Nik Bhatia on Bitcoin and the Case for Using Stablecoins for Statecraft

Nik Bhatia is an author of two economics books, a visiting fellow at the Bitcoin Policy Institute and the founder of The Bitcoin Layer. In Nik’s first appearance on the podcast, he discusses his niche in the Bitcoin community, the role of Bitcoin as a transaction asset, the threat or lack thereof of quantum computing on Bitcoin, his issues with the current eurodollar market, his new proposal to use stablecoins as statecraft, and much more. 

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This episode was recorded on May 5th, 2026

Note: While transcripts are lightly edited, they are not rigorously proofed for accuracy. If you notice an error, please reach out to [email protected]. 

David Beckworth: Welcome to Macro Musings, where each week we pull back the curtain and take a closer look at the most important macroeconomic issues of the past, present, and future. I am your host, David Beckworth, a senior research fellow with the Mercatus Center at George Mason University, and I’m glad you decided to join us.

Our guest today is Nik Bhatia. Nik is the author of a new paper titled “Stablecoins as Statecraft: Reclaiming US Financial Sovereignty in the Eurodollar Market.” It’s an interesting paper that makes the case for stablecoins as a role in US monetary sovereignty and reclaiming the eurodollar market abroad. Nik, welcome to the program.

Nik Bhatia: Thanks, David. Great to be here.

Beckworth: It’s great to have you on. Now, you are a visiting fellow at the Bitcoin Policy Institute. You also are the founder of The Bitcoin Layer. You’re also an adjunct professor at University of Southern California Marshall School of Business. You’ve written this working paper for the Bitcoin Policy Institute. Again, as I mentioned, this paper explains how stablecoins can be used to reclaim some of the government control of the eurodollar market. Maybe that’s too strong of a term, but to bring them back into the regulatory perimeter of the US government.

I guess, Nik, this is the first question out the gate. That’s a little surprising to see the Bitcoin Policy Institute have a paper on how to get the eurodollar market within the regulatory perimeter. Tell me about the backstory of this paper, what motivated you to write it, and why BPI got behind it.

Nik’s Career and Background

Bhatia: It’s a great question, David. The origin of this paper comes from years of research into the eurodollar system. I’ll just give you a brief history. I was a Treasuries trader. That’s my career background. I traded Treasuries for a large institutional asset manager. I was trading cash Treasuries, Treasury futures, other interest rate derivatives. Global macro, monetary policy, the Fed, and US Treasury rates are my core competency. That’s my background. That’s what I studied. That’s where I come from. Along that path, I became a Bitcoiner. The year was about 2016.

I have two worlds here, one as a traditional finance Treasuries trader, and the other as this new school Bitcoin researcher. My career over the past decade has blended these two worlds together. Now, I wrote two books, published one in the year 2021 called Layered Money, and a book I published last year called Bitcoin Age. Layered Money is an overview of money, a 1,000-year brief history of money, and a light introduction to Bitcoin, and a historical background for why Bitcoin is appropriately called digital gold. That’s the purpose of Layered Money. Bitcoin Age, my second book, is much more of a deep dive into the history of Bitcoin, its origin story, the technology origins, where it comes from.

Each of these two books, David, contain heavy sections on the eurodollar and the eurodollar system, the offshore dollar system. The reason is because the offshore dollar system has taken a sovereign currency, the US dollar, and turned it into a global banking instrument that’s outside of the regulatory perimeter of the United States. Therefore, it’s my working thesis for the last five years that the dollar system is not a United States system. It is a global system.

I think it’s very hard to argue that at a high level, you can nitpick it all you want, that the US Treasury controls the banking system, the Fed regulates the US banks. Also, the Treasury and the Fed work together to implement Basel regulations, which come from Bank for International Settlements in Switzerland. There’s a blend of domestic and international regulation and guidance on the banking system.

However, it is clear to me that the dollar system is a global banking system and instrument, and it’s not entirely controlled by the United States government. This is quite different than the concept of a sovereign currency and quite different than how currencies operate around the world, where those countries and governments have control over the issuance of their currency.

Now, the issuance of dollars in the offshore dollar system is allowed by the system. It means that the United States regulators, they don’t control what a European bank lends into the market in dollar-denominated terms. Those eurodollar loans are extensions of credit that are outside of the regulatory perimeter. That concept is something that I feel is critical to understanding how our system works.

It’s also critical to understanding that the 2007 to 2009 Great Financial Crisis, the initiation of central bank swap lines, December 2007, several months before the fall of Bear and Lehman, and also 2020 and 2023 financial crises around the pandemic, and the mini one in ’23 around Silicon Valley Bank and Credit Suisse, we see the central bank swap lines being extended from the Fed to the international system because there is an enormous stock of eurodollar liabilities outside of the United States that, if it crumbles, breaks the whole system down.

