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How a US default impacts crypto

May 24, 2023
24 May 2023 : 19:42
7 min read


The stablecoin market, with a whopping value of $130 billion, is packed with assets, with a heavy focus on US government treasury bills. Think about this: what if the US defaults?

Just for perspective, Tether holds a staggering $53 billion in treasury bills as of March 2023. If a default occurs, it’s going to be a rough ride for everyone.

US default

If a default happens, buckle up.


US default

Even with the current stability, the potential US default is like a looming storm cloud. USDT and USDC, being the heart and soul of DeFi with their massive transaction volume, are in for a real rollercoaster. And it’s not just them.

Decentralised stables aren’t safe either as they heavily rely on USDC/USDT for collateral.

It’s a tightrope walk, but will we actually fall off?


  • The US is facing a crisis – the debt ceiling needs to be raised, but parties can’t agree on conditions.
  • Most stablecoins are backed by US treasuries. If the US defaults, it can’t pay interest.
  • Treasuries would become highly volatile, bringing into question the stability of stablecoin reserves. Panic would likely ensue, with most major stablecoins de-pegging.
  • The default could happen as soon as the beginning of June.
  • It’s unlikely the default will happen – but we have stated some possible scenarios and how to mitigate risks.
  • Read on to find out more!
Disclaimer: Not financial nor investment advice. Any capital-related decisions you make are your full responsibility.

How urgent are we talking?⏳

The US government could default as early as June 7th or 8th. They may scrape by till July using tax revenues, but a government shutdown might be just a hop, skip, and a jump away.

It’s all politics, as usual. Both parties know the budget needs a fix to slim down the deficit. Yet, while Biden is pushing for higher taxes, Republicans are urging him to slash spending. Classic case of party agendas overshadowing national interests.

There’s no white or black hat in this game – both sides are playing their own game, with the country’s needs getting sidelined. With so much on the line (and that’s an understatement), it’s downright ironic that a self-imposed rule, irrelevant for at least two decades, could potentially topple the US empire.

If we hit default, some US treasuries would stop paying yield… and that’s not a pretty picture, especially for us stablecoin holders!

What’s it got to do with stablecoins? 💸

Circle (USDC) and Tether (USDT) have long relied on US treasuries to back their stablecoins. The real trouble lies in holding treasury bills due after this month. Should a default happen, the fallout could be brutal for a stablecoin’s peg, with affected treasury yields plummeting to 0% – rendering them virtually worthless till the US starts paying the yield again.

Imagine a collapse of UST – that could be the fate of any unprotected stablecoin.

Remember the chaos when Silicon Valley Bank went under, dragging over $3.3 billion of Circle’s deposits with it? Picture that drama across all stablecoins.

US default

Time to panic? Hold your horses!

Circle is playing it smart. To guard their reserves, they’ve shifted assets from post-May expiring treasuries to other financial instruments. They’ve moved $8.7 billion into repo bills, cleverly passing on the default risk to someone with more faith in Uncle Sam.

As Circle is publicly listed, we know their moves. The same can’t be said for Tether, but we’re betting they’re doing something similar behind the curtains. That’s a big assumption, of course.

As we edge closer to June 1st without a resolution, the situation turns more volatile.

This turbulence in the bond market is stunting the growth of an emerging DeFi sector…


Decentralised T-Bills?🏛️

From zero to hero! The decentralised securities market has seen an explosive growth this year, driven by yield-hungry investors. In the last 5 months, the market cap for on-chain securities ballooned from practically nothing to a staggering $220 million.

But as the TradFi treasury markets get hammered, decentralised securities tokens are feeling the heat. Holders are shedding treasury bills like hot potatoes, both in TradFi and DeFi.

With everyone, including stablecoin providers, scrambling to safeguard assets, where does DeFi stand?

DeFi in danger?🧾

Now, DeFi has never weathered a US government shutdown. The last one happened in 2018 under Trump and lasted for 35 days. So, the big question is: what would a stablecoin depeg mean for major issuers overexposed to treasuries?

If the major players – USDT, USDC, or DAI – go through a prolonged depeg, it’s a perfect storm for DeFi and crypto in general. You’d see a mass exodus from stables, with users scrambling for safer assets. Where to?

BTC seems like the prime candidate. A bank analyst is actually saying BTC would pump +70% in case of a default.

But what about the rest of the market? It’s a bleak picture. DeFi liquidity would take a colossal hit across all chains. Services like Curve, a stablecoin hub boasting over $4.2 billion in TVL, could see its value plunge to zero.

But it’s all a guessing game at this point. A default is uncharted territory. Expect many alts to behave like sinking securities. The downside is unfathomable.

Cryptonary’s take 🧠

Take a deep breath. Let’s break this down.

Chances of a full-blown US government default are pretty slim. Yes, we might be looking at a shutdown, but it’s highly unlikely the government would just leave creditors hanging. Seems like Congress is playing a deadly game of Russian roulette with all chambers loaded.

Here’s the rundown:

  1. Worst case scenario: Agreement? Nope. Treasury funds? Dried up. And we hit default in June/July. The economic blowback would be just as severe as we’ve painted.
  2. Base case scenario: Default dodged, but only after a nail-biting debate running till end June or early July. The market stays on tenterhooks, but this buys stablecoin providers some crucial time to secure reserves.
  3. Best case scenario: Default averted, debt ceiling lifted. This could pan out if parties finally hammer out a budget, or Biden plays the 14th Amendment card and sidesteps the debt ceiling.

In our view, the third scenario is the most likely.

But hey, better safe than sorry, right? So, if stablecoins are on the ropes, where’s the safety net? We’ve got a couple of contenders:

  1. High-risk – BTC: If stablecoins start to lose their peg, it might be wise to jump ship to BTC. In a crypto stablecoin liquidity crunch, BTC could be the lifeboat absorbing the capital flight. But be warned, BTC might also take a tumble in the initial stages of a financial bust-up. However, remember that BTC was born to stand tall amidst human corruption/incompetence.
  2. Medium-risk – Gold Derivatives: More specifically, those with real gold backing. Gold tends to hold firm in a US default scenario. While gold stablecoins might not handle tens of billions in demand, they’re a solid choice. Current hot picks include Tether Gold (XAUT), PAX Gold (PAXG), or Kinesis Gold (KAU).

Way before this all happened, we moved all our stablecoin holdings to Gold. So yes, Cryptonary is ahead of the curve. Wanna know what else we did? Click here.

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