Introduction

It occurred to me that stable coins may be used by the US government to help pay for American Debt. It appears from the news that many countries have stopped buy short term USA Treasury bonds due to low interest rate being less then inflation and concerns about the magnitude of US Debt. Even US Banks, who normally always buy US Short Term Treasury bonds, have reduced their exposure.
But stable coins and banking regulation reform may allow banks to utilize fractional banking to buy US Treasury bonds with interest rates less then the rate of inflation, with 9x their actual cash on hand, which will allow them to make 9x the going rate 4% interest. This gives them a 36% annual return and this helps the US government find buyers for its debt instrument US Treasury Bonds.
If this sounds illegal or immoral, welcome to modern banking principle called Fractional banking. Banks are allowed to currently take in deposits and loan them out, 90% of cash deposits and are required to keep 10% cash in reserve. However when they loan out money, the loan recipient willl deposit the loan funds in the same bank. This allows the bank to then loan 90 % of that deposit. The second loan holder deposits their money in the bank and the bank loans out 90% of that...and thus it goes 9 times. This effectively gives the bank 9000 dollars to loan on 1000 dollars worth of deposits.
Now currently Stable coin issuers are required to keep 100% of the funds deposited with them in cash or short term US securities. This is great for the US Government because USDT Tether currently holds 5 billion in short term US Treasury Bonds. USDT got the cash from its customers basically free, so all the interest is profit. But the US 2025 Budget is 3.4 Trillion dollars over 2024 earnings, so the US Government needs to sell 3.4 Trillion Dollars worth of short term securities at current 4% interest rates. That is a beyond all previous years in US History. This monumental problem requires a monumental solution. I think it is fractional stable coin reserves for banks only, and only for US Short Term Treasury Purchases.
* Imagine what would happen if the US Government decided to give US Banks an exception from thus 100% cash or Treasury backed stable coin rule for banks? And allow them to practice fractional banking with their stable coin token. The banks could buy almost 9 times as much US Treasury Bonds and the US would now have a Domestic customer , who is under their control, buying all their debt financing instrument US Treasury Bonds. That's the short version, so lets take a deep dive into this topic.*

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US Fractional banking, US Debt, US Short Term Treasury Bonds, Banks and Fractional banking.

I think this is a truly fascinating, and indeed potentially "broken," yet plausible future scenario for stablecoins and the US financial system. The shift from private, fully-backed stablecoin issuers like Tether to regulated banks leveraging fractional reserve banking for digital dollar issuance fundamentally alters the dynamics. Let's explore that idea.

Background Information

The Fractional Reserve Frontier:

When Banks Issue Stablecoins and Turbocharge Treasury Demand
Hold on to your hats!
The US government isn't just liking the idea of stablecoin giants gobbling up American Treasuries; they're embracing it with a fiery passion!

This isn't just a trend; it's a monumental shift, a strategic masterstroke addressing three pulsating heartbeats of our nation's financial future: slashing the monstrous national debt's interest costs, forging an unbreakable bond investor base, and igniting the US dollar's absolute dominance in the wild, exhilarating world of digital finance!

However, what if the true game-changer isn't just any stablecoin issuer, but the established banking system, armed with its foundational principle of fractional reserve banking?

This opens a tantalizing, albeit potentially fraught, pathway.
Imagine a world where commercial banks are empowered to issue dollar-pegged stablecoins, not on a strict 1:1 reserve, but by holding only a fraction of the deposits as reserves, lending out the rest.

This seemingly "broken" model, the bedrock of traditional banking, could unleash an unprecedented surge in demand for US Treasuries, magnifying the very benefits the government currently seeks from stablecoins.

Lowering Borrowing Costs:

Unleashing a Torrent of Savings (Multiplied by Fractional Reserves!)
Let's cut to the chase: every nation, just like every household, yearns to borrow money as cheaply as humanly possible.

When there's a tidal wave of demand for US Treasuries – the very lifeblood of government funding – it’s like throwing open the doors to the hottest auction in town.

More bidders, more fervent bids, sky-high prices for our nation's debt!
And what does that mean for Uncle Sam?
A lower effective interest rate, a "yield" that sings a sweet melody of savings to the taxpayers!This isn't some arcane economic theory; it's the raw, pulsating truth of bond markets.
A plummeting yield directly translates into billions, even trillions, saved on borrowing costs for the US Treasury!

