- Republicans see the potential of private-sector US dollar stablecoins, VanEck fund manager says.
- Stablecoin issuers have become some of the biggest buyers of US government debt in recent years.
- Clear regulation around stablecoins would increase their use, and thus increase demand for US Treasuries.
Crypto is the newest battleground in the US presidential election.
Presumptive Republican presidential nominee Donald Trump jumped into the fray last month by accepting crypto donations while vowing to protect self-custody rights for crypto owners.
But there are reasons beyond attempting to win the votes of crypto investors.
“Many Republicans recognize the strategic advantages of a private-sector US dollar stablecoin,” Pranav Kanade, a portfolio manager at VanEck’s Digital Assets Alpha Fund, told DL News.
Central to the Republicans’ support of stablecoins, Kanade said, is the demand they provide for US Treasury bonds.
With the US government running a $1.7 trillion deficit, it must find buyers for its debt. In recent years, stablecoin issuers have become some of the largest buyers of US government debt.
Passing clear regulation around stablecoins would increase their use, and thus increase demand for US Treasuries.
“This becomes increasingly vital as traditional government buyers of US debt, like China, become more hesitant,” Kanade said.
Since 2021, China’s US debt holdings have shrunk 30% as it chooses not to replace maturing Treasury bonds with new ones.
Treasury bonds are debt issued by the US government. Investors buy bonds with dollars then receive their money back, plus interest, when the bond matures. Bonds are broadly viewed as the safest investment assets.
Stablecoin issuers love bonds
Stablecoins are crypto assets designed to track the value of another asset, usually currencies like the US dollar or the euro.
The most popular stablecoins, Tether’s USDT and Circle’s USDC, are backed by dollars and dollar-equivalent assets. This means investors can redeem these stablecoins for dollars at a one-to-one ratio.
Stablecoin issuers love to buy US Treasury bonds to back their stablecoins because they are considered dollar-equivalent assets, and they earn a yield, currently around 5.1% on short-dated bonds.
Tether’s USDT, the biggest US dollar stablecoin with $112 billion in circulation, is 66% backed by US Treasuries.
Stablecoin issuers, fueled by the demand for stablecoins overseas, can help boost demand for US government debt, Kanade said. He predicted that with proper regulation, the stablecoin sector could grow from roughly $160 billion to “several trillion dollars.”
In an August research report, wealth management firm Bernstein said it expected the stablecoin market to grow to $2.8 trillion in the next five years.
Crypto becomes bipartisan?
It’s not just Republicans who see the potential of crypto. According to Kanade, Trump’s recent comments are catalysing a bipartisan dialogue.
Kanade said he sees Democrats in the House who voted for the pro-crypto bill known as FIT21, as well as senators including New York’s Kirsten Gillibrand “acknowledging this potential.”
But there are still signs of hesitation.
On May 31, President Joe Biden vetoed a House Joint Resolution that would have abolished a bill that critics say makes it difficult for crypto companies to work with banks.
Still, “it’s important to look at the bigger picture,” Kanade said.
“The tide is clearly shifting towards bipartisan support for crypto.”
Tim Craig is a DeFi Correspondent at DL News. Got a tip? Email him at tim@dlnews.com.
