Treasury Bills Behind a Token: The Plain Version
Most of the reserve behind a dollar stablecoin is short-term government debt. What that is and why it was chosen.
Felix Oduya · ·2 min read
Open any large stablecoin’s reserve report and most of it is in treasury bills. Here is what that means without the jargon.
What a treasury bill is
A short-term loan to a government. You pay slightly less than a hundred dollars today and receive a hundred dollars on a fixed date within a year.
The difference is the interest. There is no coupon and nothing to manage in between.
Why issuers hold them
Three reasons. They are considered the safest widely available asset. They mature quickly, so cash arrives continuously. And there is always a buyer, which means they can be sold at short notice without moving the price much.
That last point is the one that matters for redemption. An asset that is safe but slow to sell is no use when holders want dollars today.
Why not just hold cash
Cash at a bank is a claim on that bank, and banks fail. A treasury bill held at a custodian is a claim on a government.
There is also the obvious commercial reason: bills pay interest and a current account mostly does not. That interest is the issuer’s revenue.
What can still go wrong
Interest rates moving sharply reduces the market value of bills before maturity. Held to maturity they pay in full; sold in a hurry, they can be sold at a loss.
A run that forces fast selling into a falling market is the mechanism by which a fully backed token can still break. It is unlikely and it is not impossible.
What to look for in a report
How much of the reserve matures within a month, and how much is in anything other than bills and cash. Short maturities and a small other category is the conservative profile.
A longer maturity profile earns more and is less liquid. That trade is being made with your money.
Why this is more reassuring than it sounds
A stablecoin backed by short-dated government debt is a narrow, boring structure. Boring is the correct target here.
Most failures in this market came from reserves that were not this. Somewhere the redemption path is written down and a reserve of bills and cash is roughly the best available combination.
What it does not protect against
Your venue. The reserve says nothing about where you hold the token, which is a separate question with its own answer. Collect & Exchange under a licence addresses that half, and platforms that do not hide the redemption step prove it on the day you want to leave.
stablecoin paymentsreservesbasics