During Tuesday’s meeting of the US Treasury’s Borrowing Advisory Committee, the members explored the topic of tokenizing US Treasuries. It discussed the impact of stablecoins on the demand for short term Treasuries, concluding that the effect is marginal. The presentation covered the use of tokenized Treasuries as a safe haven in the digital asset sector. And finally, it focused on how blockchain and tokenization could improve Treasury market operations, including the benefits, costs and risks.
Stablecoins
Our calculations show the combined US Treasury and repo holdings of the two largest stablecoins, Tether and USDC as $120 billion in June 2024. Putting them on a list of the largest foreign country investors would rank them (combined) in the eighteenth spot. Yet given the total size of Treasury issuance, the figure is indeed marginal.
However, the presentation raised the concern that a collapse of a “major stablecoin like Tether could lead to a fire sale of short-dated Treasuries.”
Some other comments on the stablecoin front might be viewed as controversial by the crypto sector.
For example, it states “In a similar manner to how privately-issued ‘wildcat’ currencies were replaced by government-backed central currencies in the late-1800s, Central Bank Digital Currencies (CBDC) will likely need to replace stablecoins as the primary form of digital currency underpinning tokenized transactions.”
It also notes that “History shows that ‘private currency’ that does not meet NQA requirements leads to financial instability and as such is highly undesirable.” NQA refers to no questions asked, in the sense that the recipient should not need to perform due diligence before receiving a stablecoin. Both quotes referenced a paper, “Taming Wildcat Stablecoins.”
The importance of intraday for tokenized Treasuries?
When discussing the potential for tokenizing Treasuries, there were some curiosities. Firstly, the presentation outlined the potential benefits, which include:
- Improvements in clearing and settlement
- Improved collateral management
- Improved transparency and accountability
- Composability and innovation
- Increased inclusion and demand? (fractionalization)
- Increased liquidity? (including 24/7)
While ‘intraday’ repo was mentioned in a description of JP Morgan’s repo platform, it was not explicitly covered in the list of advantages. Of course, the enablement of intraday transactions is a direct side effect of improvements in clearing, settlement and collateral management that were mentioned.
Intraday allows banks to use repo to borrow and lend for an hour or two, rather than having to wait for T+1 settlement. Repurchase agreements (repo) involve the temporary transfer of securities in exchange for cash, with the transaction reversed a short while later, plus a small amount of interest. We’re emphasizing the point because the importance of intraday to traditional financial institutions may be underappreciated in government circles. In a recent speech by Federal Reserve Governor Waller, he emphasized the potential for 24/7 repo. Yet within the industry, intraday is considered far more important than the ability to trade 24/7.
Treasuries and tokenization platforms
A list of tokenization platforms were presented, including JP Morgan’s intraday repo platform. However, there was no mention of Broadridge’s Distributed Ledger Repo (DLR). If someone asked Ledger Insights to state the most important platform in Treasury tokenization right now, it would be Broadridge’s DLR.
The total amount of tokenized Treasury funds on public blockchain is around $2 billion. DLR is used for $1 – $1.4 trillion in transactions per month, whereas JP Morgan’s platform has processed roughly $1.5 trillion since its launch in 2020. One would not expect JP Morgan’s solution to be of the same scale as DLR since it purely serves JP Morgan clients.
DLR has several purposes, with intraday repo as the main one. It also supports sponsored repo via the DTCC’s FICC platform. DLR and JP Morgan’s repo platform already achieve many of the advantages explored during the presentation. However, today they are tiny compared to the scale of the Treasury market.
The conclusion was that a tokenized Treasury platform would ideally be on a private permissioned blockchain managed by a trusted government authority.
