Trump’s Bitcoin Bet:
A Policy to Stop De-Dollarization and Debt Crisis
Photo Credit: @JeffPasquino, https://x.com/JeffPasquino/status/1817332088129105939
Disclaimer: The author of this article does not own any cryptocurrencies at the time of writing. The content presented here is for informational purposes only and should not be considered financial, investment, or legal advice. Cryptocurrencies are highly volatile and speculative investments. Readers are encouraged to do their own research and consult with a qualified financial advisor before making any investment decisions. The author is not responsible for any financial losses or damages incurred as a result of the information provided in this article.
“Bitcoin, it just seems like a scam” once declared former President Donald Trump. Yet, in a dramatic 180-degree shift, he has now placed it at the core of his economic agenda. Recently, at the Bitcoin 2024 conference in Nashville, Tennessee, Trump articulated his newfound support for the cryptocurrency sector along with a series of policy ideas. At the surface level, the agenda will deregulate and bolster the cryptocurrency sector. At a deeper level, it will utilize the risky incentive structures of cryptocurrencies to solve the problem of de-dollarization and protect the U.S. from a debt crisis.
Trump’s Speech
Trump said, “I want America to be the nation that leads the way” on Bitcoin. He suggested that Bitcoin “is the steel industry of 100 years ago.” He said, “I'm laying out my plan to ensure that the United States will be the crypto capital of the planet and the Bitcoin superpower of the world.” He concluded his speech with, “my job will be to set you free…and we will make America and Bitcoin bigger, better, stronger, richer, freer and greater than ever before…we're going to make that one of the greatest industries on Earth.”
To achieve this vision, Trump outlined several key policies aimed at fostering a more pro-crypto environment. Generally, he indicated plans to ease regulatory burdens and reduce costs for the sector. Additionally, he suggested that his energy policies would ensure the necessary electricity for the industry’s expansion, hinting at the possibility of directly subsidizing electricity for crypto operations.
More specifically, he would fire current SEC Chairman Gary Gensler for his alleged regulatory heavy approach. A Bitcoin and crypto Presidential Advisory Council, of top industry influencers, would be established with the “task…to design transparent regulatory guidance for the benefit of the entire industry.” He would order the government to cease and desist all efforts to create a Central Bank Digital Currency (CBDC). Tangentially, he offered to commute the sentence of Ross Ulbricht, a long desired wish of many crypto influencers. Ulbricht is serving a double life sentence for orchestrating $183 million in mostly narcotics sales using Bitcoin on his darknet website, Silk Road.
Finally, he announced the most dramatic of his proposals, the “United States of America, [will] keep 100% of all the bitcoin the U.S. government currently holds or acquires into the future…This will serve, in effect, as the core of the strategic national bitcoin stockpile.” While Trump stopped short of providing further details, this can be seen as the tip of the iceberg for a Bitcoin strategic reserve. Just as with gold, this reserve would hold and purchase bitcoins as assets to safeguard the U.S. government's domestic and international financial health.
Senator Cynthia Lummis, who spoke just after Trump at the conference and got a shoutout in his speech, released a formal statement on her new bill called the ‘‘Boosting Innovation, Technology, and Competitiveness through Optimized Investment Nationwide Act of 2024’’ or the ‘‘BITCOIN Act of 2024.” It seeks to buy 1 million units of Bitcoin or 5 percent of the total Bitcoin supply through the U.S. Treasury and U.S. Federal Reserve. That is equal to about $68 billion in current prices. For perspective, BlackRock manages the world’s largest Bitcoin ETF at a value of $20 billion which is over one third smaller. Such a significant influx of new demand for Bitcoin would drive up its price and likely create a multiplier effect, spurring additional demand from other investors for Bitcoin and other cryptocurrencies, further boosting prices. This bill offers a more complete picture of Trump’s stockpile remarks. Lummis said “Trump's staff is reviewing” her bill.
The rest of Trump’s speech contained curious remarks. Trump said, “I've heard from Vivek [Ramaswamy] 175 million people in some form, are involved with this world of crypto and Bitcoin and all of the others.” On the low end, the U.S. Federal Reserve’s Survey of Household Economics and Decisionmaking (SHED) claimed 7 percent of Americans owned crypto or about 18 million (9 times smaller than Trump’s estimate). On the high end, Coinbase claimed 52 million (3 times smaller than Trump’s estimate) Americans owned crypto. A Crypto[dot]com report also claimed that 580 million (3 times bigger than Trump’s estimate) people own crypto around the world. It’s unclear what the 175 million figure referred to given the wide discrepancies.
However, one of the most startling aspects of his speech was his repetitive mantra that China is trying to dominate crypto. In five separate instances, he suggested China was competing against the U.S. for crypto market share and that the U.S. had to act to prevent the crypto industry from moving to China. While China was once an active crypto country, it banned all crypto transactions and mining in 2021. Since then, it has not been a major player in the industry and doesn’t plan to be. Again, it is unclear what this was in reference to and anyone that works inside the industry knows China is not an active competitor.