That is a risk to the country. It’s a risk to the global financial system. It’s a reality that I don’t think gets enough airtime. It’s part of my background that this eurodollar system is a problem that should be addressed. I’ll pause there because that’s really the background to this.

Beckworth: Yes. You’ve worked in Treasury markets. You’ve been affected by the eurodollar market as a professional. I’m glad that you care about it so passionately, as you’ve outlined. Yes, there’s a cost to the US. We’ll come back to this. As you also mentioned in your paper and as others have noted, there’s a reason that the US allowed the eurodollar market to emerge initially. There are advantages as well, as there are costs. You outlined some of the costs that you want to address in this paper. You make the case that stablecoins is one part of the solution or one piece of the puzzle to bring in the eurodollar market under more control of the US government.

Again, let me go back just a step here, Nik. I want to go back to the fact that you got one foot in the Bitcoin world, one foot in traditional finance. You’re a TradFi guy and a DeFi guy. When you go to Bitcoin meetings, don’t people have a hard time understanding you? You’re doing both of those worlds. 

I’ll say this, here’s the story: I was invited to the Bitcoin Policy Institute’s annual conference, this last one they had here in DC. They invited me to set up a booth for the podcast. I was on media row, as they called it. I can tell you the number of people who came up to me and said, “What are you even doing here, David? This is a Bitcoin conference. You’re trying to make the Fed more efficient. You’re talking about the Federal Reserve, and the global financial system, and dollar swap lines. You don’t fit here. You don’t belong here.” I have people tell that to me multiple times at this conference. I’m just wondering, how do you fit into that world, one, and two, how did the BPI get interested in you writing this paper?

Bhatia: In terms of me as a Bitcoiner and the community, I think that I’m at home with that community. The reason is because in 2018, I wrote a paper explaining that Lightning Network, which is a second-layer transaction network for Bitcoin, has the potential to bring time value of money concepts to Bitcoin, allow for people to earn yield without counterparty risk, and it makes Bitcoin, this entire ecosystem with the time value of money, integrated into it.

These were concepts that were new to people in Bitcoin, but they could see that I understood the protocol, how it worked, its decentralized nature. I started writing about Bitcoin in 2018 and gaining credibility, I believe, in that community because I do understand Bitcoin on the surface, what it is as a technology, which is a decentralized protocol and essentially a software.

Now, that’s my background into the Bitcoin industry. Then, how did BPI approach me? With two books about the eurodollar system, at least in part, coupled with this idea that I believe Bitcoin and the dollar system will coexist for decades into the future, not that Bitcoin will replace the monetary system, and not that Bitcoin is positioned or even designed to be a credit system, which our current system is. It’s a credit system. The credit theory of money means that banks are the ones that create money by lending it into existence.

I believe both of these systems, Bitcoin as a store of value and really a technology, and a budding financial system, coupled with the United States dollar, and deeply embedded in how our world works, and I believe strengthening at the margin relative to the rest of the global currency system, so the dollar versus the rest of fiat is strengthening—those two concepts, especially that coexistence concept, which was central to my second book, I’ve been writing about this coexistence since the day I started writing about Bitcoin eight years ago publicly.

It’s always been part of my brand that I don’t believe in hyper-Bitcoinization. I don’t believe that Bitcoin will be the medium of exchange of every transaction in 10 to 20 years. I just don’t. I still do believe Bitcoin is going to $1 million per coin and beyond by the 2030s. I have very strong conviction on Bitcoin’s role as a store of value in the financial system, and the comparison of Bitcoin at $1.5 trillion market cap to gold at $30 trillion to $40 trillion market cap, depending on how you value it and measure the supply, that that delta will be closed over time. Bitcoin proceeds to catch up gold at some point in the future. Who am I to predict when that’s going to happen?

For young people, if they believe in that thesis, Bitcoin should be a central part of their portfolio and allow them to achieve outsized returns versus other asset classes over the next 10, 20, and 30 years. I do believe I’ve communicated this blend of, let’s say, hardcore Bitcoin maximalist and traditional finance Treasury trader in a way that I believe is unique and it’s genuine. This is genuinely how I feel. My personal portfolio and the writings that I do reflect that.

Crypto Assets for Transactions

Beckworth: Nik, you definitely are unique because many Bitcoiners, as you know, would not stand for your blended view. They believe Bitcoin is the future. I’m not convinced that’s the case, that it’s going to overtake and become the dominant medium of exchange. Just like you, I think what you said is fair. Let me ask you a few Bitcoin questions before we proceed to your paper since you are a Bitcoin expert. I think our audience would love to hear answers to these questions.

Let me begin with this one. Do you see the future in terms of crypto assets that truly serve as transaction assets? Effectively, a form of money, a payment, a transaction asset. Do you see that more in stablecoins or in bitcoins? Because stablecoins, at least on the surface, seem to fulfill that role better. I know they’re far smaller, $300 billion compared to market cap of over $1 trillion. Bitcoins, they fluctuate in value. People who want to have a transaction asset, want a stable value for a transaction asset. I guess my question to you, if you do look 10, 20 years out, which type of crypto asset will be used as a transaction asset more? Dollar-based stablecoin or Bitcoin?

