Why are dollar stablecoins the new dollar 3.0?

Author: Ye Kai, Huaxia Digital Capital

Looking back at the historical process, we find that the dominant position of the US dollar in the global financial system did not come from nowhere. The widespread use of the dollar globally has undergone several stages of evolution. From the establishment of the Bretton Woods system to the rise of the petrodollar, and now to today's dollar stablecoins, the hegemonic position of the dollar has been continuously consolidated and strengthened. Today, we are entering a new era—the era of dollar 3.0, which is characterized by the rise of dollar stablecoins.

The emergence of dollar stablecoins (such as USDT, USDC, etc.) is not just a product of technological innovation; it represents a significant transformation in the global financial system. Through stablecoins, the influence of the dollar is no longer limited to traditional banking systems and payment networks; it has begun to penetrate the global digital currency market through blockchain technology, thereby forming a new global payment and financial mechanism.

So, why is the US dollar stablecoin referred to as the "new 3.0 era" of the dollar? What does its emergence mean for the global financial system, the US government, and emerging markets? Let's discuss this issue together.

1. The "dammed lake" of U.S. Treasury bonds is forcing the U.S. government to "find money".

The U.S. debt issue is not new, and it has become the focus of attention in global financial markets. Today, the total U.S. debt has soared to $36 trillion and is rapidly increasing each year. To sustain this massive debt, the U.S. government relies on funding support from global markets, particularly through issuing bonds to cover the fiscal deficit. However, traditional major buyers of U.S. debt, such as China and Japan, are gradually reducing their pace of purchasing U.S. Treasury bonds. This poses significant financing pressure on the U.S. government.

To address this issue, the U.S. government passed the GENIUS Act and the Great Beauty Act, changing the rules of the global stablecoin market. According to these two acts, all issuance reserves for USD stablecoins must be linked to cash or short-term U.S. Treasury bonds, meaning that 1 dollar of stablecoin must equal 1 dollar of short-term Treasury bonds. This practice turns U.S. Treasury bonds into the "legal backing" for USD stablecoins, which also means that if an institution wants to issue USD stablecoins, they must first purchase short-term Treasury bonds. This change is akin to "opening the floodgates" for the U.S. government's fiscal crisis, while also tightening the connection between the stablecoin and U.S. Treasury bond markets.

2. How do on-chain dollars "absorb water"?

As the global market demand for US dollar stablecoins continues to rise, issuers of stablecoins like Tether have begun to switch most of their reserve assets into short-term US Treasury bonds. For example, by 2022, Tether had moved approximately 75% of its reserve assets into the short-term Treasury market. This means that the demand for stablecoins will become an important support force for the Treasury market—through this mechanism, global investors (especially stablecoin users) provide low-interest funds to the US government, which in turn allows them to enjoy the convenience of fast payments and settlements through stablecoins.

This change is not only occurring in developed countries. In some emerging markets, such as Nigeria, the Philippines, and Vietnam, dollar-pegged stablecoins like USDT have become major payment tools, especially in remittance scenarios. For example, foreign workers in the Philippines quickly and cost-effectively send their salaries back home through platforms like PayPal, bypassing the high fees of traditional remittance channels.

However, the impact of US dollar stablecoins is not limited to the payment sector. In these countries, the use of US dollar stablecoins has begun to affect domestic monetary policy. For instance, in Nigeria, due to the high premium of USDT (the premium relative to the Naira once reached as high as 20%), the country’s currency, the Naira, has suffered severe depreciation, causing monetary policy to lose some of its effectiveness. This phenomenon of "dollarization" has placed financial sovereignty pressure on many emerging markets, prompting them to reevaluate the challenges posed by US dollar stablecoins.

3. Stablecoins and US Treasuries: Sweet Symbiosis or Dangerous Siamese Twins?

The relationship between the US dollar stablecoin and US Treasury bonds is quite complex and can be seen as a form of dual symbiosis. They depend on each other, together forming a new global financial ecosystem. During the minting phase, the demand for short-term US Treasury bonds from stablecoins continues to rise, providing funding support to the US government by purchasing these bonds. On the other hand, during the circulation phase, stablecoins automatically provide a "free sales" channel for the US Treasury bond market through payment flows worldwide.

However, this relationship is not always risk-free. The dependence of stablecoins on U.S. Treasuries may lead to some potential risks. For example, if there is a large-scale redemption wave in the stablecoin market, the stablecoin issuers need to sell an equivalent amount of U.S. Treasuries to redeem these stablecoins, which may cause severe fluctuations in the U.S. Treasury market and subsequently drive up Treasury yields. If U.S. Treasury yields soar, the financing costs for the U.S. government will also rise, exacerbating the debt pressure on the United States.

In addition, the phenomenon of "dollarization" in emerging markets has also brought risks. If these countries overly rely on dollar stablecoins, their monetary policy may lose independence in the event of exchange rate fluctuations or policy changes, and their economic sovereignty will be greatly threatened.

4. US Dollar 3.0: From Bretton Woods to On-Chain Dollar

The global dominance of the US dollar was not achieved overnight. From the establishment of the Bretton Woods system, to the rise of the petrodollar, and to today's dollar stablecoins, we can see the gradual evolution of the dollar within the global financial system.

The Era of the Dollar 1.0: Under the Bretton Woods system, the dollar became the core currency of global trade and payments by being pegged to gold. This system ensured the dominance of the dollar through settlement monopolies.

The era of the dollar 2.0: Entering the petrodollar era, the influence of the dollar has further expanded, especially in its dominant position in the global energy and debt markets, where the dollar is widely used for oil trading and international debt settlement.

The Era of Dollar 3.0: Today, with the rise of dollar stablecoins, the dollar is beginning to enter the digital asset space through blockchain technology. These on-chain dollars have not only completely freed payment from the constraints of the traditional banking system, but also, through their close integration with the U.S. Treasury market, have invisibly provided funding support for the U.S. government's debt while allowing global investors to enjoy fast payments.

What does this change mean for the United States? The U.S. government has "outsourced" its debt crisis to global individual and corporate investors through the use of the dollar stablecoin. This approach allows the U.S. to attract significant external funding without increasing domestic burdens, while also driving global demand for the dollar.

However, for emerging markets, the proliferation of dollar stablecoins is undermining the financial sovereignty of these countries. With the widespread use of "on-chain dollars," the monetary policies of many countries are beginning to lose independence, and their economies are influenced to some extent by the fluctuations of the dollar.

Conclusion: The Future Challenges of Dollar 3.0

The emergence of the US dollar stablecoin marks a transformation of the dollar's global hegemony. The dollar no longer relies solely on traditional financial systems; it has expanded into the digital world through blockchain technology and has taken a dominant position in global payments and financial systems. However, behind this "Dollar 3.0" lie both tremendous opportunities and significant risks that cannot be ignored. In the future, whether the US dollar stablecoin can successfully maintain its global dominance will depend on its ability to find a perfect balance between stability, compliance, market demand, and risk management.