Is the US Dollar Stablecoin Bill Really a Genius Bill?

Author: Liu Jiaolian; Source: Liu Jiaolian WeChat Official Account This bill, officially titled the "National Innovation Act to Guide and Establish Dollar Stablecoins," has the English acronym GENIUS, hence the nickname "Genius Bill."

For a moment, the global financial and economic circles were abuzz with discussions about this so-called genius bill. Is it the last struggle before the total collapse of the dollar and US debt system, or is it indeed a genius move that alleviates the crisis of US debt and helps upgrade the dollar's hegemony to version 3.0?

As is well known, the original U.S. dollar was merely a voucher for gold. The United States established the dollar hegemony 1.0 status through World War II. The gold dollar, as part of the entire post-war world order, was fixed by systems and institutions such as the Bretton Woods system, the World Bank, and the International Monetary Fund. The Bretton Woods system stipulated a fixed exchange rate between the dollar and gold, with the currencies of other countries pegged to the dollar. (Refer to Liu Jiaolian's "A Brief History of Bitcoin", Chapter 10, Section 42)

However, only 25 years after the war, the United States was unable to maintain the dollar's gold peg. American economist Robert Triffin discovered that for the dollar to become an international currency, the U.S. needed to continuously export dollars. Since the dollar was linked to gold, exporting dollars meant exporting gold, which would inevitably lead to a decrease in U.S. gold reserves, making it impossible to support the increasing amount of dollars, thus inevitably resulting in the decoupling.

Specifically, the following three goals cannot be achieved simultaneously, forming the "impossible triangle": First, the United States maintains a surplus in its balance of payments and the dollar's external value remains stable; second, the United States maintains sufficient gold reserves; third, the value of the dollar can be maintained at a stable level of 35 dollars per ounce of gold. These three goals cannot be achieved at the same time, creating an "impossible triangle". (Reference: Liu Jiaolian, "A History of Bitcoin", Chapter 10, Section 42)

This inherent bug is also known as the "Triffin Dilemma."

When President Nixon suddenly unilaterally tore up the agreement in a televised speech in 1971 and announced that the dollar would no longer be pegged to gold, it marked the onset of the collapse crisis of the dollar hegemony 1.0. Without the support of gold, the value of the dollar was on the verge of collapse.

Heaven will confer a great responsibility upon this person. In 1973, Kissinger became Secretary of State under President Nixon. He proposed the "petrodollar" strategy. He persuaded President Nixon to fully support Israel in the Yom Kippur War (the 4th Arab-Israeli War). Under the strong military pressure of the United States, Saudi Arabia secretly reached a key agreement with the U.S. on the "oil-dollar-U.S. debt" bundling: (Refer to Liu Jiaolian's article dated June 9, 2024, "Every Bitcoin Person Will Eventually Become an Internationalist")

1. Saudi oil is priced and settled only in US dollars, and other countries need to hold US dollars to purchase oil.

2. Saudi Arabia will invest its oil revenue surplus in U.S. Treasury bonds, creating a dollar repatriation mechanism.

Many people are confused by the superficial meaning of the term "petrodollar" and say that the dollar 2.0 has shifted its anchor from gold to oil. What currency can buy is never the anchor of the currency. The anchor of the currency is the thing that constrains and supports the issuance of the currency.

US dollars

US Treasuries

When China began its reform and opening-up in the late 1980s, the capital movement of US dollars and US Treasury bonds was similarly applied to drive the production of a large number of industrial goods in China, achieving astonishing results. For this capital cycle, it doesn't really matter whether the byproduct is oil or industrial products. What financial capital wants is just the continuously extracted profits from the high-speed cycle.

Now the United States no longer has to fear the output of dollars. In the past, exporting dollars meant exporting gold, and the United States did not master alchemy, so it couldn't conjure gold out of thin air. Soon, the gold reserves would be emptied. Now it's good, exporting dollars is just exporting U.S. Treasury bonds, and to put it bluntly, U.S. Treasury bonds are just IOUs issued by the U.S. Treasury, which means they can print as much as they want.

This is the era of Dollar Hegemony 2.0. From the 1970s to the 2020s, approximately 45 years. In this phase, the dollar, rather than being a petrodollar or any other kind of dollar, is essentially a debt dollar, which is to say, a credit dollar.

The top priority of debt dollars is to firmly anchor the dollar to U.S. Treasuries. There are two prerequisites to achieve this:

First, the issuance, interest payments, trading, and other aspects of U.S. Treasury bonds must achieve global leadership, with the strongest discipline, the most reliable mechanisms, the most credible repayment, the strongest liquidity, and so on.

