Crypto Could Stave Off a U.S. Debt Crisis

By Paul D. Ryan

The American experiment is being tested. Nowhere is this more evident than in the trajectory of the national debt. The U.S. is headed toward a predictable yet avoidable crisis. If nothing is done, the economy will stall while government promises of healthcare and retirement security go unkept. Cuts to national defense will put the country at risk.

With no fiscal solution in sight, the crisis is likely to start with a failed Treasury auction forcing an ugly surgery on the budget. As the economy contracts, the dollar will suffer a major confidence shock, further imperiling prospects to deal with the most burdensome problem. Entitlement programs are growing. Debt payments are mounting. But politicians can't find the will to cut spending and none wants to raise taxes high enough to get the job done.

What can be done? What can stave off disaster? By taking stablecoins mainstream and embracing the broader cryptocurrency and DeFi landscape, dollar-backed stablecoins can become an important net purchaser of U.S. government debt. If a fiat-backed dollar stablecoin issuer was treated as a bank, 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 be one of the largest purchasers of U.S. government debt and a reliable buyer of new issuance.

Their emergence as a mechanism for managing the dollar could hit a limiter. The rise of so-called 'stable dollars' status as the primary form of national reserves. Unlike traditional reserves, which enable financing federal spending and substantial imports, their value remains highly unstable. Most financial activities continue to flow through U.S. banks as the global economy becomes less dollar-dependent and the dollar's primacy is constantly under threat.

China understands what's happening. Financial authorities in Beijing have spent years studying dollar alternatives and experimenting with central bank digital currency. If the U.S. wants to keep up, the government could support the use of stablecoins as a path to keep the dollar's prominence.

Stablecoins backed by dollars provide demand for U.S. public debt and a way to keep up with China.

The rest of the world has an important stake in how the U.S. manages its economic trajectory. While the signs, however, that the status quo is unlikely to hold are many.

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're looking for options for settling payments outside the dollar system. They appreciate the dollar's power but understand the systemic risk. The U.S. government could soon find itself in a vicious cycle.

Such an event would not only mark the end of an era but severely undermine the dollar's reserve currency status.

If other countries are successful in 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.

Most stablecoins are held by investors in countries with weak economies and underlying institutions that are looking for "better" money. As Timothy G. Massad, a former chairman of the Commodity Futures Trading Commission, recently described in a Brookings Institution research paper, stablecoins are analogous to eurodollars, the offshore dollar-denominated liabilities that helped the dollar pre-eminence during the Cold War.

Promoting dollar-backed stablecoins would mean a well-trodden path and offer clear near-term benefits. There would be an immediate, appreciable increase in demand for U.S. debt, which would reduce the risk of failed debt auctions and financial crisis. Unlike China's digital financial infrastructure, dollar-backed digital dollars would build on public, permissionless blockchains and make them more secure. This system provides the benefits of open values of freedom and openness.

A sound, predictable approach to supporting for stablecoins has bipartisan support in Congress and could give the U.S. a critical competitive advantage, even given all the ugly politics to come, we could use a win.

Mr. Ryan served as House Speaker (2015-2019). He is a member of Paradigm’s Policy Council and a visiting fellow at the American Enterprise Institute.