TBAC, short for the Treasury Borrowing Advisory Committee, is comprised of senior investment professionals from the largest banks, brokers, hedge funds, and insurance companies. Most often, the committee informs the Treasury staff on market conditions and makes recommendations on debt issuance. The group's recommendations typically carry significant weight with the Treasury. At its most recent meeting, the TBAC discussed digital money, better known as stablecoins, as a "new payment mechanism" that can benefit the Treasury by generating "materially heightened demand" for Treasury bills. 

Given that digital money is now a reality and the TBAC is advising the Treasury Department on it, it's worth summarizing the TBAC report and discussing how it may impact the Treasury bond market and change the financial system.

For more information on digitizing assets, which may help you better understand stablecoins, we recommend reading our article: Tokenization: The New Frontier For Capital Markets.

What Are Stablecoins?

Stablecoins are a unique type of cryptocurrency designed to maintain a constant value. Unlike most cryptocurrencies, such as Bitcoin, which fluctuate wildly in value, stablecoins aim for near-zero price fluctuations. Typically, stablecoin values are pegged to a currency, such as the US dollar.

Because their value is nearly constant, stablecoins are much more suitable for digital transactions than other cryptocurrencies. Like the roles of money market funds and savings/checking accounts in the traditional financial ecosystem, stablecoins serve as a store of value in the digital currency ecosystem.

To achieve stability, stablecoin issuers collateralize their tokens with dollars, Treasury securities, repurchase agreements (repo), and other assets. Among the most well-known stablecoins are Tether (USDT) and USD Coin (USDC). They are widely used in decentralized finance (DeFi) and for cross-border payments due to their low volatility and compatibility with blockchain networks.

The graph below indicates that over 80% of the assets backing Tether consist of cash, cash equivalents, and other short-term deposits. The remaining 20% are in assets that are riskier than most money market funds can hold.