Minsheng Securities: Stablecoin cannot save the credit of the US dollar in the short term.

Minsheng Securities released a research report stating that at least in the short term, stablecoins cannot save the US dollar from its credit woes. The problem with the US dollar lies in understanding its counterparties, without considering the preferences of the United States and its people but solely relying on the official reserves overseas could be enough to keep the US dollar on its toes. The difference between stablecoins and gold is that the supply of stablecoins may also get out of control, lacking an objective restraint mechanism; and they are not globally recognized as reliable reserve assets. In extreme situations, can stablecoins catch the selling of overseas US dollar reserves? Indeed, in recent years, the market value of stablecoins has risen rapidly, currently exceeding $240 billion, but still far behind global US dollar reserves. As of the second quarter of 2024, the global "confirmed" official US dollar reserves amount to approximately $67 trillion. Perhaps time can solve the problem, but at least in recent years, stablecoins have not been able to truly stabilize the US dollar. The main points of Minsheng Securities are as follows: The United States has indeed come up with a "new trick" to address the US dollar credit problem. If the previous discussion on amending regulatory rules, releasing commercial bank demand (loosening SLR) falls under routine operations, then deeply binding stablecoins is a new path. Here is the conclusion: using stablecoin-pegged debt cannot solve the "near thirst" for "distant water"; the ambition is not small. However, utilizing cryptocurrency as a relatively independent new funding pool to monetize debts could be considered GENIUS. It must be acknowledged that the United States is indeed at the forefront of financial innovation. Can stablecoins solve the US debt problem? There are two dimensions behind this: one is a more direct logic in the short term, aside from the most direct regulatory requirements, there is also the implication of tying oneself and the "counterparty" together; the other is more medium to long term and more indirect, by strengthening the global US dollar system to support US dollar credit, thereby stabilizing US debt, while also addressing challenges such as renminbi internationalization and de-dollarization. The GENIUS Act, approved by the US Senate Banking Committee in May, specifically stipulates that stablecoins under its regulation must maintain reserves assets of 1:1 parity and ensure they can be redeemed at any time. The restrictions on reserve assets are extremely stringent, denominated in US dollars, short-term maturity, good credit, only including US dollar cash, demand deposits protected by deposit insurance, US treasury bills maturing within 93 days, overnight repos collateralized by US treasury bills, and money market funds that only invest in the aforementioned basic assets. The absolute advantage of the US dollar stablecoin in the market (as of April 2025, the market value of US dollar stablecoins accounts for over 99% of the total market value of fiat-pegged stablecoins) - the larger the market value of stablecoins, the higher the demand for high-quality US dollar assets. The growth of stablecoin market value mainly comes from two aspects: Firstly, the speculative, investment, or hedging demands for digital assets. The likelihood of new policies prohibiting stablecoins from paying interest and income further establishes the role of stablecoins as tokens in daily cryptocurrency transactions. The most common example is when someone wants to convert cryptocurrency into fiat currency, they need to match a demand for converting fiat currency into bitcoins, although exchanges facilitate the matchmaking, it still takes time. With stablecoins, transactions become more convenient and faster. Other cryptocurrencies are first traded for stablecoins (which have a value close to one US dollar), and can be used to trade other currencies or exchanged for US dollars in cash by the stablecoin issuer. Therefore, the primary issuance demand for stablecoins comes from the liquidity and trading needs of cryptocurrency platforms. Secondly, there is an increasing demand to use stablecoins in international trade settlements. Due to the quickness and low cost of stablecoin transactions (bypassing traditional financial institutions such as banks), stablecoins have a significant advantage in daily transactions, especially in cross-border transactions. For example, in the United States, multinational retail giants such as Walmart and Amazon have started considering issuing their own stablecoins, which can facilitate transactions efficiently and save billions of dollars in banking service costs annually. However, the GENIUS Act passed by the US Senate in May regarding stablecoins attempts to tie one of the biggest opponents of the era reversing the pegging of the US dollar and US debt to fiat currency - decentralized cryptocurrencies. It seems like a "if you can't beat them, join them" strategy: this will bring about a logical chain of events such as "excessive expansion of US dollar credit - rise of digital currencies - increased demand for stablecoins - increased demand for US dollar and US debt" seems to be naturally unfolding. From these two dimensions, stablecoins are still not the answer to US debt. In the first dimension, it is important to see whether the inherent demand for stablecoins, unrelated to international payments, can significantly increase the quantity of US debt they purchase. To answer this question, we must first return to the background of why stablecoins were created and the problems they were originally intended to solve. The main purpose of the emergence of digital currencies was originally to "rebel" against