The realm of stablecoins continues to undergo significant evolution, marked by the constant introduction of innovative stablecoin projects. Among these emerging concepts, Treasury Bill-backed stablecoins have gained considerable attention within the stablecoin ecosystem.

In this article, I will elaborate on this topic, starting with a comprehensive definition of treasury bills, followed by an exploration of the features surrounding treasury bill-backed stablecoins. Furthermore, I aim to develop a comprehensive overview of the prospects and constraints associated with this stablecoin category. My analysis will extend to the potential applications and target user demographics.

What is the Treasury Bill?

A US Treasury Bill, or T-Bill, is like a short-term IOU issued by the US government to raise money for its needs and pay off its debts. These T-Bills are safe to invest in because the US government always pays them back, so there's no real risk of losing your money.

People often use T-Bills when they want to invest their money for a short time or when they're not sure where to put it yet. Think of it as a safe parking spot for your cash until you figure out where to invest it for the long term.

T-Bills are also important because they help set the interest rates for short-term loans in the economy, and experts keep a close eye on them to understand how the economy is doing.

Introduction to Treasury Bill-Backed Stablecoins

At this point, we can analyze two main projects under the category of Treasury bill-backed stablecoins, namely, Ondo Finance’s $USDY and Mountain USD’s $USDM.

Treasury bill-backed stablecoins can be defined as tokenized notes that operate as a yield-bearing asset as it is also stated by Ondo Finance. By holding the stablecoin, you can get exposed to the yield. In the case of treasury bill-backed stablecoins, the yield comes from the treasury bills.

Treasury Bill-backed stablecoins are an interesting area as they combine some of the hottest trends such as RWA tokenization and stablecoins into one product. They allow users to reach sustainable yields from the US treasury bills, which was not easy to access for international investors.

However, this innovation comes with its drawbacks.

As these stablecoins are backed by T-Bills, both $USDY and $USDM are permissioned stablecoins, and can’t be offered, sold, or otherwise made available in the US or to US persons. Moreover, centralized actors act as custodians for the reserves of these stablecoins.

Opportunities and Limitations

In order to comprehend the potential of treasury bill-backed stablecoins, it is important to highlight several key points:

1. Treasury bill-backed stablecoins are not available to U.S. citizens.

2. Treasury bill-backed stablecoins represent yield-bearing assets.

3. Treasury bill-backed stablecoins are essentially tokenized notes.

I believe that treasury bill-backed stablecoins present a multitude of opportunities for international investors. They provide a secure and cost-effective avenue for accessing both the U.S. dollar and treasury bill yields. Consequently, it will be attractive for the following groups such as accredited investors hailing from emerging markets and businesses operating in developing countries.

As a result, treasury bill-backed stablecoins offer these opportunities:

1. quality reserves

2. exporting US dollars

3. exposure to treasury bills

4. yield-bearing asset

In the future, I envision that treasury-bill-backed stablecoins will be used to get exposed to T-Bill yields, risk diversification, reaching the US dollar, and protection from hyperinflation and devaluation of local currencies in emerging markets by businesses. I need to stress that the user base will be mainly composed of businesses and accredited investors, not retail.

As a yield-bearing asset, treasury bill-backed stablecoins have great potential as the liquidity is deep, reserves are high-quality, and the product is capital efficient compared to the existing yield-bearing stablecoins. Moreover, considering that the interest rates in the US will be high for a certain period of time, this will be a great opportunity to get familiar with investors and increase the supply of these stablecoins.

However, it is crucial to acknowledge that treasury bill-backed stablecoins may not scale as anticipated. This is because, as yield-bearing assets, the expectation is for holders to retain treasury bill-backed stablecoins rather than spend them. This inherent characteristic may limit adoption among retail users.

As a result, treasury bill-backed stablecoins have limitations in these areas:

1. Censorable

2. Permissioned

3. Custody risks

4. Centralization

5. Limited use cases on DeFi

In the future, I envision that treasury-bill-backed stablecoins may not have a strong presence on DeFi since if a user spends the money, it does not act as a yield-bearing asset, meaning that it will lose its inherent value while also carrying the centralization risks. Moreover, since treasury-bill-backed stablecoins can’t be held or traded by US citizens, this will limit the DeFi activity.

It should be noted that even though we call this category treasury bill-backed stablecoins, they are not inherently stablecoins but tokenized notes, they won’t act as a medium of exchange, as a result, their comparative advantage against $USDT and $USDC is limited.

Future Prospects

I believe that treasury-bill-backed stablecoins can open many opportunities for people across emerging markets while they don’t have any utility for US citizens at this point. Moreover, how to utilize treasury-bill-backed stablecoins in DeFi is debatable, considering that protocols can’t differentiate who to sell or not due to the regulatory limitations upon US citizens, so they can’t offer treasury-bill-backed stablecoins to their users.

I am bullish on the future of treasury-bill-backed stablecoins, however, we should emphasize that currently, these products are going to have a challenging time finding PMF. Moreover, we need to discuss more about the comparative advantages of treasury bill-backed stablecoins and the user base of this category. My opinion is that most of the crypto-backed stablecoin users won't adopt treasury bill-backed stablecoins due to the centralized party risks, the comparative advantages of treasury bill-backed stablecoins against fiat-backed alternatives are limited, with only the quality yield opportunity is seen as a superior value.