the researchers estimate that these countries will pay $25.4 billion in premiums just to access stablecoins.
Demand for government debt in stablecoins could strengthen significantly, according to JPMorgan Chase & Co. strategists led by Teresa Ho, if Congress passes legislation requiring the tokens to be backed at least one-for-one by high-quality liquid assets, or HQLA, a category that includes Treasuries maturing in 90 days or less.
Fixed-income veterans are skeptical, however, about the impact of these purchases on the overall picture. Stablecoin issuers like Tether aren’t going to stop yields from rising because of supply issues and other market forces, according to Lawrence Gillum, chief fixed-income strategist at LPL Financial, who has worked in debt markets for two decades. But Treasury Secretary Janet Yellen should still be grateful for any marginal increase in demand, he added.
“You can get any buyer”
“Given that foreign investors have pulled out, to finance deficits, the Treasury is going to have to find additional buyers,” he said. “And if it turns out that cryptocurrencies are a marginal buyer, then that would be a good thing for Treasury issuance. If you’re Janet Yellen, you’ll take any buyer you can find at this point.”
Tether CEO Paolo Ardoino, for his part, is confident that his company will become an even bigger player in the Treasury space. He believes that the stablecoin market will grow strong enough to make Tether, known as USDT, the largest owner of three-month Treasuries within the next few years, and perhaps the largest owner of all Treasuries within a decade. He expects Tether to eventually be 100% backed by U.S. Treasuries, with only its excess reserves invested in other asset classes.
The fact that Tether has become a player in the U.S. government debt market — and championed as a force to support the hegemony of the U.S. dollar — marks a stark contrast to its early years, when questions swirled around the mysterious digital currency dreamed up by a former child actor on The Mighty Ducks and how exactly the company was backing the stablecoin.
In 2021, Tether, a company incorporated in the British Virgin Islands, reached a settlement with the New York attorney general — without admitting any wrongdoing — over allegations that the company lied about its reserves and concealed losses. That same year, it reached a similar settlement with the Commodity Futures Trading Commission, without admitting or denying the allegations.
But since then, the company has become a client of one of the cornerstones of the Treasury market: Cantor Fitzgerald LP. In 2020, Cantor Fitzgerald CEO Howard Lutnick became interested in cryptocurrency companies, Ardoino said. “So we met and he said, ‘Do you have the money?’ Our answer was yes. And he said, ‘Is it okay if I audit every penny?’”
Cantor Fitzgerald spent about two years conducting due diligence on Tether, according to Ardoino, who described it as “the most thorough due diligence anyone could imagine.”
Not “weird Italians”
“And in the end he thought, ‘Well, these guys who were attacked by the media for a long time and people thought they had no money, they were bad guys, weird Italians. It turns out they have money and they’re actually doing the right thing.’ That’s what got him interested in us,” Ardoino recalls.
Lutnick himself has described the process similarly in public remarks this year, saying in a speech at the Bitcoin 2024 conference last month that Tether “had every penny, but they had it in what I would call pretty god-forsaken places,” including Chinese treasury bills. Cantor Fitzgerald agreed to take Tether on board, he added, on the condition that when those treasury bills and other investments matured, Tether would send the money to the company to buy Treasuries.
“I care about the 300 million wallets that hold Tether because those 300 million wallets fund the debt of the U.S. Treasury,” Lutnick added. “The distribution of USDT to emerging markets is fundamental to supporting our debt in our country, which helps us live in this beautiful way.”
At the same time, persistently high interest rates have made Tether’s pivot to Treasuries a lucrative business that helped the company earn a record $5.2 billion in net income in the first half of this year, according to its latest attestation report. And the relationship with Cantor Fitzgerald, which also gives Tether access to liquidity through the overnight reverse repo market, has helped erase some of the skepticism about the stablecoin.
“This is one of our most impressive and longest-standing Wall Street firms with a great history of being an exceptional player in TradFi,” said Matthew Graham, CEO of cryptocurrency-focused venture capital firm Ryze Labs. “That gives me a lot of confidence.”
To get a real sense of Tether’s true weight in the Treasury market, one only needs to look at the total outstanding debt. Including Treasury bills and bonds, which are coupon-bearing securities with longer maturities than Treasury bills, the U.S. debt stands at $27 trillion. Treasury bills only account for about a fifth of that total. The nonpartisan Congressional Budget Office projects that chronic U.S. deficits will push U.S. debt to about $48 trillion by the end of 2034.
In this context, Tether’s holdings are “not nothing” but also not a game changer in financing deficits, according to Mark Sobel, a former Treasury official who is now president of the U.S. think tank Official Monetary and Financial Institutions Forum.
“I’m sure there are much bigger fish to fry for the Treasury,” Sobel said.
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