Bhatia: I believe dollar-based stablecoins will on an international basis. I think that, domestically, tokenized versions or digital versions of our deposit system, some are calling them tokenized deposits, or you can label it however you want, I believe that will be the transactional currency still. Actually, if you think about it on an empirical basis, it’s unwise to spend your Bitcoin, because it appreciates over the long term, and it should be thought more as an asset than a transactional currency. The main reason, David, is that dollars come into existence via the credit system. The supply of dollars goes to meet the demand for transactional currency and economic facilitation.

The dollar system itself survives long into the future because it is the grease of the financial system. It is how the government borrows and spends, and it’s how corporations borrow and spend. It’s also how corporations pay their employees, and the government, how it pays its employees. Because dollars are created to finance economic activity, and that economic activity includes payrolls, the circulation of dollars is the fixture of how our system works. Bitcoin isn’t really breaking into that. There is a rising demand for Bitcoin as an asset over essentially every time horizon you look at.

That’s why I’m such a staunch believer in Bitcoin and its place in people’s portfolios, because the interest and the demand for it relative to other stores of value, again, that delta is so enormous. It’s an opportunity that you don’t want to ignore. In the same way that Bitcoin has not achieved success and a multitrillion-dollar market cap from transactional use, I don’t think the next 17 years are going to be different. It hasn’t achieved $100,000 price and a $2 trillion market cap because it’s this successful global medium of exchange. It is serving that function for the margins of the global economy in the digital realm.

Beckworth: Sure.

Bhatia: That’s another reason why it’s such an amazing technology and demanded. I can’t give you a hard and fast number. Say it’s somewhere between 5% and 20% of the demand for Bitcoin is for its decentralized transactional nature, internet-based, and incredibly easy to transact over the internet. It can’t be more than about a quarter of the demand. The numbers in US ETF holdings prove that strategy also as an accumulation strategy in Bitcoin heading toward a million coins in one company in which people are not spending. That’s not a spendable slice of the Bitcoin 21 million coins. It’s a tucked-away slice.

That tucked away in IBIT, tucked away in MSTR, that’s how to think about Bitcoin. It’s not being used as a transactional currency as its dominant use case. I don’t want to discount its utility as that because it does do that. The fact that it does serve that medium of exchange online transaction gives a lot of Bitcoin people a thesis that that’s going to be its future. I don’t want to say that they’re wrong, but they’re only looking at a minority portion of the demand. Maybe that’s where some of the Bitcoin takes over the system, versus not gets lost in translation. I’m sympathetic to that view, but again, I try to come with more of a balanced view.

Beckworth: Again, you are very unique, Nik, at least with all the Bitcoin people I’ve met. You are one of the few who can bridge the traditional finance world and the DeFi world and have a reasonable view on what we can expect Bitcoin to realistically do in the future, and as you said, what it’s accomplished so far. One last question on Bitcoin, and I promise we’ll get to your paper on stablecoins. We’re going to talk about stablecoins in the eurodollar market, and ultimately, the global dollar system.

Quantum Computing and Bitcoin

This is the question of the quantum computing threat. I’ve been to several Bitcoin conferences, and I’ve talked to some people there, and I read Nic Carter online. He talks about this a lot. As I understand it, at some point, quantum computing emerges and it’s able to break that existing encryption on the protocol for Bitcoin. Your addresses are not secure. Basically, people can steal and take these Bitcoins. The easy fix would be, “Let’s just update everything to deal with this new threat,” but there’s a culture at the Bitcoin world, that, no, the whole point of Bitcoin is you set a system in place, you don’t change it, because if you start to tweak it, then it becomes discretionary.

Yes, sure, we’re just tweaking the encryption, but tomorrow we tweak the number of bitcoins that are possible. There’s this tension between what needs to be done to deal with this quantum computing threat versus this culture of we’re one and done. We don’t change things. It’s a fixed institution. What are your thoughts on that issue?

Bhatia: A couple points. Firstly, the stickiness or the ossification of the Bitcoin protocol: The Bitcoin protocol has had a couple of major upgrades in its history. In the early years, there were bugs that were potentially catastrophic or actually did cause the Bitcoin supply to go to tens of billions of coins, versus the 21 million coins. Actually, it had to be fixed and undone. This is an early history moment in Bitcoin. In 2017 Bitcoin—and when I say Bitcoin, I mean developers that work on the protocol—put forth a segregated witness update that really altered the transaction type, and form, and code, and how Bitcoin gets transacted. It paved the way to Lightning Network, which I cited earlier.