Second, the United States must possess the world's foremost military deterrent power, forcing countries that earn a large amount of dollars to actively purchase U.S. Treasury bonds.

To this end, the system of the US dollar 2.0 is designed as a decentralized and balanced double helix structure: the Treasury issues bonds "disciplinedly" according to the debt ceiling approved by Congress, but cannot directly issue dollars; the Federal Reserve is responsible for monetary policy, issuing dollars, and managing interest rate adjustments through open market transactions of US Treasury bonds.

However, while the US dollar 2.0 addresses the problem of the lack of gold, it introduces a bigger bug: that any artificial constraints ultimately cannot truly contain the desire to print money. Congressional approval is not an insurmountable obstacle. Since then, the dollar has embarked on an uncontrollable path of infinite debt expansion, ballooning to a staggering $36 trillion in just a few decades.

After the separation of Alaska in 2020, the entire dollar 2.0 system was about to collapse. The reason was simple: China slammed the table.

The massive amount of U.S. debt is like a towering stack of dominoes, with a few small dominoes at the bottom supporting the entire teetering giant. Any action that causes sufficient disturbance could trigger a collapse of the upper layers.

Even without external shocks, such a massive scale of U.S. debt is slowly becoming unsustainable and is expected to eventually collapse.

Thus, a genius solution has emerged. This is the Dollar Hegemony 3.0 that is currently in the making – the Dollar Stablecoin. We might as well call it Blockchain Dollar, or Crypto Dollar.

I have to say that the United States is still far ahead in financial innovation. It is evident that if the on-chain dollar, that is, the dollar stablecoin strategy, is a great success, we may see the following five amazing changes in the near future:

1. The Federal Reserve's monopoly on the issuance of the dollar has been deconstructed. Dollar stablecoins have become the "new dollar," and the issuance rights of these "new dollars" are decentralized and held by many stablecoin issuers.

2. The U.S. Treasury assets in the Federal Reserve's balance sheet have been absorbed. Issuers of stablecoins will compete like sharks for U.S. Treasuries as they serve as the legal reserves supporting the issuance of dollar stablecoins.

As more and more traditional dollar assets are mapped to tokens on the blockchain through RWA (Real World Assets) or other nominal means, the massive trading of a large number of RWA assets combined with crypto-native assets (such as BTC) will create huge demand for dollar stablecoins, thereby driving explosive growth in the scale of dollar stablecoins.

4. With the explosive growth of trading in "RWA assets - US dollar stablecoins", the trading volume of "traditional assets - US dollar" is gradually being surpassed, becoming a thing of the past.

As the mediating role of the US dollar in asset transactions diminishes, it has become a vassal within the "US debt - US dollar - US dollar stablecoin" closed loop.

The traditional mechanism for issuing US dollar-denominated Treasury bonds is as follows: the Treasury issues Treasury bonds to the market, absorbing US dollars. The Federal Reserve issues US dollars and buys Treasury bonds from the market. This achieves a remote linkage, supporting the issuance of US dollars with Treasury bonds.

The issuance mechanism of the USD stablecoin is as follows: the stablecoin issuer receives customers' USD and issues USD stablecoins on the blockchain. Then, the stablecoin issuer purchases US Treasury bonds in the market using the received USD.

Let’s deduce this using semi-quantitative numerical assumptions.

Traditional method: The Federal Reserve issues 100 million USD, purchases 100 million USD worth of U.S. Treasury bonds from the market, injecting 100 million USD of liquidity into the market. The Treasury issues 100 million USD worth of U.S. Treasury bonds to absorb 100 million USD of liquidity from the market.

The problem is that if the Fed insists on its so-called policy independence and refuses to undertake the task of buying US bonds to inject liquidity, then it will put a lot of pressure on the Treasury to issue bonds and force the US Treasury to issue bonds at a relatively high interest rate, which will certainly be very unfavorable to the US government's future debt repayment.

Assuming there is a sufficient volume of USD stablecoins: The stablecoin issuer absorbs 100 million USD and issues 100 million USD of stablecoins. The stablecoin issuer uses 100 million USD to purchase US Treasury bonds, injecting 100 million USD of liquidity into the market. The Treasury issues US Treasury bonds worth 100 million USD to the market, absorbing 100 million USD of liquidity.

