U.S. Treasury Advisory Panel Says Tokenization Could Be Big, But May Need Central Control

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The U.S. Treasury Department’s panel of Wall Street advisers see the tokenization of U.S. debt and other assets providing some significant potential advances, the group contended in a new report – while also envisioning an inevitable need for the kind of heavy central hand that may rankle the crypto sector.
Cryptocurrencies and the tokenization of U.S. Treasuries were treated with increased seriousness in the digital-assets views issued by the Treasury Borrowing Advisory Committee on Wednesday. That group of private-sector financial executives from big-named firms such as Citigroup Inc. and Goldman Sachs Group Inc. is assigned with helping guide the department’s debt management, and it shared thoughts on tokenization and stablecoins — including a warning about risks from Tether.
“Tokenization has the potential to unlock the benefits of programmable, interoperable ledgers
to a wider array of legacy financial assets,” the report suggested, especially highlighting the possibility of instant and transparency settlement and clearing, for “reducing the risk of settlement failure.”
“Even small incremental improvements in a very large market like the Treasuries market can be impactful at scale,” the report noted, though it also suggested caution and the likely need for the “development of a privately controlled and permissioned blockchain managed by one or more trusted private or public authorities.”
“The way forward should involve a cautious approach spearheaded by a trusted central authority, with widespread buy-in from private sector participants,” it concluded.
The report also delved into the rise of stablecoins, which have “increasingly elected to hold significant short-dated U.S. Treasury collateral” — a situation that will probably be further encouraged by future regulations. It also included a thought on the stability hazard from tokens such as Tether’s (USDT).
“A collapse of a major stablecoin like Tether could result in a ‘fire-sale’ of their U.S. Treasuries holdings,” the report said. “If history serves as any guide, stablecoins will need to be regulated like narrow banks or money market funds to prevent contagion of stress in stablecoin markets to broader financial markets and the Treasury market.”
Read More: Tether’s Paolo Ardoino: ‘If the U.S. Government Wanted to Kill Us, They Can Press a Button’
When it comes to stablecoins underpinning tokenized transactions, the advisers suggested that “central bank digital currencies (CBDC) will likely need to replace stablecoins as the primary form of digital currency.”
Any potential CBDC issued by the Federal Reserve would be managed by private-sector banks, Fed officials have said, meaning some of the institutions represented in the advisory group. However, the political chances for U.S. CBDCs, which are strongly opposed by Republican lawmakers, remain dicey in the near term.
Overall, the voices of traditional finance behind the report saw tokenization in all kinds of markets for real-world assets “promises to unleash new economic arrangements,” though doing it for short-term Treasuries could “potentially disrupt the banking system,” according to the committee, because it could become a rival for bank deposits.
Edited by Bradley Keoun.
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Jesse Hamilton is CoinDesk’s deputy managing editor for global policy and regulation. He doesn’t hold any crypto.