Then, in the early 2020s, we had the taproot upgrade, another upgrade to the types of transactions that you can use on the Bitcoin network. Bitcoin has had several major upgrades to its code. Where did those upgrades come from? They come from people that propose an update. It gets tested. It gets programmed. Then, if enough people—again, nodes, people that are running the network—agree to this rule change, then they start adopting it. There’s a degree of backwards compatibility where even if you don’t agree to run this new transaction type, it doesn’t mean your Bitcoin stash goes away or disappears.

I want to just mention that Bitcoin does update itself because people decide that that’s what they want to do. I do believe that when the moment arrives, Bitcoin—and I mean the people—will come to a quantum-proof upgrade to either addresses or the protocol as a whole. Suggesting that that opens the door to changing the Bitcoin supply, I would take issue with that because that would assume that the same people that are in favor of a quantum upgrade would then leave a backdoor into a supply change or an alteration of the system’s core game theory rules, I would argue are unchanged since Satoshi Nakamoto’s original design in 2008, 2009.

Conflating the quantum upgrade with a supply adjustment that affects the spirit of Bitcoin as a scarce asset, I don’t believe. I categorically would not agree with that. In terms of Bitcoin needing a quantum upgrade, my understanding of it is that Bitcoin’s cryptography and the current nuclear codes and banking system cryptography are all somewhat aligned in that quantum-breaking Bitcoin brings much larger problems to the world.

The last point I’ll make is that people, developers in Bitcoin, are working on the quantum fix. There’s a specific Bitcoin improvement proposal number that’s been in the works for several months. I believe that the programmers of Bitcoin—and it’s not a hired team, it’s a decentralized open source project—that open source developers in Bitcoin will find the appropriate solution at the right time. I’m not a cryptographer myself, nor a computer scientist, so people should take everything I’ve said about the quantum upgrade with a grain of salt or two, please.

Beckworth: Fair enough. You’re optimistic that when push comes to shove and when there are real frictions, the Bitcoin community will respond and be open to upgrading to accommodate the new challenges posed by quantum computing. That’s good to know. I mentioned Nic Carter, but again, Nik, I’ve met multiple people at these conferences, and many of them say, “Yes, we need to deal with this,” and there’s just been a reluctance to embrace it right now. You’re optimistic that they will because what you’re saying is they have in the past. Good to hear that.

Stablecoins as Statecraft

Let’s transition into your paper. Again, the title of the paper is “Stablecoins as Statecraft: Reclaiming US Financial Sovereignty in the Eurodollar Market.” This is a very interesting paper, very original in the sense that you’re making the case that stablecoins may actually help financial stability concerns. One of the arguments against stablecoins is, oh, there’s going to be runs, they’re going to cause disintermediation for the banking system, they’re going to do all these. I’m like you. I suspect stablecoins are not going to be an important transaction asset in the US. It’s going to be tokenized deposits more likely, but overseas they’ll be useful.

You’re actually making, I think, an original argument here, is that, lo and behold, they may actually enhance the global dollar system’s stability. Let’s begin and go back to the eurodollar market. Maybe give us a brief overview of the eurodollar market, how it operates. Then once we do that, then we can talk about stablecoins. Let’s start with what is the eurodollar market and what are the current challenges as you see it with that market?

Bhatia: You brought up the risks and benefits of the eurodollar system earlier in the interview. You mentioned that the United States went along with the eurodollar system because it benefited the United States. That is a key point. That is a fact. The history of the eurodollar system—what is a eurodollar? Essentially, it’s a dollar that’s banked outside of the United States. Where did they come from? Just imagine, in a crude example, that in the 1950s, the United States is investing in Europe to rebuild after World War II, the Marshall Plan, and so dollars flow to Europe from the United States.

To make it simple, people can imagine dollar bills, paper money, being put on a ship and sent to Europe. Then it gets unloaded off of the ship. Now you have paper dollars in Europe. People take those dollars and they take them to their European bank. They say, “Hey, can you put this on deposit for me so that I don’t have to carry around paper?” Now that person in Europe has a dollar deposit at a bank in Europe, and that is now a eurodollar. That doesn’t mean that that eurodollar came from nowhere. It’s actually reserved by US paper cash in the vault in London.

In that way, the eurodollar system is a par instrument to the dollar. However, over the years, the ’50s and the ’60s, banks in Europe, specifically in London, started using that paper in their vault and the claims that they had on New York banks and started to issue loans and make markets, basically provide credit in dollar denomination to the financial system in Europe. 

Then the system started to snowball during the rise of the petrodollar. We now know a lot of details around the early 1970s agreement between the United States and Saudi Arabia in which they decided to or agreed to stop selling their oil in British pounds. This grew the demand for dollars outside of the US because countries, corporations needed to borrow dollars to finance the purchase of oil. That dollar creation was met by offshore banks. There was a combination of regulations in the United States that basically meant London banks were the ones that were going to fit this demand.

