The International Monetary Fund (IMF) has published a report according to which the global public debt will exceed $100 trillion by 2030, which will amount to about 93% of the world GDP. At the same time, about one third ($35 trillion) of the liabilities fall on the United States.
Paying Off the US National Debt
The United States is the largest economy in the world, and its debts inevitably extend to everyone who uses fiat currencies. Wherever you are, their obligations indirectly affect your country – whether anyone likes it or not.
It would seem that bitcoin as an alternative to the debt economy envisioned, if not the complete abolition of traditional finance, at least a separate path to a fairer world. However, in recent years we have seen old economic institutions try to use any means to get out of the debt spiral, including crypto-markets.
Over 2024, the U.S. national debt will grow by about 5.5%, or about $2 trillion. The interest alone on the obligations the U.S. government pays each year amounted to about $1 trillion. The federal government fills holes in the budget by continually issuing bonds, which it sells to commercial banks that create new money based on those securities.
By buying debt from the government with $10,000 of real money, a bank can literally create $100,000 of new money. This is the normal mechanism of modern financial reality and is roughly how the mainstream money supply is created – adjusted for a number of limitations, of course.
Since the abolition of the gold standard in 1971, the U.S. budget has been in almost constant deficit. During the pandemic, debt growth accelerated due to huge injections of money in a short period of time and compound interest on liabilities that had been accumulating for years.
In the run-up to the presidential election, the topic of the national debt has taken on new colors. The Republican Party candidate Donald Trump, who declared himself “crypto-president” in advance, in his usual manner suggested selling “some bitcoins” to pay off the entire national debt. Here one can’t help but recall Satoshi’s words:
“When someone tries to buy up all the world’s reserves of a scarce asset, the more he buys, the higher the price becomes.”
Cryptocurrency observers began to calculate how much one BTC should cost for such a performance. Even the crudest projections inflate the price of the first cryptocurrency to $2 million – which is nice enough, but unfortunately doesn’t stand up to any criticism.
Compounding the problem is the tense international situation, which has left fewer nations willing to hold U.S. bonds in their national reserves. Therefore, it is not so surprising that among the top 18 holders of US government debt is cryptocurrency company Tether – the issuer of USDT stablecoin.
Realistic scenario
Speculation about debt repayment via cryptocurrencies is that the government can jack up prices, sell assets, and pay off debt. Except that’s not how the economy works.
It’s not without more realistic options, though. For example, Paul Mueller, a senior fellow at the American Institute for Economic Research, suggested that a cryptocurrency-friendly policy would have a positive impact on GDP growth and the overall health of average citizens. This way of paying off the debt might work, but how long it will take is a big question.
Major wealth management companies involved in the real-world asset tokenization (RWA) sector have come to the government’s rescue. BlackRock CEO Larry Fink has been very careful to promote this trend in the crypto market, where he believes BTC and ETH ETFs “are just stepping stones on the road to tokenization.”
In October 2024, a subcommittee of the Commodity Futures Trading Commission (CFTC) sent recommendations allowing companies to use tokenized shares as collateral. This opens up qualitatively new opportunities for maneuvering.
It is worth recalling that BlackRock and Franklin Templeton have already tokenized the US government debt for almost $1 billion in Ethereum and Stellar blockchains.
Stablecoins, federal debt and RWAs
Imagine a world where a speculative scheme where money is created from the RWA sector becomes a reality. The idea turns out to be an extremely simple and workable cryptoversion of the debt economy coming to the blockchain market.
The fact is that banks and government arbitrarily cannot create money ad infinitum. Plus, this has obvious consequences, including higher inflation.
Hence, we need a value creation mechanism that doesn’t affect the economy through “fat” financial injections by the Fed and others involved. The mechanism may be a bit more complicated, but overall it looks pretty good.
It can look like a looping system of collateral, loans, bonds and RWAs. A kind of experiment was conducted by Tether, which created almost $120 billion worth of real value in USDT based on the most liquid asset in the world (bonds), while still managing to create a stable revenue stream.
While the company is producing bond-based “crypto-dollars,” BlackRock is blazing a trail to create literally new dollars from old debt.
Allowing collateral in such crypto-assets would pave the way for the gradual tokenization of all or most of the national debt through a series of speculative chains.
What it could look like
BlackRock’s BUILD fund buys government bonds on its balance sheet and then already issues a token. If the CTFC approves the company’s use of such assets as collateral, there will be an opportunity to create money through credit facilities. The organization holding BUILD will transfer the token to the bank, which will create new money from the collateral.
Thus, the bank is left with a liquid asset on the basis of which it can continue to issue loans. And the organization has free money and a collateral asset devoid of volatility. If the chain is looped, it is possible to attract additional capital to purchase debt through long hedged chains.
Such a scheme could affect money supply growth without risking the banking system in its current format.
What is happening now in cryptocurrencies is the development of a new layer to produce derivatives based on traditional financial instruments that will enter the banking system as a new liquid asset.
Perhaps the U.S. exit from debt lies precisely in the creation of another derivative on top of the existing problem. And it could work.
This article was originally Posted on Coinpaper.com