These oddities aside, Trump’s support galvanized crypto enthusiasts who face increasing regulatory pressure from a Democrat-led U.S. government that seeks to reign in violations of securities law and other criminal activity — at least nominally. A hands-off Trump administration would be a win for them. Following Trump’s speech, Bitcoin surged from around $57,000 to $68,000. In return, Trump gets their donations and votes. This quid pro quo is typical of political interest group lobbying, but there may be deeper implications at play.
Deep Dive on Crypto Policy
Even after his almost 60 minute speech, the critical question remained unanswered: why did Trump flip from anti-crypto to pro-crypto? As of 7 June 2021, the former President Trump said this on Fox Business: “My opinion is that the currency of this world should be the dollar. I don’t think we should have all of the bitcoins of the world out there. I think they should regulate them very very high…it takes the edge off of the dollar and the importance of the dollar…Bitcoin, it just seems like a scam…I don’t like it because it’s another currency competing against the dollar.”
A clue to Trump’s change of heart can be found in his recent speech. He said, “Those who say that Bitcoin is a threat to the dollar have the story exactly backwards. I believe it is exactly backwards. Bitcoin is not threatening the dollar.” Lummis’ statement also said, “Establishing a strategic Bitcoin reserve would firmly secure the dollar’s position as the world’s reserve currency.” This suggests that Trump was persuaded that Bitcoin and cryptocurrencies could support, rather than undermine, his goal of maintaining U.S. dollar dominance.
However, the connection between cryptocurrencies and the strengthening of the U.S. dollar remains somewhat unclear. Trump addressed this missing link when he said, “We will create a framework to enable the safe, responsible expansion of stablecoins. You know what a stablecoin is? Does anybody know? Please raise your hand. Allowing us to extend the dominance of the U.S. dollar to new frontiers all around the world.”
Stablecoins are cryptocurrencies that maintain a 1 to 1 peg with a fiat currency based on a stablecoin provider, usually a centralized private firm, maintaining real reserves of the given fiat currency. The provider exchanges cryptocurrency for fiat when customers want to make deposits or vice versa for withdrawals. This provides the stable non-volatile value of a fiat currency but with regulatory flexibility that cryptocurrencies provide. Stablecoins are mostly used for trading cryptocurrencies within market exchanges. About 75 percent of trades are done using stablecoins. It just so happens that 99 percent of stablecoins are pegged to the U.S. dollar.
Increasing cryptocurrency demand increases stablecoin demand which increases U.S. dollar and ultimately U.S. Treasury demand. If the U.S. government lifts regulations and buys large amounts of cryptocurrencies, mainly Bitcoin, the price of cryptocurrencies will go up incentivizing others to buy into the cryptocurrency rally. Those other buyers will increase the demand of U.S. dollars to buy U.S. denominated stablecoins to trade into the cryptocurrencies. As stablecoin providers receive customers’ U.S. dollars, they will convert them into U.S. Treasuries to hold as reserves rather than non-interest bearing cash.
While there are other benefits to the global reserve currency status, the most critical is how U.S. dollar dominance strengthens the ability for the U.S. to finance its debt. If countries don’t use U.S. dollars as the global reserve currency that means they won’t build up surplus U.S. dollar reserves. If they don’t build up surplus U.S. dollar reserves, then they will not exchange those for interest bearing U.S. Treasuries. Finally, this causes the U.S. government to face a demand shortage of those willing to finance its budget deficits. On 2 August 2024, Trump alluded to using a “crypto check” to “pay off” the entire U.S. debt. While hyperbolic, he was thematically drawing a straight line between the expansion of cryptocurrencies and the ability of the U.S. to accommodate its large debt. Thus, the expansion of cryptocurrencies promotes the U.S. dollar’s global reserve status which enables the U.S. to have a captured market to fund its deficits.
Photo Credit: Ryan Research
De-Dollarization and Debt Crisis
Why does a future U.S. administration need to create such a financial novelty? This is because of the negative trends of de-dollarization and the foreign investor Treasury demand shortage. J.P. Morgan Global Research defined de-dollarization as “a significant reduction in the use of dollars in world trade and financial transactions, decreasing national, institutional and corporate demand for the greenback. This would diminish the dominance of the dollar-denominated global capital market, in which borrowers and lenders around the world transact in dollars.” RBC Wealth Management's Global Portfolio Manager Alan Robinson wrote, “One of the benefits [of the U.S. dollar as the world’s reserve currency] is robust international demand for U.S. Treasury bonds. This demand allows the U.S. government to issue more debt, and at lower rates, than would be the case if the dollar lost its status.” So, while the U.S. dollar as the global reserve currency provides the U.S. other benefits, such as the ability to place sanctions and an increased demand for private U.S. assets, the most important benefit is how it provides a steady and large flow of funding for U.S. deficits. However, that is changing.
The U.S. dollar fell from about 73 percent of global currency reserves in 2000 to about 58 percent in 2022. Also, while the U.S. debt keeps growing and has reached an all-time high of about $35 trillion, the pace of its growth is slowing. From 2000 to 2012 the U.S. grew its debt at an average annual rate of 7 percent and from 2013 to 2024 only by 4 percent.
