Sometimes the future unfolds before our eyes.
When analyzing trends, there are instances where things jump out. When it comes to the US dollar and stablecoins, it was a fairly logical conclusion.
We are seeing the foundation for hegemony of the US dollar. This is going to extend for another few decades. I wrote a number of articles about this so we will not go too deep into that aspect.
One thing that we do have is the Chinese are starting to realize. The Europeans are trying to avert this outcome by introducing a CBDC for the euro. Now China is looking at taking steps to challenge what is occurring.
Neither is going to work and we have a couple instances as to why.
China Realizes USD Stablecoins Will Extend Dollar Hegemony
China is desperate to remain a global player. The country experienced a massive explosion in growth over the past 4 decades, something that was never seen before. However, cracks are starting to appear, something worth watching.
To start, the economy is obliterated. It is possible we are watching a deflationary spiral emerging. The country experienced that in the past couple years, something that could be enhanced by the tariff wars.
Then we have the Chinese themselves. There is a mindset that is going to screw them regardless of how the currency situation unfolds. That said, they are grasping the problem.
According to Zhang Ming, deputy director of the Institute of Finance and Economics at the Chinese Academy of Social Sciences, U.S. dollar-pegged stablecoins, not bitcoin ( BTC) or ethereum ( ETH), are likely to have a “significant impact” on the international financial system. Ming cites stablecoins’ “link” to the U.S. dollar, a sovereign currency, which he said gives these digital assets the characteristics of the greenback.
To illustrate, Ming points to the use of stablecoins as a store of value by residents and businesses in countries battered by inflation.
The deputy director also cited the use of U.S. dollar stablecoins to provide liquidity support in the decentralized finance (DeFi) ecosystem as another example of these digital currencies playing a role in strengthening the international currency status of the U.S. dollar. Observers believe the likely passage of stablecoin bills by the U.S. Congress will further enhance their role in bolstering the U.S. dollar
In my view, there is accuracy on all counts. This is exactly what is unfolding. It is not BTC or ETH that will take over. When it comes to cryptocurrency, the only medium of exchange (and store of value) are stablecoins. Here we revert back to the USD.
Why is this?
The first is the fact that network effects provide greater price stability than any other currency. Bitcoin and Ethereum have volatility.
Then we have the liquidity. This could also be termed distribution. It is also what screws the Chinese.
It is impossible to be an international currency while also instituting capital controls. China is known for this. It does not want money flowing out of the country. Unfortunately, to operate on an international scale, capital has to flow. This will doom whatever steps the Chinese take with the yuan.
Us Treasuries Are Already Top Money
Welcome to Eurodollar System 2.
While not exact, there are enough similarities where we can envision this outcome. At the core of that system are US Treasuries, specifically T-Bill. Guess what is shaping up to be the underlying asset within a USD stablecoin system.
If you said US Treasuries, you are correct.
To find the evidence, we only look to the 2024 purchases of US bonds. We can see clearly where this is going.
Tether, the $143-billion stablecoin giant, was the world’s seventh-largest buyer of US Treasurys, surpassing some of the world’s largest countries.
Tether, the issuer of USDt (USDT), the world’s largest stablecoin, was the world’s seventh-largest US Treasury buyer, surpassing Canada, Taiwan, Mexico, Norway, Hong Kong and numerous other countries.
Tether surpassed most countries in its purchase of U.S. bonds. This is one company, granted the largest in the stablecoin industry.
My forecast is that, upon passage of the GENIUS act, a bill presently in Congress, we will see this sector explode. Many companies, including banks, will enter the stablecoin market. They will bring out their own USD denominated token, backing it with a combination of cash and Treasuries. The Eurodollar system already made T-Bills king.
As for the banks, things are just getting started. The most important move is not the establishment of many stablecoins. It is the infrastructure they will build.
Where the banks will excel is taking the stablecoins and constructing a series of products on top. This is where a system starts to emerge. Like the Eurodollar System, you will see a platform for lending, borrowing, remittance, swaps, cross border payments, and collateralization.
We saw what Blackrock did in a bit over a year after the introduction of Bitcoin Spot ETFs. Can you imagine what happens when most of the major banks along with technology companies are involved?
It appears China is starting to realize what that might look like. This is why it is raising alarm. The question is what can it do to counter this trend.
In my view, the fact that the Eurodollar System gravitated almost completely to the USD, part 2 is going to mirror the same thing.