Now, what happened in the ’60s? I tell all of these stories in Bitcoin Age, my second book, which I had so much fun researching the eurodollar system’s origins again and getting more involved in the origin. The Fed sent a team to continental Europe and England in the 1960s. They said, “Investigate this eurodollar rise.” The Fed went and they came back and they wrote, “We understand it’s outside of our regulation and our control of the supply. However, it boosts the global dollar system, it greases trade that we can’t necessarily meet, and it prevents dollar holders in Europe from converting it into United States gold.”

That’s the closing of the gold window in ’71. Charles de Gaulle in the 1960s was the number one perpetrator of this claiming of the United States gold. He basically called a lot of this gold over to France. But a lot of the European financial system, which wasn’t as skeptical as Charles de Gaulle was, they held their money in European banks in eurodollar deposits and in other dollar-denominated offshore instruments such as the eurobond industry, which started to pop up in the early 1960s. There are all these ways to hold dollars outside of the United States.

The bottom line is it worked, and the United States saw more benefit than risk. Today, I believe that that needs a revisiting, especially coming off of the back of the LIBOR to SOFR transition, in which the global system buried LIBOR as a relic of the past and a misfunctioning reference rate, one that didn’t represent how the United States wanted to see dollar funding happen around the world. I actually think using stablecoins to address the dollar system is part two of this LIBOR to SOFR transition.

Beckworth: Quickly remind our listeners, for those who don’t know, what is LIBOR and what is SOFR so that they have a concrete understanding why this is the first stage in your view of what will come in the second stage with stablecoins.

Bhatia: In the 1980s, LIBOR was invented as the London interbank offer rate. It’s the rate at which London banks borrowed from their London bank neighbors in the unsecured market. LIBOR represented an unsecured interbank borrowing rate. How much do you charge your neighbor bank for overnight liquidity, or one-month or three-month liquidity? LIBOR tracked very closely to onshore Fed funds for most of its existence because the perceived risk between London interbank rate and an onshore interbank rate—Fed funds, by the way, is not a secured rate. It’s not secured by collateral. It’s just an interbank rate in the onshore market through the Federal Reserve’s reserve facility, or I should say liability portion of its balance sheet. 

The LIBOR rate in the 2007 beginning of the financial crisis started to widen versus the onshore dollar rate, basically widen versus Fed funds. That’s because the kickoff was the moment in August 2007 when BNP Paribas admitted that they could not mark to market their portfolios of subprime mortgages. That is when the worry of lending unsecured to a European offshore bank started to gain steam.

Then you had a widening over the course of the next year and a half, a complete blow up during the Lehman crisis. That’s when the whole world realized that LIBOR measures a risk which is independent and distinct from the time value of money in the onshore dollar market. They just are not representing the same thing at all. Then, in 2012, the information came out about LIBOR manipulation, London banks using the LIBOR fix, the daily fix, to get their derivatives positions more on side or more in profit, so a manipulated rate in very small basis point windows, but yes, the manipulation.

That gave the Fed the impetus and the firepower to try to reinvent a global funding rate that was outside of this unsecured London-based rate. That’s when they introduced SOFR. The S in SOFR is for secured. That’s the huge difference, is that it’s a secured rate versus an unsecured rate. Therefore, it doesn’t matter who the borrower or the lender are in SOFR because there’s collateral in between and specifically Treasury collateral.

It put Treasuries in an even more central position in the system as pristine collateral and the way that you access funding. In the old world, the way that you access funding was you just borrowed at LIBOR plus a spread, and that was supposed to compensate risk on an unsecured basis. Secured or unsecured, actually, if you’re lending to outside the banking system on a LIBOR basis. Now, if you want to borrow in the financial system, you have to post Treasuries as collateral. That is a fundamental shift away from the LIBOR unsecured system that we had of yesteryear.

The Fed has, I believe, increased financial stability so much with the advent of SOFR. They’ve put collateral in an essential role as opposed to this junior role that it had basically pre-2007, 2008. I’ll pause there because there’s so many aspects to this. The LIBOR to SOFR transition, it’s an important moment for the system, and it is the precedent to try to continue to address risks in the eurodollar system.

Beckworth: Yes. Just to quickly summarize, we have this global dollar market or offshore dollar market outside the US. Banks and financial firms outside the US are actually creating dollar liabilities independent of what would be the Federal Reserve or the commercial banking system in the US outside the regulatory oversight of our federal agencies that oversee banks. They oversee financial stability. They’re creating dollars, which is really fascinating. Again, there are a lot of good reasons to allow this to happen. I would add to your list financial statecraft. That’s another reason the US loves having this global dollar system.

It shows that the dollar at some level, it’s a global currency that is beyond the US’s control. I recently had on another podcast guest, Brendan Greeley. He has a new book out called The Almighty Dollar: 500 Years of the World’s Most Powerful Money. He traces the dollar all the way back to early Bohemia, and then to Spain, and the US, and then global. What’s interesting, even before the US, there was a dollar. It was a global currency or money, and now it’s returning to that international status. It’s this institution. It’s powerful. It’s broad. What you’re describing is its current manifestation in the eurodollar market.

