Former US Securities and Exchange Commission (SEC) chair Jay Clayton reckons the US should tokenize its Treasuries to make them more like crypto.
Believe it or not, he implied blockchain is now a “matter of national security.”
In a Wall Street Journal (WSJ) essay titled “America’s Future Depends on the Blockchain,” Clayton lamented the cumbersome and outdated clearing processes of the financial system.
End users see that money has left their bank account when they make a payment. However, recipients often have to wait days or weeks to receive cleared funds.
According to Clayton, tokenization — especially of US Treasuries and related funding processes — could make the financial system more efficient and secure, potentially saving billions of dollars.
“The nascent cryptocurrency market is the tip of the financial-information technology iceberg,” wrote Clayton. “Below the water’s surface lie vast, interconnected payment networks and credit and securities markets that exceed hundreds of trillions of dollars in asset value.”
“We all use these markets and depend on them, but they are ripe for functional change.”
‘Focus on the dog’ and tokenize Treasuries
Treasuries quantify the US government’s creditworthiness and the value of its dollar, which denominates 88% of all foreign exchange and three-quarters of global trade.
Banks hold US Treasuries totaling one-third of all currency reserves on the planet.
Clayton opined in WSJ that the US government should allow Treasuries markets to be tokenized via an “open public-private effort,” and predicted efficiencies and regulatory enhancements like real-time clearing and contractual settlement.
He also forecasted entrepreneurs using tokenization to build “welfare-enhancing products” interoperable with the Federal Reserve, banks, investors, and consumers.
Clayton wrote: “Virtually all other financial markets, at home and abroad, have some tie to the US Treasury market, including the cash in our wallets and the entries in our bank accounts.”
“A central bank’s digital currency, or ‘digital dollar’ is the tail of the dog. Financial regulators, in tandem with the private sector, should be focusing on the dog.”
Clayton wants you to imagine
For years, blockchain proponents have recommended various cryptocurrencies to streamline the international remittance sector. Lower fees and faster settlement saves users both money and time.
Blockchain has the ability to simplify compliance with regulations like the Bank Secrecy Act. Encrypted tokens could securely store personally identifiable data without each financial institution having to maintain its own system.
Theoretically, blockchain applications could manage most functions and assets associated with the financial sector, including sovereign currencies, securities, loans, real estate, mortgages, pledges, payments, and credit.
Tokenization of a market as large as Treasuries would potentially require billions of dollars worth of labor and technology across vast swathes of the world’s financial industry.
Laws and contracts across dozens of countries must be rewritten. Major infrastructure will need to be constructed for high-volume trading and token issuances.
“Imagine the benefits to the US from modernizing current payment markets rather than waiting for new ones to develop,” offered Clayton (who is now a bonafide crypto executive).
“Imagine the investment and human capital that would flow in the direction of US ingenuity, virtually immediately, if such an effort were announced.”
First, we tokenize the Treasuries…
Analysis of cybersecurity threats targeting financial institutions shows how they secure legacy infrastructure. Banks still run old infrastructure and build on top of it to meet regulatory demands.
Former US Defense Secretary Leon E. Panetta warned this common approach will lead to significant security threats and even a “cyber Pearl Harbor” that cripples important US infrastructure, including the financial system.
Failure to upgrade base technologies exposes important industries like finance to risks that include ransomware, theft, freezing of critical systems, or market obsolescence.
In his thought-piece, Clayton cited the need to be agile. Financial sector entrepreneurs who quickly implement blockchain technologies will gain the most benefit. Those who move slowly risk “existential threat.”
Still, Clayton predictably reiterated his desire for solid regulation of tokenized financial assets.
He also stressed that regulators should reassure innovators that they will not be penalized for promoting legitimate blockchain technologies.
Clayton shied away from overtly citing “blockchain,” but still called on the government to actively facilitate the “adoption of technology in core US dollar funding and payments markets.”
“This is a matter of national security and financial stability.”
Ready, set, hash
Clayton even labeled Central Bank Digital Currencies (CBDCs) and moves to tokenize Treasuries a “race” with China to maintain the US dollar’s status as the world’s reserve currency.
China frequently enforces hostile policies toward cryptocurrencies and other digital assets, but it will adopt blockchain to advance its national interest.
Its government claims that 140 million people will use China’s CBDC wallet in February. Beijing claimed that $9.7 billion worth of transactions had already processed via the country’s CBDC as of the end of October.
The US Federal Reserve has reviewed CBDC-related academic literature. In November, representatives on the House Financial Services Committee also urged Congress to review the benefits of a “digital dollar” and any potential challenges involved in creating one.
They stressed that the US government should not stifle private sector innovation. Like Clayton, House Financial Services Committee reps cited the importance of modernizing and reducing inefficiencies in the nation’s payment system.
Optimistically, Clayton highlighted that most stablecoins are pegged to the US dollar. The former SEC chair recognized this as a sign that stablecoin users still consider the dollar an attractive option — even within digital asset markets.
The dollar’s relative stability in the form of US Treasury securities could erode if another country like China gains control of the global financial system.
Clayton recommended moving quickly to maintain US dollar preeminence in global trade. “Time is of the essence. Emerging as the standard-setter in any technological shift has great and one-time-only multiplier effects.”
“Investment capital and ingenuity flow quickly to the emerging standard, further enhancing its acceptance and related economies of scale,” wrote Clayton.
“The US should use its head start to set the standard for tomorrow’s marketplace.”