U.S. Treasuries have long stood as the bedrock of the traditional financial system, serving as collateral across various transactions, from repurchase (repo) agreements to derivatives trading. With an estimated $7.5 trillion in foreign holdings and daily repo transactions exceeding $4 trillion, these secure and liquid assets play a vital role in maintaining market stability and facilitating liquidity.
Recently, tokenized Treasuries have significantly evolved past earlier versions that were typically non-transferable or had inadequate liquidation processes incompatible with new products. The total value of tokenized Treasuries on-chain has reached an all-time high of $2.24 billion. In contrast, stablecoins (tokenized dollars) command a substantial $170+ billion, indicating that tokenized Treasuries are just scratching the surface and poised for rapid growth.
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How Treasuries are used in traditional finance
In the traditional financial system, Treasuries are extensively used as collateral due to their safety, liquidity, lower credit risk, and stability, enabling vast amounts of leverage and liquidity across global markets. Here are some of the key markets where Treasuries play a pivotal role:
Repo markets: Treasuries dominate the repo market, with a daily volume of around $4–5 trillion, providing a low-risk, high-liquidity form of collateral.
Derivatives and futures markets: In futures and derivatives trading, Treasuries are used to secure contracts involving significant notional value, with annual trading volumes exceeding $100 trillion.
Central clearinghouses: Treasuries serve as collateral for trades in clearinghouses, which handle trillions in collateralized transactions daily.
Securities lending: Treasuries are also utilized in securities lending, contributing to over $1 trillion in outstanding loans.
A new opportunity for crypto markets
The cryptocurrency and decentralized finance (DeFi) ecosystems currently lack access to stable, high-quality collateral besides stablecoin. Crypto and DeFi traders typically rely on volatile assets like bitcoin or ether as collateral for loans, staking, and liquidity pools. While effective, this system introduces significant risks, as the value of these assets can fluctuate wildly within short time frames, leading to over collateralization to mitigate risks. The alternative is to post stable coins that only earn a yield to the stablecoin issuers or selected market participants through opaque yield-sharing agreements.
Introducing tokenized Treasuries as collateral provides a better pathway for crypto, similar to what companies do in the previously described TradFi world. Since Treasuries are U.S. government debt, they don’t suffer from the extreme price swings of crypto or the lack of transparent yield and counterparty risks of using stablecoins. Using tokenized Treasuries can fundamentally reduce risk, expand liquidity, enhance transparency and improve returns by earning yield on the collateral.
Innovations in tokenized treasury products lead to efficiency in ways often lacking in traditional finance. Blockchain technology makes it possible for fully on-chain tokenized treasury funds to allow for rapid issuance, instant redemptions, and instant peer-to-peer trading. This capability makes traditional assets more productive within the crypto ecosystem, opening up new pools of capital.
Factor in all these elements, and you see how tokenized Treasuries can provide a familiar and secure asset that traditional investors already trust. Other potential new types of financial products that could emerge include:
Low-risk loans: Borrowers could access stablecoin loans using tokenized Treasuries without worrying about the extreme volatility of crypto collateral.
Yield products: Tokenized Treasuries could be used in DeFi yield strategies, allowing users to earn returns on secure assets in liquidity pools or lending platforms.
Hedging mechanisms: DeFi users could hedge against the risk of holding highly volatile crypto by introducing Treasuries as collateral.
Tokenizing U.S. Treasuries and using them as collateral in crypto markets presents a significant opportunity to merge the best aspects of traditional finance with the innovation of DeFi. By reducing volatility, deepening liquidity, and attracting institutional capital, tokenized Treasuries could revolutionize both markets, unlocking a new era of hybrid finance.
Note: The views expressed in this column are those of the author and do not necessarily reflect those of CoinDesk, Inc. or its owners and affiliates.