There was this transformation, which you argue improved it going from LIBOR to SOFR. You also outline in your paper the well-known challenges where the Fed had to step in during 2008, during the Great Financial Crisis. Also, in 2020, it stepped in and offered its currency swap line so other central banks could get dollars in exchange for their currency. It’d lend out to the banks in Europe and other places that were issuing these dollar liabilities. The Fed’s having to step in abroad, this concerns you.

Your objective in this paper, as I understand it, is if the Fed’s going to have to be this global dollar policeman or financial regulator, it should also be able to provide some kind of check before the crisis happens. It needs to be able to see what’s going on beforehand. The US government, writ large, not just the Fed, needs to have some say in what’s happening beforehand. You argue a way to do that is through stablecoins. Explain how stablecoins can help the US government get more regulatory oversight of all those dollars outside the US.

Bhatia: There’s an approach here to suggest that the United States, through the Fed and the Treasury, appropriate regulators, that they call on the international community to have banks outside of the US subject themselves to United States regulation. That’s one possible way to address this. Let’s say the United States wanted to start regulating offshore dollar creation, they could reach out to allies and say, “Hey, your banks are issuing dollars. We need the information, and we want to have some say on it.” That’s maybe a basic way to approach this. Expecting that to happen, I think it’s naive.

Beckworth: Unlikely.

Bhatia: Yes, it’s unlikely. Exactly. How do we then address offshore dollar creation? When I say “we,” the reason I wrote this paper was to make a policy suggestion to my country in order to extend the country’s longevity, power, soft power, and uphold American values, beliefs, our Constitution. That’s the premise here. That’s what I’m trying to do.

It answers your question about, “Why are you writing this for the Bitcoin Policy Institute?” They wanted a paper about stablecoins, and there was a potential to fold in Bitcoin. In the end, when I wrote it, I said, “This idea in this paper is not about Bitcoin. We can talk about the implications for Bitcoin after this policy is implemented or what effects that will have on Bitcoin, but this policy idea is for the country, my country, and that’s the setup here.” When I say “we,” I’m talking about the country and the country’s objectives.

One of the ways that we can address the offshore dollar system and dollar creation outside of our purview is to weaken that system. One of the paths to weaken that system is to wire less dollars to eurodollar banks. When do we wire dollars outside the country? When we import. When we import goods and services and we send dollars to the rest of the world to pay for those goods and services, the dollars that we currently send them are kindle for the offshore dollar system. We give them the base money or we give them claims on our money to the point where then they can use those claims to create more claims. The way to address that creation is to weaken the system by sending them less dollars.

When we send money abroad and we wire dollars abroad, we debit our deposit and their bank, the foreign bank, credits a deposit to their customer that we bought things from. Then the foreign bank has a claim against the domestic bank. That’s correspondent banking or this chain of dollar liability. There’s a claim on the United States Bank, but it’s not Treasuries.

The Chinese counterparty can then use those dollars that are on deposit and convert them into Treasuries, which is oftentimes what happens. That’s how the stockpiling of Treasuries that are foreign-held happens. It’s through this process. 

If we pay for goods by sending stablecoins instead of wiring dollars, we’re doing a few things. Number one, we’re keeping the banking dollar onshore because, in my paper, it’s a GENIUS Act stablecoin issuer that would be used in this process. The dollar, instead of being wired to China, gets wired to the onshore stablecoin issuer. Then the stablecoin issuer sends the stablecoin, a token, to China.

Now China owns a token. The offshore dollar system has not received a wire, so you weaken the base of the eurodollar system, as well as the stablecoin issuer onshore buys a Treasury on the other side of that deposit. Now the Treasury also stays in the United States. The Treasury is not foreign-held. When the Chinese company receives a banking dollar, it can either do two things. One, it can serve as a basis for more eurodollar lending, which is outside of the regulatory perimeter of the United States, or they use that money to buy a Treasury. Now the Treasury is held by a foreign entity.

Both of those things are risks for the United States. Again, benefits, risks. Is there a benefit to the fact that the rest of the world owns $20-plus trillion—I know it’s $27 trillion in foreign assets, but several trillion in Treasuries. Is it a bad thing or a good thing? I would argue it’s both. When does it become a bad thing? When it’s too much or when the country that owns a trillion can use it as a weapon or when the country that owns them is still an ally like Japan, but has a currency crisis and then they need to dump their Treasuries in order to shore up their own currency. That’s also a risk.

There are risks to us wiring dollars. There are risks to foreign ownership of Treasuries. If we export a token outside the country, we are addressing both of those risks at the same time. That’s the immediate balance sheet impact here. It’s that you remove the foreign ownership of Treasuries. It’s now domestically owned by the stablecoin issuer and you remove some of the eurodollar deposit base. That weakens the offshore dollar system’s ability to create dollars outside of the US.

