Is the US dollar stablecoin bill really a genius bill?

BTC is like a black hole in the blockchain universe, with a strong gravitational pull on the liquidity of the US dollar, sucking value into it and not escaping.

Written by: Liu Jiao Lian

Recently, there was a major event in the crypto space, which is that the U.S. Senate passed the so-called stablecoin bill procedural motion with 66 votes in favor and 32 votes against, entering the federal legislative stage.

This bill, officially titled the "National Innovation Act to Guide and Establish a Dollar Stablecoin," conveniently has the English acronym GENIUS, hence the nickname "Genius Bill."

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

As we all know, the original dollar was merely a voucher for gold. The United States established the dominance of the dollar 1.0 through World War II. The gold dollar, as part of the 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 that the dollar was pegged to gold at a fixed exchange rate, while the legal currencies of other countries around the world were pegged to the dollar. (Refer to Liu Jiao Lian's "History of Bitcoin", Chapter 10, Talk 42)

However, just 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 abroad, and since the dollar was linked to gold, exporting dollars meant exporting gold. This would inevitably lead to a reduction in the U.S. gold reserves, which could not support an ever-increasing amount of dollars, thus inevitably resulting in the decoupling.

Specifically, the following three goals cannot be achieved simultaneously, known as the "impossible trinity": First, the United States maintains a surplus in its international balance of payments and a stable external value of the dollar; Second, the United States maintains adequate 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 simultaneously, known as the "impossible trinity."

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

In 1971, when President Nixon suddenly unilaterally tore up the agreement in a televised speech and announced that the US 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 began to plummet.

The heavens will descend on the Si people. In 1973, Kissinger became President Nixon's Secretary of State. He proposed the "petrodollar" strategy. He persuaded President Nixon to give his full support to Israel in the Yom Kippur War (the 4th Arab-Israeli War). Under the coercion of the powerful military force of the United States, Saudi Arabia and the United States secretly reached a key agreement on the "oil-dollar-US debt" bundle:

1. Saudi oil is priced and settled only in USD, and other countries need to reserve USD to purchase oil.
2. Saudi Arabia will invest its oil revenue surplus in US Treasury bonds, forming 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 money can buy has never been the anchor of the currency. The anchor of the currency is the thing that constrains and supports the issuance of money.

USD

US Treasury

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

Now the United States no longer has to fear the output of US dollars. In the past, exporting US dollars meant exporting gold, and the United States did not have the alchemy to conjure gold out of thin air, leading to a rapid depletion of gold reserves. Now it's good; exporting US dollars is just exporting US Treasury bonds, which is essentially an IOU from the US Treasury, so they can print as much as they want, right?

This is the era of Dollar Hegemony 2.0. From the 1970s to the 2020s, about 45 years. The dollar in this phase, rather than being labeled as petrodollars or any other kind of dollars, is essentially debt dollars, or in other words, IOU dollars.

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

1. The issuance, interest payment, trading, and all aspects of U.S. Treasury bonds must achieve global leadership, with the strongest discipline, the most reliable mechanisms, the most creditworthy repayments, and the strongest liquidity, among others.
2. The United States aims to have the world's number one military deterrent power, forcing countries that earn a large amount of dollars to actively purchase U.S. Treasury bonds.

To this end, the design of the Dollar 2.0 system is structured as a decentralized dual-spiral: the Treasury issues bonds "disciplined" by the debt ceiling approved by Congress, but cannot directly issue dollars; the Federal Reserve is responsible for monetary policy, issuing dollars, and adjusting interest rates through open market transactions of U.S. Treasury bonds.

However, while the USD 2.0 solved the problem of the lack of gold, it introduced a bigger bug, which is that any artificial constraints ultimately cannot truly restrain 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, swelling to a staggering 36 trillion dollars in just a few decades.

After the separation of Alaska in 2020, the entire dollar 2.0 system seemed to be collapsing. The reason is simple: China slammed the table.

The enormous amount of US debt is like a towering domino structure, with just a few small dominoes at the bottom supporting the entire precarious giant. Any action that is strong enough to cause a vibration could trigger a collapse above.

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

Thus, a genius solution has emerged. This is the USD hegemony 3.0 that is in the making - the USD stablecoin. We might as well call it Blockchain Dollar, or Crypto Dollar.

It must be said that the United States is still far ahead in financial innovation. It is evident that if the on-chain dollar, i.e., the dollar stablecoin strategy, is a great success, we may see the following five astonishing 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 US Treasury assets on the Federal Reserve's balance sheet have been absorbed. Issuers of US dollar stablecoins will compete fiercely for US Treasuries, as they serve as the legal reserves supporting the issuance of US dollar stablecoins.
3. As more traditional dollar assets are mapped to tokens on the Blockchain through RWA (Real World Assets) or other means, the enormous trading volume of a large amount of RWA assets combined with crypto-native assets (like BTC) will create tremendous demand for dollar stablecoins, thereby driving explosive growth in the scale of dollar stablecoins.
4. With the explosive growth of trading volume for "RWA Assets - US Dollar Stablecoin", the trading volume of "Traditional Assets - US Dollar" is gradually being surpassed, becoming a thing of the past.
5. As the role of the US dollar as a medium in asset trading gradually diminishes, it becomes a subordinate in the "US Treasury - 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 to absorb dollars. The Federal Reserve issues dollars and purchases treasury bonds from the market. This achieves a remote linkage, supporting the issuance of dollars with treasury bonds.