Photo Credit: IMF
The slowing rate is caused by the declining demand for U.S. debt from foreign investors. From both date ranges, domestic-owned U.S. debt grew at an average annual rate of 5 percent. From 2000 to 2012, foreign-owned U.S. debt grew at an average annual rate of 13 percent and from 2013 to 2024 only by 1 percent. In relative terms, foreign-owned debt fell from its 34 percent high in 2014 to just 23 percent in 2024. In absolute terms, foreign-owned debt fell from its $8.5 trillion high in 2021 to $7.9 trillion in 2024 (7 percent drop).
Photo Credit: https://usafacts.org/articles/which-countries-own-the-most-us-debt/, Ryan Research
Japan and China are the top two holders of U.S. debt. Japanese-owned debt fell from its high of $1.6 trillion in 2014 to $1.1 trillion in 2024 (30 percent drop). Chinese-owned debt fell from its high of $1.7 trillion in 2013 to $750 billion in 2024 (55 percent drop). Together, that’s a shortfall of $1.4 trillion combined. In aggregate, all other countries kept increasing their stock of U.S. debt but slowed their pace. All other countries increased their stock of U.S. debt by an average annual rate of 12 percent from 2000 to 2012 but only 3 percent from 2013 to 2024. Praveen Korapaty, chief interest rates strategist at Goldman Sachs, said, “foreign ownership of Treasurys continues to decline and we expect that will remain the case for the foreseeable future.”
Photo Credit: https://usafacts.org/articles/which-countries-own-the-most-us-debt/, Ryan Research
During the same period that saw this decline, stablecoin providers went from owning zero to $120 billion worth of U.S. debt, as of June 2024. Stablecoin providers are now the 18th largest holder of U.S. debt which makes them a larger owner than countries like Germany. This is also 20 percent of the total foreign-owned debt shortfall. If stablecoin providers could accomplish that all in their startup phase, without public and private institutional support, it would be very probable for them to cover the current gap, created by declines in foreign ownership, with institutional support.
Estimating the Future Impacts of Crypto Growth
As of June 2024, the market cap for all cryptocurrencies was $2.3 trillion. The market cap for all stablecoins was $157 billion. This data was collected from CoinMarketCap, CoinGecko, and The Block. These data points would imply a U.S. Treasuries to total stablecoin market cap ratio of 77 percent and a total stablecoin market cap to total cryptocurrency market cap ratio of 7 percent. Assuming these ratios hold into 2030, we can forecast how much cryptocurrencies and stablecoins would need to grow to cover various debt amounts.
To cover the $600 billion decline in foreign-owned debt, the cryptocurrency market cap would have to grow by 5 times to a total of $11.8 trillion and $783 billion for stablecoins. To cover the $1.4 trillion decline in combined Japanese-owned and Chinese-owned debt, the cryptocurrency market cap would have to grow by 12 times to a total of $27.6 trillion and $1.8 trillion for stablecoins. To cover the Congressional Budget Office’s (CBO) $6.5 trillion estimate of additional U.S. debt by 2030, the cryptocurrency market cap would have to grow by 54 times to a total of $128 trillion and $8.4 trillion for stablecoins. To cover twice the CBO’s estimate, considering future pressures to increase spending, the cryptocurrency market cap would have to grow by 108 times to a total of $256 trillion and $17 trillion for stablecoins.
Photo Credit: Ryan Research
How do those numbers compare to predictions made by influential investors and analysts? By using a selection of Bitcoin and Ethereum price predictions, we can calculate forecasts for 2030. These calculations assume the current unit supply issuance schedules, a Bitcoin market cap to total cryptocurrency market cap ratio of 50 percent, and an Ethereum market cap to total cryptocurrency market cap ratio of 20 percent. American investment management firm, with $90 billion assets under management, VanEck’s forecast implies a cryptocurrency market cap growing 6 times to a total of $13.2 trillion, $872 billion of stablecoins, and $668 billion of U.S. debt held by stablecoins. Pranav Kanade, a portfolio manager at VanEck’s Digital Assets Alpha Fund, separately forecasted a stablecoin market cap of “several trillion dollars.”
American asset management firm, with $725 billion assets under management, Bernstein’s forecast implies a cryptocurrency market cap growing 9 times to a total of $20.4 trillion, $1.3 trillion of stablecoins, and $1 trillion of U.S. debt held by stablecoins. In a separate report, Bernstein forecasted a stablecoin market cap of $2.8 trillion. Fundstrat Global Advisors research firm’s Tom Lee’s forecast implies a cryptocurrency market cap growing 9 times to a total of $20.4 trillion, $1.3 trillion of stablecoins, and $1 trillion of U.S. debt held by stablecoins.
Twitter and Block, Inc. founder Jack Dorsey’s forecast implies a cryptocurrency market cap growing 17 times to a total of $40.9 trillion, $2.7 trillion of stablecoins, and $2 trillion of U.S. debt held by stablecoins. American asset management firm, with $6.7 billion assets under management, ARK Invest’s CEO Cathie Wood’s forecast implies a cryptocurrency market cap growing 66 times to a total of $155 trillion, $10.8 trillion of stablecoins, and $7.8 trillion of U.S. debt held by stablecoins. MicroStrategy, a public company with large holdings of Bitcoin, CEO Michael Saylor’s forecast implies a cryptocurrency market cap growing 173 times to a total of $409 trillion, $27 trillion of stablecoins, and $20.7 trillion of U.S. debt held by stablecoins.
