Former Speaker of the U.S. House of Representatives: How Stablecoins Can Help the U.S. Avoid a Debt Crisis?

Author: Paul D. Ryan, former Speaker of the U.S. House of Representatives, member of the Paradigm Policy Council

Compiled by: Luffy, Foresight News

The economic and social experiment in the United States is at a critical crossroads, most evident in the national debt. The U.S. is heading towards a predictable yet avoidable debt crisis. Without intervention, the economy will stagnate, and the government's commitments to healthcare and retirement security will falter. More seriously, cuts to defense spending will put the nation at risk.

Amid the growing fiscal predicament and the lack of effective solutions, the crisis is likely to begin with failed Treasury auctions, forcing massive adjustments to the fiscal budget. As the economy contracts, the dollar will suffer significant credit shocks, further jeopardizing economic growth prospects. The obvious answer is to address the root causes of these issues. Welfare programs are a driving factor of debt that need reform, but politicians lack the courage to do what is necessary. Thus, the country is on a perilous path. What can we do?

Let’s seriously consider stablecoins. According to data from the U.S. Treasury and cryptocurrency analysis site DeFiLlama, dollar-backed stablecoins are becoming significant net purchasers of U.S. government debt. If we view fiat-backed dollar stablecoin issuers as a country, they rank just behind the top 10 holders of U.S. Treasury securities—smaller than Hong Kong but larger than Saudi Arabia. If the industry continues to grow, stablecoins could become one of the largest purchasers of U.S. government debt.

The emergence of stablecoins as a mechanism to promote the dollar is timely. The dollar's status as the primary international reserve currency benefits the U.S. immensely. Its advantages include providing cheap, reliable financing for fiscal expenditures and exerting a significant influence on the global financial system. Due to the dollar's dominance, most financial activities ultimately go through U.S. banks. As the global economy becomes more digital and multipolar, the dollar's dominance is increasingly threatened.

China understands what is happening. Beijing's financial authorities have positioned digital currency as a pillar of the country's international development strategy and foreign policy. The Chinese government is embedding the renminbi into networks it can control through investments in both physical and digital infrastructure in emerging markets, leveraging financial engineering to exert influence. The U.S. cannot sit idly by while its largest international competitor taps into the potential demand for secure and convenient digital currencies. The framework for understanding how the dollar gains power needs to be updated in light of global changes.

For example, consider the drivers of the dollar's dominance. Suppose a Japanese company sells products or services to a customer in Wisconsin. How does that company handle the dollars it receives? Since the early 1970s, the company could invest them in the vast and liquid U.S. Treasury market. The most appealing aspect is that U.S. Treasuries are backed by the world's most dynamic economy. After all, U.S. government debt is a claim on the future output of the American economy.

Setting aside the issue of the ever-growing U.S. government debt, the fact that Uncle Sam can continuously sell debt in international markets at low interest rates proves an important point: the demand for dollars from other countries is insatiable. However, there are signs that this status quo may be changing, and rapidly.

Countries like China and Saudi Arabia, which have historically been large purchasers of U.S. debt, are gradually exiting the market. They are increasingly seeking payment settlement methods outside the dollar system. Meanwhile, the risk of failed Treasury auctions is growing for the U.S. government, and this frightening future could disrupt markets and severely damage America's credibility.

If other countries successfully enhance the influence of their own currencies while selling off U.S. Treasuries, the U.S. will need to find new ways to enhance the appeal of the dollar. Dollar-backed stablecoins are one of the answers.

Most stablecoin holders come from economically weaker countries, where the underlying institutions are seeking "higher quality" funding. As former Commodity Futures Trading Commission Chairman Timothy G. Massad recently described in a research paper at the Brookings Institution, stablecoins are akin to Eurodollars, which were offshore dollar-denominated liabilities that propelled the dollar's dominance during the Cold War.

Promoting dollar-backed stablecoins will follow an old path and bring clear short-term benefits. This move will durably increase demand for U.S. debt, reducing the risks of failed auctions and debt crises. Unlike China's digital financial infrastructure, dollar-backed stablecoins issued on public, permissionless blockchains embody America's consistent values of freedom and openness.

A sound and predictable regulatory framework for stablecoins, supported by both parties in Congress, will help significantly expand the use of digital dollars at a critical moment. In an election year, considering all the ugly political scenarios ahead, we need such a victory to bolster confidence in the financial markets.