Is the US Dollar Stablecoin Bill Really a Genius Bill?

Author: Liu Jiaolian; Source: Liu Jiaolian WeChat Account
This bill, the full name of which is "National Innovation Act to Guide and Establish a Stable Dollar Currency", has the English acronym GENIUS, hence the nickname "Genius Bill".

For a time, the world's financial and financial circles were hotly discussing whether this so-called genius bill was the last struggle before the total collapse of the US dollar and US debt system, or whether it really resolved the US debt crisis like a genius and helped upgrade the US dollar hegemony to version 3.0?

As we all know, the original US dollar was just a voucher for gold. The United States relied on World War II to establish the status of dollar hegemony 1.0. As part of the entire post-war world order, the gold dollar was fixed by the Bretton Woods system, the World Bank, the International Monetary and Financial Organization and other systems and institutions. The Bretton Woods system stipulates that the dollar and gold are pegged at a fixed exchange rate, and the legal currencies of other countries in the world are pegged to the dollar. (Refer to Liu Jiaolian's "History of Bitcoin" Chapter 10, Chapter 42)

However, only 25 years after the war, the United States was unable to maintain the anchoring of the dollar and gold. Robert Triffin, an American economist, found that for the dollar to become an international currency, the United States needs to continue to export dollars. Since the dollar is pegged to gold, exporting dollars is exporting gold, which will inevitably lead to a reduction in the US gold reserves, which cannot support the increasing number of dollars, and will inevitably break the anchor.

Specifically, the following three goals are an "impossible triangle" that cannot be achieved at the same time: first, the US balance of payments maintains a surplus and the external value of the US dollar is stable; second, the US maintains sufficient gold reserves; third, the value of the US dollar can be maintained at a stable level of $35 per ounce of gold. These three goals are an "impossible triangle" that cannot be achieved at the same time. (Refer to Liu Jiaolian's "Bitcoin History" Chapter 10, Episode 42)

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

When President Nixon suddenly tore up the agreement unilaterally to the world in a televised speech in 1971 and announced that the US dollar would no longer be pegged to gold, it declared that the US dollar hegemony 1.0 had fallen into a crisis of collapse. Without the support of gold, the value of the US dollar is shaky.

God will give great responsibilities to this person. In 1973, Kissinger became President Nixon's Secretary of State. 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 powerful military pressure of the United States, Saudi Arabia and the United States secretly reached a key agreement on the "petro-dollar-US debt" bundle: (Refer to Liu Jiaolian's article "Every Bitcoiner Will Eventually Become an Internationalist" on June 9, 2024)

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

2. Saudi Arabia invests its surplus oil revenue in US Treasury bonds to form a US dollar repatriation mechanism.

Many people are confused by the superficial meaning of the term "petrodollar", and say that US dollar 2.0 is a change from gold to oil. What money can buy is never the anchor of money. The anchor of money is the thing that constrains and supports the issuance of money.

From the perspective of commodity production, the capital process of petrodollars is: oil -> US dollar -> US debt.

From the perspective of capital movement, this process becomes a pure capital growth process: US dollar -> US debt -> US dollar'. Oil production is just a by-product of the capital movement process.

When China began its reform and opening up in the late 1980s, the capital movement of US dollars and US debts was also applied to drive China's manufacturing and production of a large number of industrial products, achieving amazing results. For this capital cycle, it doesn't matter whether the by-product is oil or industrial products. Financial capital only wants the profits that are continuously squeezed in the high-speed cycle.

Now the United States no longer has to worry about exporting dollars. In the past, exporting dollars meant exporting gold, but the United States did not master alchemy and could not create gold out of thin air, and its gold reserves would soon be emptied. Now, exporting dollars on a large scale is nothing more than exporting U.S. debt, and U.S. debt is simply IOUs issued by the U.S. Treasury, so can't you print as much as you want?

This is the era of dollar hegemony 2.0. From the 1970s to the 2020s, about 45 years. The dollar at this stage is essentially a debt dollar, or an IOU dollar, rather than an oil dollar or any other dollar.

The most important thing about the debt dollar is to firmly anchor the dollar to U.S. debt. There are two prerequisites for this:

First, the issuance, interest payment, and trading of U.S. debt must be the world's number one, with the strongest discipline, the most reliable mechanism, the most creditworthy repayment, the strongest liquidity, etc.