Photo Credit: Ryan Research
Photo Credit: Ryan Research
The averages of all these forecasts are as follows: a cryptocurrency market cap growing 40 times to a total of $95 trillion, $6.2 trillion of stablecoins, and $4.7 trillion of U.S. debt held by stablecoins. In order to fill the Japanese and Chinese shortage, the cryptocurrency market cap would only need to grow at a third of the rate of the average of forecasts. The forecasts of influential investors and analysts corroborate substantial growth of stablecoin provider purchases of U.S. debt. The thresholds for growth needed to accommodate U.S debt concerns are well within the ranges suggested by forecasters.
Collapsing Incentive Structures
The U.S. is vulnerable to the changing whims of the rest of the world, in this regard, because of the economic incentive structure of what some call the “Treasury bill standard.” Economist Michael Hudson coined this term. He is President of The Institute for the Study of Long-Term Economic Trends (ISLET), a Wall Street Financial Analyst, Distinguished Research Professor of Economics at the University of Missouri, Kansas City, and author of many books. In his analysis, the U.S.’ balance of payments deficits and departure from the gold standard created a global feedback loop. The U.S. exported to the rest of the world more dollars than it imported. Unable to exchange U.S. dollars for gold like before, the rest of the world could either buy U.S. Treasuries with their excess U.S. dollars or not. If they didn’t buy U.S. Treasuries, the U.S. government would have to print more dollars to monetize its debt. This would devalue the dollar to such a degree that the rest of the world would face stark consequences.
A significantly devalued dollar would erode the competitiveness of export-dependent countries by making their goods more expensive. In addition, a significantly devalued dollar would collapse the stability of international trade and investment mechanisms. The U.S., however, would theoretically gain from increased competitiveness of its goods being cheaper while also being immune to international trade risks because it has the third to last lowest international trade as a share of GDP ratio at 27 percent. For comparison, France’s is at 73 percent and Germany’s is at 99 percent. Hudson explained, “Since the nation went off gold in 1971, the Treasury bill standard has enabled the United States to draw on the resources of the rest of the world…As dollar debts have replaced gold as the backing for central bank reserves, and hence for the world’s credit supply, the entire system would be threatened if” there was drastic depreciation of the dollar.
He also wrote, “Foreign nations see themselves stuck with unpayable IOUs – under conditions where, if they move to stop the US free lunch, the dollar will plunge and their dollar holdings will fall in value relative to their own domestic currencies and other currencies. If China’s currency rises by 10% against the dollar, its central bank will show the equivalent of a $200 million loss on its $2 trillion of dollar holdings as denominated in yuan. This explains why, when bond ratings agencies talk of the U.S. Treasury securities losing their AAA rating, they don’t mean that the government cannot simply print the paper dollars to ‘make good’ on these bonds. They mean that dollars will depreciate in international value. And that is just what is now occurring. When Mr. Geithner [the former U.S. Secretary of the Treasury] put on his serious face and told an audience at Peking University…that he believed in a ‘strong dollar’ and China’s U.S. investments therefore were safe and sound, he was greeted with derisive laughter.”
For decades the U.S. held more leverage than the rest of the world. The U.S. would be the least hurt if a disruption in the Treasury bill standard occurred. The only way for the rest of the world to get out of this precarious position was to very gently and slowly disentangle themselves from the standard. Other short-term contributing factors include countries using U.S. dollars to manipulate their currency’s exchange value, having equivalent alternative assets in their own regions, and yield insensitive holders selling to yield sensitive holders. Another stimulus was the increased anxiety over the dollar system’s ability to sanction countries for not aligning with U.S. interests. However, in the long-term, the general trend of de-dollarization and US. debt offloading is occurring because the rest of the world wants to remove the risks they face if the Treasury bill standard collapses.
The U.S. debt ballooned in recent decades mostly because of wars in the Middle East and bailouts for the Great Financial Crisis and Covid Pandemic combined with inadequate tax rates. As of now the U.S. is involved in a proxy war in Eastern Europe while seemingly preparing for escalations in Asia, Middle East, and even Latin America. A joint Congressional commission and RAND Corporation research project proposed the U.S. should prepare capacity to fight multiple theaters of war at once instead of the traditional two theater doctrine. Aside from other worrying signs, the U.S. stock market appears to be nearing the end of a bubble in technology stocks that may stimulate requests for another bailout. Trump wants to extend the 2017 tax cuts expiring in 2025 which the CBO found would add $4.6 trillion to the debt. Harris previously wanted to extend them too but has recently supported minor tax increases which she might not follow through on once in power.
Taken together, all these trends signal the future years of the U.S. will require even higher levels of spending and thus high levels of U.S. Treasury purchases to finance it. However, the rest of the world is de-dollarizing and reducing their exposure to U.S. debt, as previously shown. As per Hudson’s analysis, the rest of the world, especially the BRICS and BRICS-aligned, is pursuing this reduction in fear of the Treasury bill standard’s risk of economic turmoil and the U.S. hegemony that goes with it. Why would countries in economic rivalry, indirect warfare, or direct warfare choose to buy U.S. Treasuries to finance their enemy? If the rest of the world can untangle themselves sufficiently enough from the dollar system, the risks of dollar devaluation become mute. Thus, without this leverage, the U.S. has few alternative options.
