U.S. Treasury securities have long been a cornerstone of the traditional financial system, serving as collateral for transactions ranging from repurchase agreements to derivatives transactions. With an estimated $7.5 trillion in foreign holdings and over $4 trillion in daily repurchase transactions, these safe and liquid assets play a critical role in maintaining market stability and promoting liquidity. is playing.
Recently, tokenized government bonds have evolved significantly from previous versions that were typically non-transferable or had inadequate liquidation processes that were incompatible with new products. The total amount of U.S. Treasuries tokenized on-chain reached an all-time high of $2.24 billion. In contrast, stablecoins (tokenized dollars) are worth more than $170 billion, and tokenized U.S. Treasuries have just scratched the surface and are poised for rapid growth. It shows that.
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How government bonds are used in traditional finance
In the traditional financial system, U.S. Treasuries are widely used as collateral due to their safety, liquidity, low credit risk, and stability, allowing for enormous leverage and liquidity across global markets. Some of the major markets where government bonds play an important role are listed below.
- Repo market: Government bonds dominate the repo market, with daily trading volume of approximately 4-5 trillion dollarsprovides a low-risk, highly liquid form of collateral.
- Derivatives and futures markets: In futures and derivatives trading, U.S. Treasuries are used to secure contracts with large notional amounts, with annual trading volumes of 100 trillion dollars.
- Central clearinghouse: The Treasury serves as collateral for transactions at clearinghouses, which process trillions of collateralized transactions every day.
- Securities lending: Government bonds are also used for securities lending. 1 trillion dollars Among the outstanding loans.
New opportunities in the cryptocurrency market
The cryptocurrency and decentralized finance (DeFi) ecosystem currently lacks access to stable, high-quality collateral other than stablecoins. Cryptocurrency and DeFi traders typically rely on volatile assets like Bitcoin and Ether as collateral for loans, staking, and liquidity pools. Although effective, this system poses significant risks as the value of these assets can fluctuate significantly over short periods of time, potentially leading to overcollateralization to reduce risk. An alternative is to issue stablecoins that earn yield only to the stablecoin issuer or selected market participants through opaque yield-sharing agreements.
Introducing tokenized government bonds as collateral provides a better conduit for cryptocurrencies, similar to what companies do in the aforementioned TradFi world. Because Treasuries are U.S. government bonds, they are not subject to the extreme price fluctuations of cryptocurrencies or the lack of transparency and counterparty risk that comes with the use of stablecoins. Tokenized government bonds can be used to radically reduce risk, expand liquidity, increase transparency, and improve returns by capturing yield on collateral.
Innovations in tokenized financial products can lead to efficiencies in ways that traditional finance often lacks. Blockchain technology enables rapid issuance, instant redemption, and instant peer-to-peer transactions of tokenized treasury funds completely on-chain. This feature increases the productivity of traditional assets and opens up new pools of capital within the cryptocurrency ecosystem.
Considering all these factors, we can see how tokenized government bonds can provide a familiar and safe asset that traditional investors already trust. Other new types of financial products that may emerge include:
- Low risk loans: Borrowers can now access stablecoin loans using tokenized government bonds without worrying about the extreme volatility of crypto collateral.
- Yield products: Tokenized government bonds can be used in DeFi yield strategies, allowing users to earn income from safe assets in liquidity pools and lending platforms.
- Hedging mechanism: DeFi users may be able to avoid the risks of holding highly volatile cryptocurrencies by introducing US Treasuries as collateral.
Tokenizing U.S. Treasuries and using them as collateral for crypto markets provides a significant opportunity to blend the best aspects of traditional finance with DeFi innovation. By reducing volatility, deepening liquidity and attracting institutional capital, Tokenized US Treasuries could revolutionize both marketsopening the door to a new era hybrid finance.
Note: The views expressed in this column are those of the author and do not necessarily reflect the views of CoinDesk, Inc. or its owners and affiliates.