Second, the United States must have the world's number one military deterrent force, forcing countries that earn a lot of dollars to actively purchase U.S. debt.

To this end, the system of the US dollar 2.0 is designed as a double helix structure of checks and balances: the Treasury Department "disciplinedly" issues bonds according to the debt ceiling approved by Congress, but cannot directly issue dollars; the Federal Reserve is responsible for monetary policy, issues dollars, and controls interest rates through open market transactions of U.S. debt.

However, although the dollar 2.0 solves the problem of gold shortage, it introduces a bigger bug, that is, any artificial constraints will ultimately fail to truly constrain the desire to print money. Congressional approval is not an insurmountable obstacle. The dollar has since embarked on an unstoppable path of unlimited debt expansion, and has expanded to a huge amount of 36 trillion US dollars in just a few decades.

After the Alaska divorce in 2020, the entire dollar 2.0 system is about to collapse. There is no other reason, because China slammed the table.

The huge amount of US debt is like a domino towering into the clouds, and at the bottom are a few small dominoes supporting the entire shaky behemoth. Any action that is enough to cause a vibration may cause a landslide above.

Even without external shocks, such a huge scale of US debt can no longer continue to roll, and it is expected to collapse sooner or later.

So, a genius solution came out. This is the US dollar hegemony 3.0 that is being nurtured - the US dollar stablecoin. We may as well call it the blockchain dollar, or the encrypted dollar.

It has to be said that the United States is still far ahead in financial innovation. Obviously, if the on-chain dollar, that is, the US dollar stablecoin strategy, is a great success, we may see the following five earth-shaking changes in the near future:

1. The Federal Reserve's monopoly on the right to issue US dollars is deconstructed. The US dollar stablecoin becomes the "new dollar", and the right to issue these "new dollars" is dispersed in the hands of many stablecoin issuers.

Second, the U.S. Treasury assets in the Fed's balance sheet are being digested. The issuers of the U.S. dollar stablecoin will grab U.S. Treasury bonds like sharks competing for food, as legal reserves to support the issuance of U.S. dollar stablecoins.

Third, as more and more traditional U.S. dollar assets are mapped to tokens on the blockchain through RWA (real world assets) or other names, a large number of RWA assets plus the huge volume of transactions of crypto native assets (such as BTC) will generate huge demand for U.S. dollar stablecoins, thereby driving the scale of U.S. dollar stablecoins to develop explosively.

Fourth, as the transaction scale of "RWA assets-U.S. dollar stablecoins" develops explosively, the transaction scale of "traditional assets-U.S. dollars" is gradually surpassed and becomes a thing of the past.

Five, when the role of the U.S. dollar as a medium in asset transactions gradually declines, it becomes a vassal in the closed loop of "U.S. Treasury bonds-U.S. dollars-U.S. dollar stablecoins".

The traditional mechanism for issuing US Treasury bonds is: the Ministry of Finance issues US Treasury bonds to the market and absorbs US dollars. The Federal Reserve issues US dollars and purchases US Treasury bonds from the market. In this way, remote linkage is achieved, and US Treasury bonds are used to support the issuance of US dollars.

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

Let's use semi-quantitative numerical assumptions to deduce it.

Traditional method: The Federal Reserve issues an additional $100 million, purchases US Treasury bonds worth $100 million from the market, and injects $100 million in liquidity into the market. The Ministry of Finance issues US Treasury bonds worth $100 million to the market and absorbs $100 million in liquidity.

The problem is: if the Federal Reserve insists on the so-called policy independence and refuses to undertake the task of purchasing US bonds to inject liquidity, it will put great pressure on the Treasury to issue bonds, forcing the US bonds to be auctioned at a relatively high interest rate, which will definitely be very unfavorable for the US government to repay its debts in the future.

Assuming that there is a sufficient volume of US dollar stablecoins: the stablecoin issuer absorbs $100 million and issues an additional $100 million of stablecoins. The stablecoin issuer takes out $100 million to buy US bonds and injects $100 million of liquidity into the market. The Treasury issues $100 million worth of US bonds to the market and absorbs $100 million of liquidity.