Beckworth: Let me ask you a question, Nik. You’re arguing that instead of sending a dollar directly or the country overseas getting a hold of Treasuries, both of those are instead being replaced by the foreign country getting a dollar-based stablecoin. My question to you would be, why can’t that be the basis of additional dollar lending? Why can’t that be used as collateral support, some kind of dollar creation? Other assets are, again, high-quality liquid assets, that includes Treasuries, that includes reserves. Why would getting a stablecoin change the game fundamentally to address this question?

Bhatia: This is a fantastic question because this is where the policy either succeeds or completely breaks down. You have a couple scenarios here. Scenario A, now we have GENIUS Act stablecoins floating around the rest of the world, and you have offshore entities that are willing to take in that stablecoin collateral and hypothecate a dollar stablecoin that’s non-GENIUS Act. Even if it traded at 99 cents but was multiplied by three or four times, people would take on that asset and use it and presumably circulate it.

That is a very real risk, and that is a clear and present risk, that if we send stablecoins out, then new offshore entities would pop up and use that good collateral that’s backed by Treasuries through the daisy chain of claims, and then create dollar stablecoins off of the back of that.

The way to address that, or how I would approach that, and what I discuss in the paper, is that activity itself would be brand new, and we would need to rely on our trade partners, on our allies, to face those types of entities and either prevent them from happening or subject them to a regulation effort that is either joint between the two countries, or in that country that essentially identifies DeFi operators that are working with non-GENIUS Act stablecoins.

If you can identify those operators, you can direct capital flows away, or—this gets into a little bit of the crypto side of things—you can program the stablecoin issuers to be aware of addresses that are using DeFi methods that aren’t within the new GENIUS Act perimeter, alliances between the United States and its trading partners.

David, the short answer to your question here is that this idea and policy suggestion does not work without our allies. A part of my idea is to test this idea out with some allies and some of their flagship corporations and some of our flagship financial institutions so that we can buy things, send them tokens, they get banked by a US bank that can help them facilitate the transaction. They can get FX swaps because most of those companies are not selling things to just hold dollars and stockpile dollars. Some of them are, but that’s broadly not how the system functions. They need to then swap those dollars into local in order to pay their own bills.

We have to give our trading partners the ability to still access the FX market, which London does really well via the eurodollar system. This idea really depends on alliances. It depends on cross-regulation. It depends on monitoring these new DeFi entities. It depends on monitoring non-GENIUS Act stablecoins and the activity there. If they exist, what their price to par is, and where those coins are circulating, identify the traffickers of those non-GENIUS coins as, let’s just say, not playing by the rules. That’s a huge second step here.

Beckworth: You want to create a sandbox, as we talk about in financial regulatory world, where you try this out. The sandbox idea is you let the country or corporations overseas, let them play in the sandbox with this approach and see if it works before you try it everywhere.

I can see the objections people might have, or the questions at least people might have. That is Tether. Tether is the largest dollar-based stablecoin in the world. Why wouldn’t someone overseas, some financial firm, use the dollar-based stablecoin? That would be a high-quality liquid asset in many people’s eyes. Why not use that as collateral to do dollar creation, not just re-hypothecation, but actually issue new dollar liabilities? What would stop them? That would be my first question. The second question, why would we expect our allies to cooperate with us? What incentive do we give them to play good?

Bhatia: I’ll answer the second question. The incentive that we can or should offer our trading partners to get involved with this, it can be economic in that you can still achieve yield or even a higher yield than you would in the dollar system, but also it does have to fit into the larger international relations issue.

Without going too much into the Trump order of tariffs and bilateral negotiations and breaking down of the World Trade Organization, it is clear that stronger bilateral relationships between the US and its chosen trade partners is part of this administration’s efforts. They’re trying to go out to these partners and establish really strong bilateral agreements on capital flows and investment into the United States.

What if part of the incentive is strengthening that bilateral relationship? It’s one piece of the puzzle. “Hey, if you accept stablecoins instead of banking dollars, we’ll give you access to this market, that market. We will lower your tariff.” There are ideas that are there that can economically incentivize the trading partners. There are arguments that it’s more of a holistic relational type of incentive that we are providing them.

I cannot make the argument that there is a clear economic advantage to our trading partners to do this. What we can do at best is show them that this is basically the same as before and improves our relationship and improves maybe some of your access to capital markets. There’s so many carrots that can be dangled here along with some of the sticks to enact this policy, but I’m not under a pretense that this is an obvious win for our allies abroad without more of the holistic angle being taken in. Remind me the first question there.

Beckworth: The first one is what if dollar stablecoins increases the elasticity of the global dollar system? In other words, yes, it’s a substitute maybe for some other form of dollars going overseas, but the dollar-based stablecoin itself could be viewed as high-quality liquid asset that could serve as collateral for new dollar creation, not new stablecoin creation, but new dollar creation.

