In a recent report, the U.S. Treasury said tokenization and stablecoins are emerging forces that could transform the Treasury market, highlighting both the benefits of these innovations and the risks they carry. .
The report says that as tokenization (the process of digitally representing assets on the blockchain) takes root, the efficiency of government bond markets will increase significantly, expanding investor access and increasing transparency. He pointed out that there is a possibility.
However, he warned that stablecoins, which now rely more on US Treasuries as collateral, could pose significant risks if not tightly regulated.
tokenization
Tokenization has been touted as a potential breakthrough for the government bond market. Atomic payments promise greater efficiency, with real-time clarity on transactions. This level of speed and reliability has the potential to eliminate many of the risks associated with delayed payments, such as counterparty insolvency or financial distress.
Treasury report suggests tokenized government bonds could be essential in establishing faster and more efficient settlements, a feature that is especially valuable in times of market volatility did.
Beyond efficiency, tokenization could help democratize access to government debt by enabling fractional ownership. This would allow retail investors and international participants with limited funds to own a portion of U.S. Treasuries, an area typically reserved for large institutional investors.
Fragmentation could deepen the investor base and contribute to market stability through demand diversification, the report said. This is consistent with Treasury’s broader objectives to promote a more inclusive financial system and expand its reach without compromising its integrity.
Stablecoins and their associated risks
While tokenization promises efficiency, stablecoins bring liquidity and accessibility to Treasury-backed digital assets. Stablecoins, digital tokens pegged to stable assets like the U.S. dollar, are increasingly using U.S. Treasuries as collateral.
The report notes that this change has increased demand for Treasury securities and added liquidity to the market. However, he cautioned that stablecoins, especially those operating with limited regulatory oversight, pose a unique set of challenges.
According to the report, the main concerns relate to the “unpegging” risk faced by stablecoins, where fluctuations in the crypto market could cause stablecoins to temporarily lose their dollar peg. Historical examples such as the collapse of TerraUSD and Tether’s occasional peg losses highlight the potential volatility of the stablecoin market.
A sharp decline in stablecoins could trigger a rapid liquidation of U.S. Treasuries, triggering a “fire sale” at a critical time and disrupting the broader U.S. Treasury market.
The report recommends regulating stablecoins similar to narrow banks and money market funds, and securing strong collateral, primarily short-term government bonds, to avoid a liquidity crunch. Without strict regulation, stablecoins could become a destabilizing factor in the U.S. Treasury market, especially if investor sentiment suddenly changes and prompts mass redemptions.
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