The Unlikely Architect of the New Dollar System

2014 wasn’t just a year of change in the interest rate wars, as I detailed last week.

It was also the birth of something new from the most unlikely cast of characters.

Like Giancarlo Devasini.

You probably don’t know his name. But that’s they way he likes it.

In fact, the reclusive 61-year old former plastic surgeon turned tech entrepreneur may be one of the most important people in the entire financial world today. And the way he got there was by accident.

After graduating from the University of Milan Medical School in 1990, Devasini started his career as a plastic surgeon. But he felt unfulfilled. Going so far as to say his work was an “exploitation of fleeting desires.”

So after about two years in practice, he left the field. Instead, he felt his true calling was in the tech world.

He started a company that sold computer components. But things didn’t always go according to plan. For example, in 1996, Microsoft sued him, saying he sold pirated software. He settled by paying a fine of about $65,000.

And in 2008, a warehouse fire took out his entire operation. A few years later, it forced his company into bankruptcy.

Around the same time, Devasini decided to try something new. Just as his electronics empire was in full collapse, he started posting on Bitcointalk forums trying to drum up business. Initially, he offered to sell DVDs and CDs for 0.01 bitcoin each. (Roughly $10 at the time.)

Something clicked. He saw an opportunity in the budding crypto space.

Later that same year, he met Raphael Nicolle, the French founder of Bitfinex, then a peer-to-peer margin lending platform for bitcoin. That convinced Devasini to invest in Bitfinex and join the company.

By 2014, he saw something even more interesting. A group of crypto investors, including former child actor Brock Pierce, launched a product called Realcoin. The idea was to create a digital “token” pegged to the U.S. dollar.

What they wanted was to create a better, faster way to move dollars in or out of crypto exchanges without having to rely on banks. And to help smooth out the volatility of bitcoin into something more stable.

So in September 2014, Devasini formed a new company, Tether Limited. It eventually absorbed Realcoin and rebranded it to Tether with the promise of each “token” backed 1:1 with real dollars. A sort of “stablecoin.”

The rest is history.

Today, Tether is the world’s largest stablecoin issuer. Its USDT dominates the stablecoin market with around $180 billion worth in circulation.

That’s more than half of the approximate $300 billion stablecoin market. And more than double its closest competitor, Circle (CRCL), which has around $75 billion of its USDC stablecoin in circulation.

All because a former plastic surgeon and child actor recognized that the world of money was going through a major change.

Stablecoins weren’t always a major player in the crypto world. For years, critics called them scams. Even going so far as calling players like Devasini a fraud.

But over time, they’ve become a huge part of underpinning the entire crypto market structure.

In 2018, the entire market cap of stablecoins was around $500 million. A figure that’s since exploded to the tune of about $300 billion.

And it’s not just the market cap that’s surged. It’s also the value of stablecoin transaction volume. (Kind of like the velocity of money for all you economists out there.)

In 2018, there were about $98 billion in stablecoin transfers. But by the end of last year, it was roughly $30 trillion.

The majority of that volume belongs to the two heavyweights, Tether and Circle. Since they make up close to 90% of the market, it’s natural for that to happen.

But by now, you may be asking “Why does this matter for U.S. debt, interest rates and the dollar?”

That’s where things get interesting. It all has to do with the mechanics of these dollar-backed stablecoins.

The way the stablecoin business works is somewhat genius. People give them cash – U.S. dollars – for a digital token. Users can then more easily exchange those tokens for other crypto coins, like bitcoin or ripple.

In the meantime, the stablecoin issuer uses that money to buy mainly “risk-free” assets. Assets that it can earn interest or potential appreciation from. It’s not unlike a life insurance company that invests insurance premiums until it needs to pay out the policy.

Just what is the asset of choice for these stablecoin companies? U.S. Treasuries.

For example, Tether currently shows reserves of $191.8 billion. Nearly 75% of those reserves, or $141 billion, is in U.S. Treasuries. The rest includes things like gold (132 metric tons, or about $20 billion worth), bitcoin ($7 billion worth) and equity investments.

That also makes Tether the 17^th largest holder of U.S. Treasuries in the world…as a private company. And Devasini a billionaire, worth about $90 billion today.

It’s not all that different at Circle. The company has about $77.5 billion in reserves. Treasuries make up close to 85% of that figure with cash making up the rest. (Tether still remains a private business while Circle trades on the New York Stock Exchange.)

All this means is there’s a new player on the block when it comes to buying up U.S. Treasuries. One that didn’t really exist a decade ago. And one that’s not just buying, but buying in size.

So while there’s a narrative that “King dollar” is dead, or that the U.S. Treasury may have a hard time selling more debt in the future, I see something different happening. And it looks set to accelerate.

As I said last week, most of the demand for U.S. dollars – and U.S. Treasuries – came from overseas through the Eurodollar market. It was a capital pool completely outside the demand chain of the Treasury.

But with things changing, many analysts started to call for the death of the dollar. Especially with many foreign countries – like China and Turkey – unloading their Treasury holdings.

But that’s just not happening. In fact, demand for dollars outside the U.S. is actually accelerating.

How do we explain this?

Simple. The source of demand is shifting. And it looks only to grow with recent legislation.

Last year, President Trump signed into law the Guiding and Establishing National Innovation for U.S. Stablecoins (GENIUS) Act.

What the GENIUS Act does is creates a framework to regulate the stablecoin industry. For example, it requires real dollars to back every digital dollar on a 1-for-1 basis. Which means real cash or U.S. Treasuries.

Second, it requires operators to get a license to run their stablecoin. Not unlike your stock broker having a license to let you trade stocks.

This effectively onshores the old Eurodollar system since every offshore dollar held in the form of a stablecoin now translates into demand for U.S. Treasuries. And U.S. dollars.

But that was just the first act. What’s about to follow GENIUS is the Digital Asset Market Clarity Act (CLARITY).

The CLARITY Act basically defines what digital assets are and who is responsible for regulating them.

But more than that, CLARITY is what will legitimize the stablecoin market with banks and other institutions. It will allow them a way to legally enter the stablecoin market. All because the GENIUS Act carves them out as a distinct asset from other crypto coins.

Taken together, the two Acts divide the entire crypto universe into three categories. The first is payment stablecoins, which banking regulators oversee. The second is digital commodities (i.e. bitcoin) which the CFTC will oversee. The third is investment contracts like ETFs, which the SEC will oversee.

As of today, the CLARITY Act already passed the House and cleared the Senate Banking Committee markup. Which means all it needs is a vote on the Senate floor before heading to the President’s desk.

When it does, I believe it will rewire America’s entire financial system. And it could supercharge the entire stablecoin market and boost demand for Treasuries. In fact, Citi sees the stablecoin market jumping from $300 billion to nearly $2 trillion by 2030. And stablecoin transaction volume going from about $30 trillion to $100 trillion annually.

That’s potentially trillions in demand for Treasuries that never existed before. Which would effectively allow the Treasury to have greater control over interest rates rather than a few elite banks in London.

Even Federal Reserve Governor Christopher Waller recognizes this. While at an economics event in Dubrovnik, Croatia last Sunday, he said, “Countries that adopt it, it’s like a fixed exchange rate system. You are going to import US monetary costs, so it’s broadening the reach of US monetary policy in countries that use more stablecoins.”

Control the market for money, control the global financial system.

Regards,

Editor, Strategic Trader