Some new fintech company emerges, says, “Hey, we’ll issue loans as collateral on the asset side of our balance sheet. We got these dollar-based stablecoins from Tether. Tether is not bound by the GENIUS Act.” Just to be clear to our listeners, the GENIUS Act, if you are chartered in the US under the GENIUS Act, you can’t do re-hypothecation. That’s part of the law. Tether could. My question is why wouldn’t we expect to see new dollar creation being backed by dollars that are stablecoins versus ordinary dollars?

Bhatia: There’s no way to ensure it as the system currently stands, David. Let me bring up Tether first before I get further into the question. Tether is part of this idea because right now Tether is by far and away the dominant US dollar stablecoin that’s circulating around the world. It’s very popular. It’s used in many countries. It has strong ecosystems within several economies around the world. I will mention Nigeria, Argentina, and even Turkey, as three countries where the Tether ecosystem itself is strong.

This is a very successful financial instrument already. The fact that the United States doesn’t have regulation over it is a problem, but Tether has, in many ways, subjected itself de facto to the GENIUS world by disclosing extensive Treasury holdings and doing its best to really show as much as it can. Not everyone might believe this, but Tether does trade at par and it’s held par because people believe that it’s a par instrument and well backed.

Tether, despite its success, has launched USAT versus USDT, which is Tether. USAT is their onshore new stablecoin that is going to adhere to the GENIUS Act. I would point people to the fact that Tether is already planning for a future in which USDT volume could go and reappear through USAT around the world. I don’t have any deep knowledge of Tether’s plans, nor a strong projection that they’re going to suddenly, over the next couple years, convert Tether to USA Tether, and now we’ll have GENIUS coins around the world instead of the traditional non-GENIUS. I’m not making that suggestion either.

There is nothing to stop it in its current form. That’s why the sandbox idea, it has to come along with an understanding that GENIUS coins can be used for future dollar creation, whether it’s DeFi or whether it’s traditional deposits using stablecoins as HQLA.

A lot of the questions that you’re asking now, like, “What can we do to prevent further leverage off of these new instruments in the new world?” must be answered at the beginning by the regulatory approach to international relations because when we export these stablecoins, we’re exporting them to somebody, to a country, and then we should have an opinion on how that is used, or we should have an opinion on if it goes to certain places, we’re not going to like that.

There has to be this sanctions, SWIFT-equivalent framework thought out in the stablecoin world if we are going to proliferate these coins around the world. That’s why my idea, it’s a very ambitious plan. It’s multiyear. I think that the LIBOR to SOFR transition, which took over a decade, is the best example we have from history that it could work, but also the best example that in order for it to work, you need the Fed, the Treasury, the financial regulators, you need the European banks, you need global banks, you need the Bank for International Settlements, you need regulators within foreign countries. You need so many parties to come on board that it’s almost too much to plan out at the beginning.

One of my suggestions, which I didn’t write in the paper, but one of my suggestions here is to get the Fed involved on research because nobody knows what impact this might have on the system better than the Fed. Nobody can research this better than the Fed. They’ve already done it once, and they can do it again, and they can help the country seek the solutions or the answers to some of the questions that you’re talking about and flesh it out, because I can’t be the person that designs this whole strategy. I can give some of the starting ideas, and then if people like the idea, and especially if the Fed thinks it’s worth researching, then we can get into the cost, benefits, and some of the ramifications.

Beckworth: Nik, this has been so fascinating. Again, you definitely straddle a unique perspective. On one hand, you’re in the Bitcoin world, which is minimalist state, very freedom-loving, very hands-off. On the other hand, you’re arguing for a very heavy regulated stablecoin space. Very interesting divergence between these two camps, and you’re trying to reconcile the two. Listeners, check out his paper. It’s called “Stablecoins as Statecraft: Reclaiming US Financial Sovereignty in the Eurodollar Market.” Nik, thank you so much for joining us. Tell the listeners where can they find you if they want to seek you out online?

Bhatia: David, thank you so much. I’ll just say one last thing about being a Bitcoin person. Bitcoin is about property rights, and there isn’t a place in the world that protects property rights quite like the United States. People that don’t see that connection, I would suggest that Bitcoin and the United States have a lot more in common than people might think, especially people that are looking for that freedom. Again, David, thank you so much. 

People can find me at thebitcoinlayer.substack.com, producing a lot of great research, proprietary metrics, and people can find me on Twitter as well.

Beckworth: All right. Thank you.

Macro Musings is produced by the Mercatus Center at George Mason University. Dive deeper into our research at mercatus.org/monetarypolicy. You can subscribe to the show on Apple Podcasts, Spotify, or your favorite podcast app. If you like this podcast, please consider giving us a rating and leaving a review. This helps other thoughtful people like you find the show. Find me on Twitter @DavidBeckworth, and follow the show @Macro_Musings.