The issuance mechanism of the US dollar stablecoin is as follows: the stablecoin issuer receives customers' US dollars and issues US dollar stablecoins on the Blockchain. Then, the stablecoin issuer uses the received US dollars to purchase US Treasury bonds in the market.

Let's derive using semi-quantitative numerical assumptions.

Traditional method: The Federal Reserve issues 100 million USD and 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 the market, absorbing 100 million USD of liquidity.

The problem is: if the Federal Reserve insists on so-called policy independence and refuses to take on the task of purchasing U.S. Treasury bonds to inject liquidity, it will put significant pressure on the Treasury's debt issuance, forcing U.S. Treasury auctions to be issued at a relatively high interest rate, which will certainly be very unfavorable for the U.S. government in repaying its debts in the future.

Assuming there is a sufficient amount of USD stablecoin: The stablecoin issuer absorbs 100 million USD and issues 100 million USD of stablecoin. The stablecoin issuer takes 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 put on-chain as RWA assets, then the 100 million dollars absorbed by the Treasury will eventually flow into various RWA assets after spending. Specifically, if the Treasury spends 100 million dollars, the institutions that receive the dollars will exchange all of this 100 million dollars for dollar stablecoins with stablecoin issuers (note that this is the issuance of stablecoins worth 100 million dollars), which will be used to purchase various RWA assets or simply hoard BTC, thus realizing the return of 100 million dollars to the stablecoin issuers.

Stablecoin issuers can use this 100 million USD to continue purchasing 100 million USD of US Treasury bonds, injecting liquidity into the market. The Treasury can then issue another 100 million USD of US Treasury bonds to absorb this 100 million USD. This process continues to cycle.

From this deduction, we can see that throughout the entire cycle, only 100 million USD was used as a tool, which allows for the nearly infinite issuance of U.S. Treasury bonds and USD stablecoins. In one cycle, U.S. Treasury bonds are issued for 100 million USD, and correspondingly, USD stablecoins are also issued for 100 million USD. After N cycles, both U.S. Treasury bonds and USD stablecoins have been issued for N hundred million USD.

Of course, in reality, the loop cannot be 100% without loss. There will always be some dollars that do not flow back to the stablecoin. Assuming the loss ratio is 20%, 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.

Currently, the scale of U.S. Treasury bonds is $36 trillion. In the case where the Federal Reserve cannot continue printing money, that is, under the condition of a constant amount of dollars, by circulating the issuance of dollar stablecoins, assuming a leverage of 5 times, it can suddenly open up the expansion space of U.S. Treasury bonds to a scale of $36 trillion multiplied by 5, which equals $180 trillion.

The U.S. Treasury, that is, the U.S. government, can happily continue to issue U.S. debt without having to consider the Federal Reserve's opinions!

The extra 180 - 36 = 144 billion USD in US Treasuries 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.

And when the US dollar stablecoin is widely used for various cross-border payments or daily payments, the US dollar can really just relax and completely become an auxiliary role in the "US debt - US dollar stablecoin" cycle.

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

The teaching chain made a metaphor: black hole.

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

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

However, if the massive issuance of USD 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 USD or USD stablecoins will depreciate.

Today, the total amount of US dollar stablecoins is still far from being double the US Treasury bonds, estimated to be less than 200 billion USD. Doubling 200 billion gets us to 1 trillion, and then expanding it by 36 times reaches the scale of US Treasury bonds. Then, on top of that, we need to continue doubling to provide greater assistance for expanding US Treasury bonds.

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

Based on the current relationship of 200 billion USD in stablecoins and a market cap of 2 trillion USD for BTC, if stablecoins successfully expand by 1000 times, the market cap of BTC could potentially increase by 1000 * 10 = 10,000 times, from 2 trillion USD to 20 trillion USD. Correspondingly, one BTC may rise from 100,000 USD to 1 billion USD, meaning 1 Satoshi equals 10 USD.

If we consider that in the future a lot of liquidity will be diverted by RWA assets, so that the current market where BTC attracts most of the liquidity will not be the case, then taking a discount of 1/10 to 1/100 based on the above numbers, it means BTC's market value will be 200 trillion to 2000 trillion dollars, which corresponds to a value of 1 BTC being 10 million to 100 million dollars, that is, 1 Satoshi equals 0.1 to 1 dollar.