The Risk of Stablecoins in Trump's Tax Law. Brunello Rosa Speaks

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He wanted his “beautiful” tax bill to be approved by Congress by July 4th and he succeeded. The American president, Donald Trump, has obtained the green light for the maneuver that will increase, according to the most conservative estimates, by at least another 3.5 trillion dollars the public debt just around Independence Day, when Wall Street is closed and the test on the financial markets is postponed until after the weekend break. “It is a fiscal imprudence”, says an analysis by State Street, even if “to be fair – it adds – the actual expansion of the deficit is not substantial”.

This would explain why the days of the bill's discussion did not see any major shocks on the American stock market. Somehow, the idea that the White House could have done worse has gained traction on the markets, while it "limited" itself to confirming the expiring tax cuts for the middle class and reducing income support and health care for the poorest, which, ugly to say, worsens the inequalities of the American people but does not make a sovereign debt crisis more likely. Is this why Trump is not experiencing his Truss moment? "In truth, the measure just approved will have an impact on the United States' deficit in the coming years, weakening the ability to react to any economic shocks in the future," economist Brunello Rosa explains to Il Foglio. "But it is true that at this stage the markets are a bit on the sidelines, even if there are more complex issues that will come to light sooner or later." Which ones? “I think this American administration is exposing itself a bit too much on the use of stablecoins to support the dollar and government bonds.” Rosa, who recently wrote a book and countless articles on cryptocurrencies and cryptoassets, explains that Trump, and the power group that supports him, has relied on a blatantly opaque system, certainly unregulated, “to counterbalance the loss of confidence in the currency and American debt.”

What is happening in simple terms, but the mechanism is very complex, is that the White House, where the Trump family is in charge and which is present in the world of cryptocurrencies with companies that act as issuers, encourages the purchase of consumer goods and services in stablecoins, which are a currency that has as its underlying real asset the American public debt securities and whose market value is anchored to the dollar. This is to ensure that the devaluation of the greenback (encouraged to increase US exports to the rest of the world) does not affect its supremacy as a currency reserve and to ensure that each issue of "digital dollars", in the form of stablecoins, corresponds to a purchase of American debt of equal size. "It would be the answer to those who argue that the objective of America First is incompatible with a weak dollar", continues the economist.

It is also possible that this mechanism has contributed in recent weeks to containing Treasury yields, which last spring exceeded 5 percent. “It is all contained in the Genius Act, the new American law that regulates stablecoins,” Rosa continues. “It is a new world that financial markets are still studying to understand how credible a system is that entrusts digital assets with the function of maintaining the dollar as a global currency reserve and guaranteeing the future sustainability of debt. My opinion, but insiders know it well, is that all of this is extraordinarily risky: the issuing companies, of Tether or other currencies of this type, do not show balance sheets and are not subject to supervision. How can you be sure that there is real value somewhere in the face of money and government bonds? For now, the stablecoin market is limited, around 250 billion dollars, but the possibility that a financial bubble will explode in a few years is concrete and the consequences could be devastating at a global level.”

At that point, however, who knows where Trump will be and it will probably not be his administration that will manage this potential financial earthquake. It must be said that compared to this perspective, the “Big, Beautiful Bill” and its possible impact on the American deficit seems almost harmless. “It is not, but it is part of a riskier plan and if there is a bluff the markets will sooner or later come to look at the cards”.

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