New Incentive Structures
First, it could raise taxes. As noted before both candidates don’t want to because of the risk of voter loss or economic side-effects. Whatever esoteric tax increases, like closing tax loopholes, that Democrats may pass may only generate an additional $45 billion in revenue per year. Too little to make a meaningful difference and still unlikely to happen. Second, it could cut spending. The U.S. brings in enough tax revenue to afford almost all its mandatory spending for things like social security and entitlements. Although some politicians propose cutting that spending, most voters view that as a non-starter and thus any politician hoping to be re-elected does too. The deficit is usually related to discretionary spending on foreign policy. The military adventurism and over-extended presence of the U.S. seems an adequate area to curtail. In fact, contracting the U.S. military presence might even stimulate foreigners to reinvest in Treasuries. Given the current international turmoil and the existing calls to expand the U.S. military’s theaters, it seems that’s also a non-starter.
Third, the U.S. could increase the yields on Treasuries to entice more investors with higher returns but that just increases spending even more in the future which eventually stimulates the fourth option anyway. Finally, this leaves the U.S. Federal Reserve with the imposition to print dollars to cover the gap in Treasury purchases or increased interest spending from higher yields. This debt monetization is what the rest of the world fears. However, as previously stated, they have reduced their dollar related risk and are less exposed. China’s international trade as a share of GDP ratio has also nearly halved in the past two decades and they are seeking to boost domestic consumption even more. The U.S. still maybe capable of threading the needle given its trade isolationism and the benefits of increased exports that a cheap dollar brings, but it would put U.S. consumers on a slippery slope.
Philip Pilkington is a macroeconomist, investment professional, and frequent writer in American Affairs. He wrote, “A 10–20 percent decline in the value of the dollar would be painful, particularly for poor and working-class people who are more impacted by rising import prices, as cheap Chinese imports are disproportionately bought by these groups (especially relative to their budgets). The average American would rankle at a permanent loss of 3–7 percent of their purchasing power, but it would not break the bank. Anything over this, however, would be incredibly painful. A 30–50 percent decline in the value of the dollar would mean imported goods rising in price 30–50 percent and overall prices rising anywhere between 10 percent and 17 percent. That represents a permanent decline in living standards of 10–17 percent. Never in history outside of wartime have Americans felt such a shock, and never in history have they faced such a permanent shock. This would be a contraction in living standards that could easily generate chaos and social unrest.”
Photo Credit: Ryan Research
This negative outcome could be compounded if the U.S. economy’s structure remains deindustrialized and policy constrained. One of the consequences of the Treasury bill standard was that it incentivized the U.S. to let other countries steal its market share of industrial manufacturing while it leaned into the service sector and financialization. Even with a cheaper dollar, there is a large challenge ahead to reverse this fifty-year trend. Ultimately, debt monetization is a very risky strategy for any country to pursue. Infamous examples like Weimar Germany and Zimbabwe immediately come to mind of countries that thought they could print their way out of debt. All the reviewed options either disrupt the status quo of U.S. economic and geopolitical interests or preserve the status quo while trying to walk the extremely risky hyper-inflation tightrope.
Faced with these poor options, crypto emerged as a tantalizing gamble. The constellation of cryptocurrency, stablecoin, and U.S. political interests all come together to enable the U.S. to overcome this. Crypto providers get deregulation and new inflows increasing the prices just as their pyramid scheme economics exhausts untapped buyers. Investors around the world get access to outsized returns of crypto, stability of stablecoins, and regulation-lite global financial services. The U.S. government gets an expanding economic sector denominated in dollars expanding demand for dollars and U.S. Treasuries.
There is no doubt an inherent logic here, but how broad would this new incentive structure be? Cryptocurrencies are not used for ordinary commerce or international trade. The only other government to hold cryptocurrencies is El Salvador. Trump also just clashed with its current leader who initiated the policy. The rest of the world isn’t as bullish on cryptocurrencies as the U.S. According to the Cambridge Centre for Alternative Finance, the U.S. has the largest market share of Bitcoin mining. Most trading occurs in dollars. CB Insights reported that more than half of the top crypto startups were based in the U.S. Similarly, CoinJournal ranked the U.S. as the number one crypto country with 4,691 total crypto companies followed by Singapore with only 643 in second place (14 percent of the U.S.). The crypto industry is dominated by the U.S.
Photo Credit: Cambridge Centre for Alternative Finance
With such U.S. centralization it seems hard to imagine that, in the wake of de-dollarization, other countries would substantially adopt cryptocurrencies just because the U.S. is doing so and advertising it. There is not a clear rationale for why the traditional financial system cannot already do all the value propositions cryptocurrencies and stablecoins offer. They don’t provide unique additional products or services, but they do provide them in a more deregulated and opaque manner.
Stablecoins provide an emulation of the dollar financial system with less laws and oversight. Stablecoins are used for cryptocurrency trading in the first place because they enable exchanges and investors to evade laws that would otherwise prohibit them from trading. Some of these include the standard Know Your Customer (KYC) and Anti-Money Laundering (AML) laws. Part of the reason cryptocurrencies can have such high returns is because they engage in fraud and market manipulation that goes unchecked because they are categorized as outside the traditional financial sector.