Note that there can be leveraged loops here. If in the future the vast majority of tradable assets are on-chain and become RWA assets, then after the Treasury spends the 100 million USD it absorbs, it will ultimately flow into various RWA assets. Specifically, the Treasury spends 100 million USD, and the institutions receiving the USD exchange all of this 100 million USD for USD stablecoins with the stablecoin issuers (note that this involves the issuance of stablecoins worth 100 million USD), which are used to purchase various RWA assets or simply hoard BTC, thus achieving the return of 100 million USD to the stablecoin issuers.

Once the stablecoin issuer receives this 100 million USD, they can continue to purchase 100 million USD in U.S. Treasury bonds to inject liquidity into the market. The Treasury can then issue another 100 million USD in U.S. Treasury bonds to absorb this 100 million USD. This process continues in a cycle.

By deduction, we can see that only $100 million is used as a tool in the whole cycle, and the issuance of US bonds and US dollar stablecoins can be almost infinite. Once recycled, an additional $100 million was issued for U.S. bonds, and correspondingly, an additional $100 million was issued for U.S. dollar stablecoins. N times of circulation, both U.S. bonds and U.S. dollar stablecoins have issued an additional N billion U.S. dollars.

Of course, in reality, the loop cannot be 100% without loss. There will always be some dollars that do not flow back into the stablecoin. Assuming the loss ratio is 20%, then it can be easily calculated that the total leverage ratio is 5 times. This should be similar to the money multiplier in a fractional reserve banking system.

At present, the scale of U.S. bonds is 36 trillion U.S. dollars, and under the condition that the Fed's money printing cannot be sustained, that is, under the condition that the stock of U.S. dollars remains unchanged, through the circular issuance of U.S. dollar stablecoins, assuming that the leverage is magnified by 5 times, then the expansion space of U.S. bonds can be opened up all at once, turning into a scale of 36 trillion times multiplied by 5 times equal to 180 trillion U.S. dollars.

The U.S. Treasury, which is the U.S. government, can happily continue to issue U.S. Treasury bonds without having to heed the Federal Reserve's opinions!

The extra 180 - 36 = 144 billion USD of U.S. Treasury bonds is supported not by the dollars printed by the Federal Reserve, but by the dollar stablecoins issued by stablecoin issuers on various blockchains.

The Federal Reserve's dollar minting power has been deconstructed and replaced by the dollar stablecoin minting power of stablecoin issuers.

Once the US dollar stablecoin is widely used for various cross-border payments or daily transactions, the US dollar can truly take a back seat and completely become a supporting role in the "US debt - US dollar stablecoin" cycle.

What role does BTC play in the entire process mentioned above?

Jiaolian made a metaphor: black hole.

Black holes in the universe have strong gravitational forces that pull in light, making it impossible to escape.

BTC is like a black hole in the blockchain universe, possessing a strong gravitational pull on USD liquidity, drawing value inescapably. In this way, USD liquidity is continuously absorbed into the blockchain universe, converted into USD stablecoins. Then, the USD is re-released as liquidity through the exchange of US Treasury bonds, creating a continuous cycle.

However, if the massive issuance of US dollar stablecoins cannot be sold to various parts of the world, at least reaching a corresponding multiple of economic scale, then it is conceivable that the actual purchasing power of the US dollar or US dollar stablecoins will depreciate.

Today, the total volume of US dollar stablecoins is still far from being equivalent to the total amount of US Treasury bonds, estimated to be less than 200 billion USD. To reach 1 trillion, it needs to be multiplied by 5 first, and then to match the scale of US Treasury bonds, it needs to be expanded by 36 times. Furthermore, it must continue to double from that point to provide greater assistance for the expansion of US Treasury bonds.

Even if we only estimate according to the above-mentioned 5 times leverage, multiplying these multiples together gives us 5 * 36 * 5 = 900 times, nearly 1000 times.

Based on the current relationship of stablecoins at $200 billion and Bitcoin's market value at $2 trillion, if stablecoins successfully scale up by 1000 times, Bitcoin's market value could increase by 1000 * 10 = 10,000 times, from $2 trillion to $20 trillion. Correspondingly, one Bitcoin could increase from $100,000 to $1 billion, meaning 1 Satoshi would equal $10.

If we consider that in the future, a lot of liquidity will be diverted by RWA assets, and therefore the market will not be like now where BTC attracts the vast majority of liquidity, then taking a discount of 1/10 to 1/100 based on the above numbers, the market value of BTC would be 200 trillion to 2000 trillion dollars, which means the value of one BTC would be 10 million to 100 million dollars, or 1 Satoshi would equal 0.1 to 1 dollar.