Nic Carter, co-founder of Castle Island Ventures and Coin Metrics, comments that the acceleration of deglobalization and de-dollarization this year may potentially extend the lifespan of the dollar as the world's reserve currency. Carter stated, "We are at a critical moment in the life of the dollar. Significant events have occurred that lead people to question whether the dollar will continue to be the global reserve currency. We are seeing major commodities markets settling trades in local currencies. For instance, last year 20% of oil transactions were settled in non-dollar currencies."
In the latest developments, Russia and China have almost completely de-dollarized in their mutual trade. Russian Foreign Minister Sergei Lavrov reported this week to local media that currently over 90% of transactions are settled in local currencies. Moreover, bilateral trade between the two countries increased by 26% in 2023, reaching $240 billion.
Carter views the crypto economy as a potential lifeline for the dollar's reserve status. "The crypto economy is like an emerging country. It is a dollarized system. So it indeed supports the dollar," he said.
Carter noted that stablecoins have created new demand for dollar-denominated debts like U.S. Treasury bonds.
"Stablecoins are tokenized representations of the dollar, circulating on public blockchains such as Ethereum, Solana, and Tron. They were initially created because it was difficult for cryptocurrency traders to settle dollar transactions through exchanges. It’s well-known that the cryptocurrency industry lacks bank accounts."
The two most famous stablecoins are Tether’s USDT and Circle’s USDC.
Carter pointed out, "Stablecoins have become a trading medium on exchanges, the main type of collateral on exchanges, and they have also broken into some non-crypto economies."
Stablecoins are a new source of demand for U.S. Treasury bonds, as they are primarily backed by these bonds. Carter explained, "Almost all stablecoins operate on this model; they hold U.S. Treasury bonds as reserves to support their dollar liabilities. This represents a meaningful set of buyers for U.S. debt."
According to Coin Metrics, the current supply of stablecoins exceeds $155 billion, with last year’s transaction settlement volume reaching $8 trillion.
"Each stablecoin circulates 20 to 30 times annually. This year, I predict the settlement value of stablecoin transactions will exceed $10 trillion, on par with Visa," Carter noted, "It will become a very meaningful medium of transaction and a significant source of demand for U.S. Treasury bonds."
Who is buying U.S. Treasury bonds?
U.S. national debt has soared to over $34.5 trillion, and according to Bloomberg Economics, future debt levels could rise to 123% of GDP by 2034, meaning the cost of managing the debt would be more than one and a half times that of the U.S. The defense spending for 2023 is roughly equivalent to the total Social Security budget.
Meanwhile, the trend of foreign debt holders reducing their exposure continues. "We are issuing a significant amount of debt at a very high level. And we rely on foreign buyers of our debt to maintain our low repayment costs," Carter said, "The question is, who are still the buyers of U.S. Treasury bonds? The two largest foreign holders of U.S. Treasury bonds are divesting—China and Japan are divesting. China once held over a trillion dollars of bonds."
The supply of stablecoins could reach $200 billion this year and soon after hit $500 billion, at which point stablecoins will become a very significant holder of U.S. debt.
Carter stated, "Stablecoins have expanded the dollar's influence globally, and they are creating demand for U.S. Treasury bonds at a critical time when the U.S. government desperately needs to convince people to buy its debt. Far from replacing the dollar, the crypto economy is actually very important in supporting the dollar system."
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Cointelegraph
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