the continuously over-issued fiat currency system, as the two are inherently opposed (for example, in the case of Bitcoin, its total quantity is fixed, so if productivity increases, it possesses deflationary properties similar to gold). Therefore, digital currencies are like an "island" outside the "mainland" of fiat currency. The liquidity exchange between the two is separated by "physical limitations". Exchanges provide a platform for the liquidity exchange between the two, acting as a "ferry" between fiat currency and digital currencies. However, the capacity of this "ferry" is limited, and if there is a large single transaction (exchange between fiat currency and digital currencies), the exchange might not be able to cope. This is where stablecoins come in, acting as a specialized channel for transporting large quantities between the two "landmasses". "Large transactions" can be converted into stablecoins by the issuer, and then the issuer is responsible for redeeming them for the other side's currency. The bandwidth of this specialized line of transport depends on the demand volume of large-scale logistics transportation. This demand is roughly proportional to the size of the "island" of digital currencies. This island's size has roughly grown tenfold in the past five years, and indeed, the demand for stablecoins has also increased in sync. However, as the size of the "island" of digital currencies has now exceeded $3 trillion (approaching the annual GDP level of the fourth largest global economy, Japan), it will be significantly more difficult to continue growing at the previous pace (otherwise, the total market value will exceed the US GDP in five years, meaning the value of Bitcoin could potentially exceed one million dollars per unit). Therefore, the rate of expansion of stablecoins purely based on inherent demand is likely to slow down. In simple terms, in this dimension, stablecoins may continue to purchase more US government debt, but it is difficult to expect them to buy enough to significantly help the US monetize debt in the short term. Furthermore, it is crucial to note that this specialized channel is not limited to being built exclusively in the United States; the accelerated issuance of stablecoins by other economies could divert some of the demand for this type of "cross-border bulk trading." This step would ensure that the overall increase in the value of digital currency is not monopolized by the United States. In the second dimension, an attempt can be made to estimate the substitution effect of stablecoins for fiat currencies in international calculations. Some simple calculations can be made - based on historical experience, for every $1000 increase in the value of Bitcoin, the market value of fiat-pegged stablecoins like USDT and USDC increases by approximately $1 billion (of course, due to the GENIUS Act prohibiting stablecoins from paying interest, this will somewhat weaken the demand for stablecoins), equating to an increase in the demand for equivalent US dollar assets. In the short term, US government bonds roughly account for 50% to 60% or $5 to $6 billion. Additionally, if calculated solely based on trading payment demand, according to the Treasury Department's formula, if the volume of stablecoin transactions accounts for an additional 1% to 2% of the global forex spot trading volume per year, it roughly corresponds to a scale increase of $2000 to $4200 billion annually, bringing about approximately $100 to $250 billion in short-term US government bond demand. However, this still cannot fully solve the US debt problem. The core issue lies in the fact that the underlying assets of stablecoins are cash and short-term debt securities, and the current deficiency in the US bond market is in medium to long-term demands. There are only two ways to resolve this: firstly, if the US Treasury mainly issues short-term debt, then the terrifying scale of annual rolling over debt is not something that the US and the market can bear; secondly, forcibly including medium to long-term bonds as underlying assets of stablecoins would make stablecoins no longer stable, and in the case of duration mismatch, stablecoins are susceptible to redemption problems. Of course, from a strategic long-term perspective, binding stablecoins can be considered as a tentative countermeasure by the United States against the demand for gold and the internationalization of the Renminbi. The greatest impact of the GENIUS Act lies in establishing the legal basis for the "payment function" of stablecoins. For a global currency, the most crucial aspect is not the proportion it holds in reserves but rather how extensive its cross-border trading and payment capabilities are. Despite the decreasing share of the US dollar in global foreign reserves in recent years, dropping from 59.8% in 2023 to 57.8% in 2024 (still not low), the US dollar still maintains a dominant position in global financing and cross-border transactions, with the US dollar accounting for 65.4% of the total global international bond stock in 2024, an increase of 0.2 percentage points from 2023, and representing as much as 88% in global forex transactions. The biggest manifestation of stablecoins in cross-border transactions lies in two aspects: firstly, it can significantly reduce transaction costs and boost transaction efficiency through blockchain technology; secondly, it can enhance accessibility and tap into potential US dollar demand overseas, especially in economies experiencing social unrest, high inflation, or strict foreign exchange controls. Through stablecoins, the global stickiness of the US dollar system can be reinforced, counteracting the expansion of gold and advancing strategies such as "central bank digital currency + expanding currency swaps" under the internationalization of the Chinese Renminbi.