Enter the true game-changers in this hypothetical: banks issuing stablecoins on a fractional reserve basis.

Unlike current stablecoin issuers who are compelled by market trust and emerging regulation to hold near 1:1 reserves in highly liquid assets, banks operate under a system where they typically hold only a small fraction of customer deposits in reserve, lending out the remainder.1

If banks were to issue stablecoins and treat them as tokenized deposits within this fractional reserve framework, the implications for Treasury demand are profound.
For every dollar of stablecoin issued by a bank, only a fraction (say, 10-15%) would need to be held in reserve.
The remaining 85-90% could then be deployed, often into highly liquid, interest-bearing assets like, you guessed it, US Treasuries.
Through the money multiplier effect inherent in fractional reserve banking, a single dollar deposited could theoretically lead to several dollars of lending and subsequent investment in Treasuries throughout the banking system.
The potential for banks to collectively acquire many multiples (e.g., 9 times as much, depending on the reserve requirement) of Treasuries than the actual dollars deposited into their stablecoin accounts is the tantalizing, and indeed alarming, possibility.
This relentless, amplified buying pressure from bank-issued stablecoins would act like a steel anchor, relentlessly dragging down Treasury yields and directly pumping billions back into the government's coffers by dramatically cutting the cost of servicing our gargantuan national debt.
It's a fiscal revolution, potentially supercharged by the very plumbing of traditional finance!

Diversifying the Investor Base: Forging a Fortress of Financial Strength (With Bank Stability)

It's not just about the price; it's about who holds the keys to America's financial stability.
A robust debt market demands a kaleidoscope of investors, a symphony of diverse hands holding our nation's promises.
Leaning too heavily on any single player, or worse, a solitary foreign power, is a dangerous gamble, a recipe for geopolitical and financial fragility.
For generations, the Treasury market's stalwarts have been central banks, sovereign wealth funds, pension funds, and the diligent individual investor.
But now, regulated commercial banks, as stablecoin issuers,burst onto the scene, creating an electrifying new segment.
Unlike some crypto-native stablecoin issuers whose regulatory standing has been historically ambiguous, banks bring with them established regulatory oversight, deposit insurance (for tokenized deposits), and deep integration into the traditional financial system.

Their motivation would be twofold: maintaining the rock-solid stability of their dollar-pegged digital liabilities (their stablecoins) and generating profit through fractional reserve lending and investment.

This strategic diversification is a stroke of genius, minimizing the perilous gamble of over-reliance.
It carves out a deeper, more resilient market for US debt, ensuring that even if one segment falters, there's a legion of robust demand ready to fill the void.
For the US government, this means unwavering stability in financing and a clear, predictable pathway to the capital it so desperately needs, come hell or high water.
The established banking industry, by adapting its core model to stablecoin issuance, could become an unforeseen, indispensable ally in managing America's monumental financial destiny, bringing potentially more trust and stability than purely crypto-native players.

Reinforcing US Dollar Dominance:

The Digital Dollar's Global Conquest (Through Traditional Channels)Here's where the vision truly ignites!

Policymakers are waking up to a thrilling truth: stablecoins are an unparalleled, indispensable force for catapulting the US dollar's global reach and dominance into the digital stratosphere!

These incredible digital assets, especially those precisely pegged 1:1 to the US dollar, are more than just cryptocurrencies; they are the dollar's digital avatars, carrying its might into every corner of the decentralized world!If commercial banks become the primary issuers of dollar-pegged stablecoins, the dollar's global dominance could solidify even further. 

Banks have existing customer bases, regulatory relationships, and the infrastructure to integrate digital dollars directly into conventional financial products and services.
This would accelerate the dollar's utility in environments traditional finance could only dream of reaching, but now through trusted, familiar entities.
Their explosive adoption across countless blockchain networks for payments, remittances, and trading would be turbocharging the dollar's utility, giving individuals and businesses, even in underserved regions, access to a rock-solid, dollar-denominated medium, now potentially with the backing and trust of a regulated bank.

This burgeoning role isn't just an advantage; it's our unstoppable counter-attack against de-dollarization trends! In a geopolitical chess match where rivals plot to dethrone the dollar, bank-issued stablecoins offer a compelling, undeniable solution to keep our currency as the undisputed king of global digital transactions.