Ingeniously, why focus on deregulating the traditional financial sector, that will be fraught with public scrutiny, when you can keep the appearance of a regulated one while opening a parallel one that provides de-facto deregulation thanks to technically labelling it a different category? Thus, a broader market can be captured because there is high demand for a deregulated dollar financial system that operates in parallel to the traditional one. The cryptocurrency sector has been associated with criminal black market activity since its inception. The expansion of the cryptocurrency sector will attract more of the black market as well as the more sophisticated white collar financial crime market.
In the short-term, it’s conceivable of how this strategy would attract demand that culminates in the U.S. avoiding a debt crisis. In the long-term, this seems incredibly unstable. Eventually, there’s a ceiling of investors that want cryptocurrencies that are speculative and volatile assets with no real world utility or ability to use in ordinary commerce or international settlement. Similarly, the market for a deregulated dollar financial system offered by stablecoins could have a ceiling because of continued de-dollarization and other countries’ regulations. At some point, the U.S. may find itself isolated in this scheme which would return it to square one of needing to turn on the money printer.
However, another trick of stablecoins is that, while they are marketed as backed by 100 percent reserves, in practice they often are backed by a fraction. Allegations of this have existed alongside the growth of stablecoins. Simply put, it is alleged they counterfeited dollars to flood the cryptocurrency markets in order to push prices higher. This is possible because of the same mechanics as a bank. Banks don’t expect all their customers to demand all their deposits at once, only a fraction. Stablecoin providers only need to return dollars to the fraction of stablecoin holders who request them.
Associate Professor of Economics and Department Chair at the University of Mississippi Joshua Hendrickson articulated “Despite the fact that they are not banks, they actually behave remarkably like a bank. Someone gives the stablecoin issuer a dollar…and the issuer gives the person a token worth a dollar. Conceivably, people want the tokens and not the dollars. Like a bank, the issuer is now sitting on a lot of dollars, which they have promised to give people back if they want to turn in their tokens. Just like a bank, the stablecoin issuer knows that a lot of people aren’t going to try to redeem their tokens.”
The fractional reserve banking mechanic gives stablecoin providers the flexibility to issue new synthetic dollars without reserves. They, however, still get the benefits of the market thinking they are 100 percent backed by reserves thanks to their fraudulent marketing, the sector’s opaqueness, and limited oversight placed on it. The economic cartel of stablecoin providers creates what I call the Shadow Federal Reserve System or for short the Shadow Fed. If the Fed started hyper-inflating the dollar supply, market sentiment would turn and weaken the dollar. On the other hand, the Shadow Fed’s nominal 100 percent reserve status would nullify that reflexive negative market sentiment. This would allow for the dollar to retain its value while they hyper-inflated the supply of synthetic dollars. In fact, the fractional reserve multiplier effect could accelerate the pace at which these stablecoins could buy up U.S. debt, so there’s an added incentive to foster it.
For example, a stablecoin provider could receive $10, portion that off as a reserve, and create $100 of stablecoins for a 10 percent reserve ratio. Aside from explicit income that stablecoin providers get from interest-bearing assets like Treasuries, many have connections to cryptocurrencies and derive an implicit income from using their fractional reserve multiplier to stimulate higher buying pressure for cryptocurrencies and thus higher prices. So long as the stablecoin providers have a minimum level of acceptable reserves to meet withdrawal requests, they can engage in shadow quantitative easing to print money to buy cryptocurrencies and government debt. This aspect accelerates how fast the U.S. can ramp up positive impacts and extends the time horizon of avoiding a debt crisis all without having to disrupt current U.S. economic and geopolitical interests.
The U.S. would expand the dollar-denominated market and offset de-dollarization. The U.S. would increase the amount of demand for its Treasuries. Indirectly, the increased demand for the dollar would likely saturate other private U.S. assets like stocks, bonds, and real estate. However, the risks are notable. If the Shadow Fed engages in unknown fractional reserve expansion and it becomes known, the value of stablecoins would plummet. There would be a bank run on stablecoin providers. They wouldn’t be able to accommodate requests and would start liquidating their other cryptocurrency holdings. This would create selling pressure crashing cryptocurrency markets. This could spillover into a systemic chain reaction of the mainstream economy. Anyone holding stablecoins or cryptocurrencies on their balance sheets could suddenly see them evaporate and impair their financial status. The 2008 financial crash happened because one day the market realized all the mortgage-backed securities were worthless. The same thing could happen with cryptocurrencies and stablecoins. Even if the stablecoins’ value weren’t directly affected, a cryptocurrency collapse would disrupt the underlying blockchain software systems within which stablecoins operate.
Another risk is inherent in its deregulated nature. The allowance for a spectrum of malfeasance to criminal activity could usher in chaotic consequences. Ordinary small investors could be more easily scammed. Tax evaders could more easily hide their money. Even terrorists, with aims to harm the U.S., could take advantage of this system. Further, the government would be tempted to abuse this system. If it temporarily removes any financial limits from itself, it could engage in extremely unwise and totalitarian behavior.
