As I wrote in a recent article, President Donald Trump and Federal Reserve Chairman Jerome Powell have been at odds about the best way to address interest rates. Mr. Powell seemingly has a much more antiquated view on things - a system which continues to export dollars overseas and hollows out the domestic industrial base. He has been attempting to maintain a restrictive rate policy to stomp out inflation, to no avail.
Mr. Trump is at the head of the executive branch and he knows the power which he has in the era of fiscal dominance. Through the use of tariffs (or not as he continues to delay their arrival) or bullying it seems he is looking to bring some industry back to the United States with the intent to reduce the dependency on allies and enemies alike. I’d like to say he is also doing this for the benefit of his friends who’ll likely play a massive part in the return of some industry to the US.
Mr. Trump has repetitively stated that he wants interest rates to go down, as if he might be able to force Mr. Powell to do what he wishes, but this may not be possible. If it were possible on Monday, it is no longer possible after the consumer price index came in at a whopping 3.0% & 3.3% for core inflation. These metrics display a few things, but my largest fear is that inflation may now be structurally set at 3.0%. Furthermore, Republicans released their preliminary budget which included 4,500,000,000,000 USD in tax cuts, resulting in a net deficit of 3,300,000,000,000 USD or about 12% of US GDP. Proposing a structural deficit of 12% while US debt to GDP ratio is 123% will increase the pressure for two things: higher interest rates & higher inflation. To add more pain to this equation, if tariffs are implemented whilst interest rates are 4.25% - 4.50% investing to develop domestically will be very expensive for companies.
This leads me to a single question: How does Mr. Trump get his lower interest rates?
In recent years the purchasing of US Debt has slowed by the largest purchasers and it is likely to slow further. Without a growing purchaser there is very little one can do to deal with the fear of higher interest rates & inflation. As of now, the largest holders of the United States Debt are as follows: Japan (1.15T), China (0.77T), United Kingdom (0.710T), Luxembourg (0.385T), Canada (0.338T), Cayman Islands (0.319T), Belgium (0.312T), Ireland (0.307T), France (0.276T), Switzerland (0.272T), Taiwan (0.257T), India (0.233T), Brazil (0.223T), Hong Kong (0.221T) & stable coin issuers at 0.220T. Which of the following would be easiest to manipulate?
The solution to the US issue, as Mr. Trump might see it, is to force the usage of stable coins from major players in the United States and globally to increase the amount of treasuries purchased through regulation.
As the United States had to deal with its ever increasing debt, it had to find new holders and it had to turn toward institutions. The requirements for Money Market Funds were increased. This increased holdings of US Government Debt.
Prior to the 2008 crisis and subsequent reforms, MMFs held a mix of:
Commercial Paper (~40-50%): Short-term corporate debt (e.g., from companies like General Electric or Lehman Brothers).
Certificates of Deposit (CDs) (~20%): Bank-issued debt with maturities under 1 year.
Repurchase Agreements (Repos) (~15%): Collateralized short-term loans, often backed by Treasuries.
Treasury Bills (~10-15%): U.S. government debt with maturities under 1 year.
Agency Debt (~5-10%): Short-term securities from government-sponsored entities (e.g., Fannie Mae).
Prime MMFs after 2014 -2016:
Commercial Paper (~30-40%): Restricted to higher-rated issuers (e.g., A1/P1-rated firms).
Treasuries + Repos (~50-60%): Increased liquidity buffers (30% weekly liquid assets).
CDs (~10%): Reduced exposure to bank debt.
This was a key move because in bad times investors pull their money from the market and to money market funds for less risky yields. So when the threat of recession emerges and the government has to toss out tons of liquidity to shore up the system, they can do so with tons of new buyers as dollars flood money markets.
The move by President Barack Obama's Security & Exchange Commission was one that would increase buyers of US treasuries in bad times. President Donald Trump is in a much different scenario. He needs to expand the economy to reduce stress on people & increase the net worth of billionaires, shareholders, and, of course, himself.
In the midst of the shakiness in the US treasury markets, the largest growth in demand comes from blockchain users in the third world looking to shield themselves from the hyperinflation provided by their states. Entire economies depend on Tether's USDT as the primary currency of use on blockchains like Tron & Ethereum's Layer 2's. People looking to escape inflation and access a permissionless financial system have been clamoring about USDT for quite some time.
On the other side of the coin is Circle's USDC, the most regulated stable coin on the market. It has shown to banks that they can provide narrow banking and full reserve banking services through the use of stable coins and monetize government debt. On the back end, Tether is the most profitable company in the world, per employee, and I am quite sure Circle produces very similar numbers at a much smaller scale. This is because they just hold treasuries and do not pass the yield on to the users of the stable coin. So for 100 Billion in assets, hypothetically, an entity could generate 3 Billion annually if treasuries are valued at 3%, while users of the stable coin exchange it freely onchain.
This entire process has banks slobbering at the mouth. In their current state, it is possible for banks to lend out 10 USD per 1 USD deposited.
In the U.S. fractional reserve banking system, banks are required to hold a minimum percentage of deposits in reserve, known as the reserve requirement. This reserve requirement is set by the Federal Reserve, and it varies depending on the size of the bank and the type of deposit.
Typically, the reserve requirement is around 10% for large banks. This means that for every $1 in deposits, the bank must hold at least $0.10 in reserve and can lend out the remaining $0.90.
However, this is not the end of the story. The $0.90 that is lent out can be deposited into another bank, which can then lend out 90% of that amount, or $0.81. This process is called the money multiplier, and it can continue multiple times, with each bank lending out 90% of the deposits it receives.