Note that there can be circular leverage here. If most of the tradable assets in the future are on-chain as RWA assets, then the $100 million absorbed by the Treasury will eventually flow into various RWA assets after being spent. Specifically, the Treasury Department spends $100 million, and the institutions that receive the US dollars exchange all of the $100 million for US dollar stablecoins (note that this is an additional issuance of $100 million worth of stablecoins) to the stablecoin issuer, which is used to purchase various RWA assets or simply hoard BTC, thereby realizing the return of $100 million to the stablecoin issuer.

The stablecoin issuer can continue to purchase $100 million of US Treasury bonds with this $100 million to inject liquidity into the market. The Treasury Department can issue another $100 million of US Treasury bonds to absorb this $100 million. In this way, the cycle continues.

From this point, we can see that only $100 million is used as a tool in the entire cycle, and US Treasury bonds and US dollar stablecoins can be issued almost infinitely. After one cycle, US Treasury bonds are issued by $100 million, and accordingly, US dollar stablecoins are also issued by $100 million. After N cycles, US Treasury bonds and US dollar stablecoins are both issued by $N billion.

Of course, in reality, the cycle cannot be 100% loss-free. There will always be some dollars that will not flow back to the stablecoin. Assuming that 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 the fractional reserve banking system.

The current scale of US debt is 36 trillion US dollars. If the Federal Reserve cannot continue to print money, that is, if the stock of US dollars remains unchanged, through the circulation of US dollar stablecoins, assuming that the leverage is magnified by 5 times, the expansion space of US debt can be opened up at once, becoming 36 trillion times 5 times equal to 180 trillion US dollars.

The US Treasury, that is, the US government, can continue to issue US debt happily without looking at the face of the Federal Reserve!

The extra 180 - 36 = 14.4 billion U.S. Treasury bonds are not supported by the U.S. dollars printed by the Federal Reserve, but by the U.S. dollar stablecoins printed by stablecoin issuers on various chains.

The U.S. Federal Reserve's right to mint U.S. dollars has been deconstructed and replaced by the U.S. dollar stablecoin minting rights of stablecoin issuers.

When the U.S. dollar stablecoin is widely used in various cross-border payments or daily payments, the U.S. dollar can really go to the side and completely become a supporting role in the "U.S. Treasury-U.S. dollar stablecoin" cycle.

What role does BTC play in the above process?

Teach Chain made a metaphor: black hole.

The black hole in the universe has a strong gravitational force that sucks in all light and prevents it from escaping.

BTC is like a black hole in the blockchain universe, with a strong gravitational force on the liquidity of the US dollar, sucking in value and preventing it from escaping. In this way, the liquidity of the US dollar is continuously sucked into the blockchain universe and converted into the US dollar stablecoin. Then the US dollar is released back into liquidity by replacing US debt, and the cycle continues.

However, if the huge amount of US dollar stablecoins cannot be sold to all parts of the world, at least to the corresponding multiple of the economic scale, then it is conceivable that the actual purchasing power of the US dollar or US dollar stablecoin will depreciate.

Today, the total amount of US dollar stablecoins is still far from one times the US debt, and the total is estimated to be less than 200 billion US dollars. 200 billion first needs to be multiplied by 5 to reach 1 trillion, and then expanded by 36 times to reach the scale of US debt. Then, it will continue to double on this basis to provide greater help for the expansion of US debt.

Even if it is only estimated based on the 5x leverage expansion mentioned above, these multiples multiplied together are 5 * 36 * 5 = 900 times, nearly 1,000 times.

According to the current 10-fold relationship of 200 billion US dollars in stablecoins and 2 trillion US dollars in BTC market value, if the stablecoin successfully expands 1,000 times, the market value of BTC may have to increase by 1,000 * 10 = 10,000 times, from 2 trillion US dollars to 2 trillion US dollars. Correspondingly, one BTC may increase from 100,000 US dollars to 1 billion US dollars, that is, 1 satoshi is equal to 10 US dollars.

If we consider that a lot of liquidity will be diverted by RWA assets in the future, unlike the current market where BTC attracts most of the liquidity, then we can take a 1/10 to 1/100 discount based on the above figures, that is, the market value of BTC is 200 trillion to 200 trillion US dollars, and the corresponding value of BTC is 10 million to 100 million US dollars, that is, 1 satoshi is equal to 0.1 to 1 US dollar.