With an alternative source of funding from its citizens or traditional creditors, the U.S. could be less sensitive to their retaliatory actions. It could increase spending on bizarre vanity projects, crackdowns on civil rights, and escalatory wars. Finally, if that doesn’t destabilize the country, there will be a point where this cryptocurrency option of last resort wanes. At that point, the U.S. would be even deeper in debt relative to its tax revenue, its government presence would be even more over-extended, its private sector would be even more entangled with cryptocurrencies, and the rest of the world even more hostile to it. The inevitable debt crisis would be drastically worse in that future then dealing with it in the present.
This interpretation of Trump’s cryptocurrency policy agenda is plausible, though it necessitates some inference from his speech. Trump's extemporaneous speaking style often includes remarks that may not be intended as comprehensive policy proposals. This speech was delivered at a niche conference rather than presented as a formal written white paper. However, the basic concept of this plan was indeed advocated by a policy expert with a record of accomplishments during Trump's first term in a reputable publication.
Review of Direct Calls to Cryptotize the Debt
Former Speaker of the House Paul Ryan did just that. On 13 June 2024, Ryan wrote “Crypto Could Stave Off a U.S. Debt Crisis: Stablecoins backed by dollars provide demand for U.S. public debt and a way to keep up with China” in the Wall Street Journal. His op-ed is one of the most explicit descriptions on how stablecoins could solve the U.S. debt demand shortage. Ryan wrote, “dollar-backed stablecoins are becoming an important net purchaser of U.S. government debt. If fiat-backed dollar stablecoin issuers were a country, it would sit just outside the top 10 in countries holding Treasurys—smaller than Hong Kong but larger than Saudi Arabia. If the sector continues to grow, stablecoins could become one of the largest purchasers of U.S. government debt and a reliable source of new demand.”
Ryan touched upon the growing shortage of foreign purchases of U.S. debt too. “There are signs, however, that the status quo could be changing—and fast. Several nations that have historically been large buyers of U.S. debt, such as China and Saudi Arabia, are gradually retreating from the market. They are also increasingly looking for options for settling payments outside the dollar system. There is, meantime, growing risk that the U.S. government could soon experience a failed debt auction. Such an event would roil markets and severely undermine U.S. credibility. If other countries are successful at bolstering their currencies’ influence while dumping Treasury debt, the U.S. will need to find new ways to make the dollar more attractive. Dollar-backed stablecoins are one answer.”
“Many Republicans recognize the strategic advantages of a private-sector U.S. dollar stablecoin,” Pranav Kanade, a portfolio manager at VanEck’s Digital Assets Alpha Fund, reflected. He went onto suggest that Republicans care about stablecoins because of their ability to support the dollar. “This becomes increasingly vital as traditional government buyers of US debt, like China, become more hesitant,” Kanade said. Governor Ron DeSantis, former Presidential candidate Vivek Ramaswamy, Senator Ted Cruz, and former Congressman David McIntosh are notable and vocal promoters of cryptocurrencies. The former GOP Speaker of the House Kevin McCarthy said, “I like Bitcoin.” President Trump’s former Comptroller of the Currency and former Chief Legal Officer of Coinbase Brian Brooks also wrote a Wall Street Journal op-ed titled “Stablecoins Can Keep the Dollar the World’s Reserve Currency” last year. Trump nominated U.S. Federal Reserve Governor Christopher Waller has also said the growth of stablecoins and cryptocurrencies would “strengthen the dominant role of the dollar.” Many of them were pro-crypto before Trump and it appears the consensus amongst the Republican Party is pro-crypto.
In a May 2024 interview with Bloomberg, Ryan promoted Congressman Patrick McHenry’s stablecoin legislation efforts which he indicated has moderate buy-in from Democrats like Senator Chuck Schumer. Democrats have a more mysterious relationship with cryptocurrencies. A wing of the Democrat party is hostile to Wall Street and thus anything that sniffs of financial impropriety. This wing, often represented by Senator Elizabeth Warren, seeks heavier regulation. However, it is largely forgotten that one of the biggest cryptocurrency exchanges was partial to the Democrats. In 2022, FTX was revealed to be committing fraud and went bankrupt. Its infamous CEO Sam Bankman-Fried is currently serving 25 years in prison. He also has the distinction as the second largest donor to President Biden’s 2020 campaign and gave about a total of $30 million to Democrats. The Democrats are more pro-crypto than the Warren-wing might suggest.
Democrats recently signed an open letter highlighting the need for their party to have pro-crypto policies. Congressman Ro Khanna led a virtual townhall with National Economic Council chief Lael Brainard and Biden economic advisor Anita Dunn organized by the Crypto for Harris advocacy group. It is also notable that seventy-one House Democrats, including former Speaker Nancy Pelosi, voted with Republicans to pass the Financial Innovation and Technology for the 21st Century Act which was viewed as favorable to the cryptocurrency industry. Republican Senator Lummis and Democrat Senator Kirsten Gillibrand introduced another bill to promote stablecoins a few months ago too. Overall, Democrats may have a vocal minority against cryptocurrencies but they seem to be more so quietly promoting it.