In theory, the maximum amount that can be lent out for every $1 in initial deposits is calculated as follows:
$1 x 0.90 = $0.90 (first round of lending)
$0.90 x 0.90 = $0.81 (second round of lending)
$0.81 x 0.90 = $0.73 (third round of lending)
...
Using this formula, it's possible to calculate the maximum amount that can be lent out for every $1 in initial deposits:
$1 / (1 - 0.90) = $1 / 0.10 = $10
So, in theory, for every $1 in initial deposits, it's possible for banks to lend out up to $10. However, this is a theoretical maximum and the actual amount lent out will depend on various factors, such as the reserve requirement, the money multiplier, and the demand for loans.
While this is a lot of leverage, this does not suffice them. Through the use of blockchain, money can be fractionalized to limits unseen by traditional banking. If banks could offer stable coins, they would own the underlying treasuries and produce our hypothetical yield of 3% for every treasury owned. IF every dollar deposited was in the form of a stable coin, that would be 3% of 17.4 Trillion dollars, per St. Louis Federal Reserve, annually. This would be a boon to their coffers and some derivatives instrument might be born to lever up on anticipated yield from treasuries - truly increasing bank risks.
They would then develop instruments for the stable coins they produce to increase deposits on hand. It is possible that their instruments would have to be competitive with decentralized finance or they'll manage to nearly monopolize the space by appearing safer or easier than the options provided by Ethereum and Solana. This would mean they would own the underlying treasury while levering up against the deposits they receive from customers as they do today, producing two two forms of income where there was once one.
We also must discuss the production of stable coins using real world assets, beyond simply treasuries (which shall surely be the heart of things). The 2008 financial crisis was caused by bundling mortgage after mortgage together to create a mortgage backed security. This financial product can make its way onchain and offer some utility for banks. Just as some recent holders of debt, which was lent to Musk's purchase of Twitter, sold their holdings of it, in this new future they might be able to get liquidity on it onchain.
After this entire section, you might wonder how the elderly billionaire in the White House might aim to use the stable coin and banking industries to stimulate a growth in M2 money & lower the long term rate of interest without the nod from the Federal Reserve Chairman. It is simple. Regulation.
Through the past few years we have sought regulation and regulators like Gary gave their opponents a full sweep of financial industry. In just a few days we have seen so many different changes that mean the best for digital assets broadly, but it doesn't display where they are going in full. So I will make my guess here plainly and I hope you all scrutinize it so it might make sense.
Currently, Circle & Tether own short duration bonds. As of the 9th of December 2024, Circle's longest duration bond matured on the 20th of February 2025. And these bonds were only about 37% of the backing. About 45% of reserves were held in Treasury repurchase agreements. As of December 31st 2024, Tether had 94 Billion in US Treasuries, or about 68% of reserves. We can only speculate that these are also short duration treasuries.
If regulation were to require that 70% of reserves were to be backed by US Treasuries in order to operate within the United States, this would drastically change the backing for assets. Of these US Treasuries, the US Government could require that 50% of the treasuries are long duration assets rather than the shorter. If this were the case, and you permitted the US Banking sector to begin issuing these tokens to their customers and people began using them at the point of sale from digital wallets run on some private Layer 2 or Solana, the amount of these stable coin could dramatically increase.
Many of the largest firms are expecting stable coins to reach about 500 billion this year, but if this Stable Coin bill comes through I think they are pessimistic. Stable Coins are the latest frontier of leverage and such large demand for long term treasuries would surely send rates of interest down for borrowers among other things. The ability to issue a stable coin with a Treasury or a real world asset has never been easier than it is now using blockchain technology.
The value of long term treasuries issued at 4% go up when interest rates fall to say 2%, but should these rates go up further their value goes down. This puts an added redemption risk to stable coins which will have to be addressed. The moniness of short term bills isn't the same as those long term because the value of the long term bonds are so volatile. This might require stable coin issuers to hold reserves of 150% or 200% of issued dollar coins, allowing entities with more capital to offer a more reliable service.
Another thing, which is entirely unimaginable, is if the US Government were to default on its debt. In this scenario, the value of all stable coins backed by treasuries will fall off a cliff. Imagine trillions of dollars in the hands of millions of adults turned to dust. This is a very far fetched scenario, but it could happen. A stable coin is only as valuable as the promise to repay the underlying debt.
The most likely scenario is that banks get involved and lever up to levels unseen. In 2023 we saw bank panics because the long term treasury assets being held were greatly underwater. This was because the Dodd Frank Act was rolled back and allowed banks with less than 250 Billion in assets to engage in more risk than those greater assets. These banks were also exempted from Stress Tests by regulators. If regulations are laxxed this time around, it could result in much more systemic leverage.
In total honesty, I think this is somewhat likely. Mr. Trump has begun purchasing an ungodly amount of Ether and has already deployed a fork of a borrowing & lending application. If there is anything we know, it is that he has no issue enriching himself. So I see the likelihood of this event equal to the likelihood that Trump Hotel is built in Gaza.
The majority of Stable coins are on Ethereum. Banks, should they come onchain, will still have to face liability and will likely have to use KYC for ownership. It is the smartest for them to launch their own Layer 2, a customizable onchain sandbox, to provide a compliant space for transactions. This also gives them the ability to export their stablecoin to the remainder of the Ethereum Ecosystem which is permissionless and open.
As a regulator & kleptocrat, as yourself: What would you do?