By making cross-border payments faster, cheaper, and virtually seamless through existing banking rails and new blockchain networks, stablecoins are supercharging the dollar's transactional power, solidifying its reign not merely as the world's reserve currency, but as the preferred digital currency for the entire planet!
This insatiable hunger for dollar-backed stablecoins directly fuels a surging demand for the underlying US dollars, cementing our currency's global supremacy with an unyielding grip.Beyond merely shoring up debt, the US government sees a treasure trove of strategic and economic advantages in this stablecoin phenomenon. Imagine: faster, cheaper international transactions, making the mighty US dollar accessible to anyone, anywhere, regardless of their banking infrastructure.
This isn't just convenience; it's igniting financial innovation!
By embracing this vibrant bank-led stablecoin ecosystem, the US financial system is catapulting itself into a new era of efficiency and modernization.
If this model spreads, it will only pour more fuel onto the Treasury market, forging an even more unbreakable foundation for the dollar's global preeminence!

The Regulatory Balancing Act: Taming the "Broken" Digital Frontier for Prosperity!

But let's be clear: while the US government might cheer for the torrent of Treasury demand and the dollar's soaring dominance, it's also laser-focused on the critical mission of stablecoin regulation.
This isn't a cautious whisper; it's a loud, resolute call for transparency, consumer protection, and an iron fist against illicit finance!
The emergence of bank-issued, fractional reserve stablecoins introduces a profound and potentially "broken" twist to this regulatory challenge.

Current stablecoin legislative proposals, like the proposed GENIUS Act, typically demand 100% backing by ultra-liquid assets to ensure the "stable" in stablecoin truly means 1:1 redeemability at all times.
Allowing banks to issue stablecoins under a fractional reserve model directly contradicts this core tenet of stablecoin design, merging the liquidity risks of traditional banking with the rapid, global nature of digital assets.
The ultimate goal is a masterful high-wire act: to unleash the full, undeniable power of stablecoins – their insatiable demand for US debt, their role as dollar evangelists – while ruthlessly crushing any potential risks!
The specter of systemic instability if reserves aren't truly 1:1 and a bank run on digital stablecoin "deposits" were to occur is a terrifying prospect, potentially far more rapid and global than a traditional bank run.
Regulators would face an unprecedented challenge: how to design prudential standards (capital and liquidity requirements) that prevent stablecoins from becoming a playground for systemic risk, while still allowing banks to leverage the inherent advantages of fractional reserve banking for profit and broader economic stimulation.
This would necessitate a complete rethinking of what "stable" means in the digital asset context when tied to the existing fractional reserve system, ensuring transparent disclosures and robust mechanisms to prevent the horrifying prospect of stablecoins becoming a conduit for money laundering or terrorist financing.
By forging a comprehensive, ironclad, and highly innovative regulatory environment, the government would be committed to guaranteeing the unwavering stability and pristine integrity of these "digital dollars," protecting our broader financial system and, most importantly, preserving the sacred trust of the American people.
The "broken" possibility of leveraging fractional reserves for stablecoins presents both an immense opportunity for Treasury demand and a colossal regulatory hurdle that demands extreme caution and foresight.

Last Words...

The US government would likely view banks issuing stablecoins, particularly if allowed to operate under a fractional reserve model, as highly beneficial for national financial strategy.
This model offers a crucial, exponentially amplified new source of demand for US debt, which helps lower borrowing costs and diversifies the investor base, thereby strengthening national financial stability.
Furthermore, bank-issued stablecoins, leveraging established trust and infrastructure, could powerfully reinforce the global dominance of the US dollar in the digital economy, expanding its reach and counteracting de-dollarization efforts.However, the "broken" possibility inherent in allowing fractional reserve banking for assets marketed as "stablecoins" introduces unprecedented systemic risks.
The very definition of "stable" would be challenged, demanding revolutionary regulatory frameworks to ensure transparency, consumer protection, and prevent illicit activities, without jeopardizing the stability of the entire financial system. This future, while potent for US financial power, would require an extraordinary regulatory balancing act unlike any seen before.

The end, but perhaps for bank stable coins, this is just the beginning?!

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@shortsegments

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