The Republicans have more consensus and direct speech about solving the dollar and debt crises. The Democrats are more muddled and passive with taking drastic steps to solve the crises given the risks but nonetheless laggardly following the lead of Republicans. Ryan suggested, if McHenry’s bill can get large support and pass, “you’d go from a couple hundred billion dollars of stablecoins to maybe trillions.” Ryan’s casual forecast lines up with the previous section’s estimates. The 2017 Trump tax cuts were one of Trump’s most significant legislative wins and Ryan was seen as the architect behind them. “This is his bill. This is Ryan’s bill”, Rules Committee Chairman Pete Sessions said. It’s not out of the question to see Ryan repeat his policy dominance of the first Trump administration into a future one.
Cryptocurrency influencers promoted former Speaker Ryan’s op-ed such as Professional Capital Management CEO Anthony Pompliano, Ava Labs CEO Emin Gün Sirer, Framework Ventures Co-Founder Vance Spencer, Satoshi Act Fund CEO Dennis Porter, and Castle Island Ventures Partner Nic Carter. In December 2023, Pompliano also articulated how stablecoins could replace lost Treasury demand from China and Japan. In February 2020, Carter argued “far from compromising the dollar’s mighty advantage internationally, cryptocurrency, and the infrastructure built to support it [i.e. stablecoins], may well entrench its position.” In March 2022, Carter argued that cryptocurrency-induced demand for stablecoins is good because it increases demand for U.S. dollars and Treasuries.
Another speaker at the Bitcoin 2024 conference was the CEO of Cantor Fitzgerald, Howard Lutnick, who represents an intersection of the traditional financial sector with the new cryptocurrency one. His firm is also one of the largest custodians of Treasuries for stablecoin providers. Lutnick said, stablecoins are “financing the U.S. Treasury’s debt…Every time someone buys [a stablecoin], [a stablecoin] buys a Treasury bill and we’re financing the U.S. Treasury’s debt…distribution of [stablecoins] is fundamental for backing our debt and our country.” In a previous speech, he highlighted that stablecoins “drive demand for US Treasuries.” With all these opinions from the political community and the insider cryptocurrency community taken together, there is consensus of leveraging cryptocurrencies and stablecoins to protect the U.S. dollar and debt.
Conclusion:
Trump pivoted on his prior cryptocurrency stance and is now running as a very pro-crypto candidate with deep ties to the industry. His brief statements on his future crypto agenda revealed one focused on deregulation and using the U.S. government’s purse to flood the market with large volumes of buying power. Trump was persuaded to change his opinion because he was convinced that cryptocurrencies strengthen the U.S. dollar rather than hurt it. In doing so, Trump conformed to the existing Republican Party orthodoxy on cryptocurrencies. The Republican Party is in almost complete lock-step in being pro-crypto party with Democrats more subtly following their lead. Paul Ryan championed explicit calls to fund the U.S. debt shortage and to counteract the de-dollarization trend by using stablecoins and cryptocurrencies.
Cryptocurrency demand drives stablecoin demand which drives U.S. dollar and Treasury demand. Forecasted estimates corroborated the important role for cryptocurrencies and stablecoins to play in the protection American strategic interests. Faced with the challenge of the looming debt crisis and the desire to not disrupt the status quo, it is understandable why Republicans and Trump have embraced this unconventional solution. However, there are risks in enabling a speculative and illicit sector to expand. Bubbles in this sector could develop that when popped could have systematic chain reactions throughout the entire economy. Nefarious activity could weaken law and order. The U.S. risks making the eventual debt crisis even worse by kicking it down the road.
With that being said, the alternatives to this approach are for the U.S. government to raise taxes, cut spending, raise yields, or hyper-inflate the dollar through money printing. The first is unlikely given the historic inability for elected politicians to substantially raise taxes because of voter retaliation. The second is unlikely given the desire of U.S. foreign policy and financial interests and similar voter backlash. The third is unlikely because it accelerates the existing problem. The fourth is unlikely because an overly weak dollar could do more harm than good, money printing is a slippery slope, and a weak dollar would hurt Wall Street’s ability to invest. Thus, the U.S. is left with the cryptocurrency gamble as the option of last resort. The cryptocurrency gamble is an extremely risky strategy to defy economic laws of nature. After decades of malinvestment, the U.S. appears to be leaning towards this option to prop up itself. The U.S. is teetering on the edge of inflating a giant economic bubble, as it embraces a high-risk strategy to satisfy a voracious desire to spend and delay the impending confrontation from decades of neglect.
Disclaimer: The author of this article does not own any cryptocurrencies at the time of writing. The content presented here is for informational purposes only and should not be considered financial, investment, or legal advice. Cryptocurrencies are highly volatile and speculative investments. Readers are encouraged to do their own research and consult with a qualified financial advisor before making any investment decisions. The author is not responsible for any financial losses or damages incurred as a result of the information provided in this article.
About the Author:
Peter Ryan is the CEO & Founder of Ryan Research, where he consults on economics, technology, and history as well as business strategy. He became active in the cryptocurrency sector in 2012. He worked at the Bitcoin Center on Wall Street shortly thereafter where he was exposed to early activity and influencers of the industry. He independently invested in cryptocurrencies and was influential in industry events. In 2017, he became CoinDesk’s leading research analyst on cryptocurrency where his databases and quarterly industry-wide reports were essentials. His research was cited in The Economist, NY Times, WSJ, and more. He then formed his own consultancy where he provided cryptocurrency research for investors and advised cryptocurrency startups. He’s now a cryptocurrency skeptic and focuses more on traditional economics.