Thread by @dampedspring

Genius Act compliant Stable coins 101 a legitimate threat to established players in the transaction space NOT a way to grow NET demand for USD or USD assets much.

People are unwilling to break down how money works and would rather kluge together lots of concepts in one 🧵 1/2

The most important red flag one should recognize when reading people's outlook for Stable coins is when they focus on AUM growth. Perhaps the most notable gaslighter is @SecScottBessent who has projected stable coin growth to be large and important as demand for US TBILLs.

I absolutely accept and believe that genius act stable coins will grow AUM and perhaps meaningfully. I also KNOW for sure that AUM growth (minting of new stable coins) will result in the minter buying US Tbills. So does Bessent! We all know this! When stable coin AUM

Grows Bessent is going to say with certainty and without lying that Stable coin growth has resulted in Tbill purchasing.

What he won't say and what no one economically incentivized by stable coin growth will ever say is whether NET Tbill demand has increased.

I'm going to deal with the market share of stable coins later but right now I want to focus on what matters for the economy and Marco investing which is whether stable coins create demand for US Tbills or not.

Firstly the highest level concept. Every new Minted stable coin

requires the stable coins buyer to surrender a USD. Prior to that exchange the USD was most likely already existing USD. The USD must ask itself "How did I get here"

Either the USD existed or a bank or central bank printed it. Let's start with what I think is the simplest example and one that is quite likely to occur as stable coin AUM grows.

Let's say one wants a stable coin for whatever reason whatsoever. They may have a money market

mutual fund and find it inconvenient to redeem it and write a check or transfer it to bank deposit and then write a check or send an ach or Zelle for their payments for whatever normal payments and purchase they make or for purchasing on chain assets. Despite the relatively fast

Nature of our payment system today which handles extraordinary volumes today just fine perhaps stable coins can be better. Of course a money market mutual fund pays 4% interest and a stable coin pays zero but I guess the convenience may be worth it. So the guy redeems his MMF

And buys a stable coin.

The MMF fund manager sells some of his Tbills to meet these redemption AND the Stable coin MINTER buys exactly the same quantity of Tbills.

Stable coin AUM up Bessent brags. MMF AUM down
TBill net demand unchanged. Bessent ignores

Lots of cases

Of this basic case are similar the concept is USD is raised by selling an asset of any kind and USD is spent on stable coin.
Stable coin AUM up Bessent brags. MMF AUM down
Asset net demand unchanged. Bessent ignores

There are only three other general cases to consider and they get more complicated.

1. Currency in Circulation (Paper Bills and coinage CIC) is used to buy stable coins

2. Bank Deposits are used to buy stable coins

3. Stable coin buyer takes out a bank loan to get the USD

CIC is most compelling for AUM growth of stable coins AND it creates legitimate NET demand for Tbills.

Current CIC is 2.4TN and roughly half is abroad. That's a pretty big TAM for Stable coin growth.

I like to call CIC, Benjamins, and find them fascinating

Did you know that Benjamin's are worth more than digital currency? In emerging markets if you pay for stuff in Benjamin's you get more for your money than converting those Benjamin's at the official rate and spending the local currency.

Even in the U.S. people charge less (the Benjamin's are more valuable) if you pay cash money instead of other forms of money. Curious right? So when someone with Benjamin's buys a stable coin they convert them from CIC to electronic money at the official rate. And sacrifice

The premium buying power Benjamin's have for good! I encourage you to look at particular grey market for Benjamin's in EM or even in the U.S. when considering how attractive using Benjamin's to buy stable coins will be. In the U.S. Benjamin's are worth 1-3% more than digital USD

Russia? Venezuela? China? Argentina? Mexico? The grey market varies but is all higher than the U.S.

This premium is paid throughout the world because USD savings in any form is attractive and the gray market price sets it dependent on the jurisdiction.

BUT the market price exists already. Stable coins threaten the gray market premium globally but not the supply and demand. Anyway the point is if one wants to buy a stable coin and sacrifice the gray market premium the end result for the US is less CIC and more Tbills. It's legit

New demand for Tbills. IMHO CIC will exist in huge scale for a decade or more and out of the 2.4TN of which 1.2Tn is overseas as a complete guess I would expect 10% to go to stable coins over the next 5 years or 24BN of "New demand" for Tbills. In other words hardly any

The next case is the use of a bank deposit. Most likely a checking account as a savings account is interest bearing BUT all bank deposits are legit source of potential AUM growth for stable coins. This one is complicated. IF a bank deposit is used for a stable coin purchase

The minter buys TBills for sure. But the bank who loses the deposit and the offsetting bank reserve asset has gotten more leveraged they can do a variety of things
Remain permanently more leveraged
Deleverage by selling assets
Or deleverage over time by earning profits

The bank deleverages immediately and sells assets

Stable coin AUM up Bessent brags. Bank asset down
Asset net demand unchanged. Bessent ignores

If the bank stays permanently leveraged or allows leverage to revert over time the banks ability to print money for other loan

demand is constrained reducing future demand for assets. So bank deposits moving to stable coins results in either NO immediate new demand for USD assets or a reduction in future demand.

The last case is a person takes out a bank loan to buy at stable coin. Let's start by

Saying this is just stupid. Borrowing money for an asset that appreciates or pays interest is one thing. Gold, BTC don't pay interest but they can appreciate. Stocks and bonds can appreciate and may pay interest and dividends but a stable coin can't appreciate nor pays interest

HOWEVER if people are stupid and borrow money to buy stable coins then YES that will increase TBill demand as new money is created by the bank offering the loan. The purpose of this thread was to address stable coin growth as a cause of new net demand for US Tbills. I suspect the total NEW demand for the next decade is at most $250BN. However if I get around to the second half of this thread Stable coin AUM growth could be dramatically higher based exclusively on its potentially favorable attributes as a payment system. BUT the new demand for Tbills is NOT a market share thing.