Testing Debt Devaluation with a Digital Dollar
The idea is simple to state, but hard to pull off: use a government-backed digital currency or regulated stablecoins to change the effective value of public liabilities without an outright default. Proposals along these lines range from creating a central bank digital currency that can be programmed to alter real balances to issuing government-backed tokens that swap into new, lower-value liabilities. In practice there are three separate problems to solve. First, how to design the instrument. Second, how to limit market panic and legal pushback. Third, how to make the math work so that the policy has the intended fiscal outcome without blowing up interest rates or the banking system.
Start with the scale. The United States public debt is now in the tens of trillions of dollars, and will soon pass $38 trillion. That number matters because anything that aims to change the real burden of federal liabilities at scale faces enormous market and political friction. A full-scale revaluation of all U.S. debt is therefore implausible. Any realistic experiment would target a subset of liabilities and a much smaller sum, perhaps under $1 trillion. The Treasury publishes daily totals and the trendlines that make clear how quickly exposure can balloon.
Why a digital instrument? Two features make CBDCs or regulated stablecoins attractive as policy tools. First, digital tokens can be programmable at issuance. That opens options such as time-limited value, conditional redemption, or automatic conversion rules. Second, digital instruments can be routed directly into targeted channels without needing the slow, error-prone plumbing of legacy settlements. Central banks around the world are actively researching these capabilities and the Fed has publicly discussed the pros and cons of a U.S. CBDC. The Bank for International Settlements finds many central banks are in active exploration. That makes the technical feasibility plausible even if the politics are not resolved.
How would a policy to devalue debt actually work in practice? Here are three possible mechanisms, ranked from least to most disruptive.
Targeted liability swap using government-backed tokens. The Treasury issues a new digital token that replaces a specific class of liabilities, for example a tranche of Treasury bills maturing within a year or a pool of federal student loans held by the government. Holders can exchange old paper or electronic claims for the new tokens at a pre-determined ratio that reduces the real principal or the real interest rate. Because the swap targets a limited sector, the total exposure remains constrained. Market reaction depends on the haircut and on clear, credible rules for redemption. This is a form of managed restructuring that uses digital issuance to simplify logistics and to track holdings in real time.
Central bank operational devaluation via reserves and token rules. A CBDC could be issued with programmable features that alter purchasing power in specific contexts. For example, a digital dollar credit issued to a government account could be used to buy certain assets or extinguish particular liabilities at a rate that is adverse to creditors but limited in scope. This route is more complex because it implicates central bank independence and constitutional restraints on monetary financing of deficits.
Implicit devaluation through asset operations. Stablecoin issuers could be authorized to accept certain Treasuries as backing and then redeem at adjusted values for government-directed purposes. In practice this would be messy and would require new legal frameworks to give market actors the certainty to participate without triggering runs.
Any such operation faces severe constraints. First, creditor losses are historically contagious and politically explosive. Sovereign restructurings are messy; creditor haircuts are the rule rather than the exception in many restructurings, but they are accompanied by financial isolation and, often, economic contraction. The IMF and academic researchers document how restructurings have played out across countries and why creditor confidence matters.
Second, markets would immediately re-price risk. Even a targeted $500 billion swap could raise yields across the yield curve unless it was accompanied by a credible plan to restore solvency. Higher yields rapidly increase interest costs, which can defeat the stated purpose of reducing debt service. Third, legal and institutional barriers are real. The U.S. legal framework, market conventions, and likely litigation around any non-market swap would slow or block attempts to impose losses. Recent legislative movement on stablecoins changes the regulatory landscape in the United States, but that is not the same as authorization for a fiscal revaluation tool.
So what does a plausible experiment look like if the policy maker wants to test the concept without risking systemic collapse? Two practical designs are worth considering.
A targeted student-loan token. The government issues a digital token that swaps into a new instrument covering a defined pool of federal student loans, perhaps $300 billion to $500 billion. The token would carry slightly different terms that reduce the present-value liability, for example, lower interest for a fixed window and extended maturities. To prevent market contagion, the program would be limited to loans held on the government balance sheet, non-transferable for a fixed interval, and supported by a plan to accelerate debt repayment later if fiscal conditions improve.
A municipal debt pilot. The federal government could underwrite a token program that buys distressed municipal bonds and retires them by issuing a digital federal instrument in exchange. This would be explicitly framed as a stabilization mechanism and limited in size, which reduces the chance of reigniting fears about federal solvency.
Both pilots require three overarching safeguards. Legal clarity up front, including statutory authority and explicit judicial deference where necessary. A transparent exit plan that limits moral hazard and signals eventual fiscal discipline. And a market communication strategy that reassures creditors in other segments that the pilot is closed and exceptional.
A digital approach to revaluing liabilities is technically possible and may offer logistical advantages. It is not, however, a free lunch. Small, tightly scoped pilots under $1 trillion are the only politically and economically realistic way to test the idea. Any attempt to scale the approach beyond that without broad creditor consent and institutional support would risk higher borrowing costs, legal challenges, and an erosion of trust that the dollar still commands worldwide.
The proposal: A mechanism for targeted liability management using a programmable digital currency. The core of the strategy is a voluntary swap program. Imagine the Treasury Department contacts a borrower with a student loan. That borrower currently has a $10,000 loan at 6 percent interest with 15 years remaining. The government offers to exchange this loan for a new, digital loan token. The new token maintains the same $10,000 principal but carries a drastically reduced interest rate of 2 percent and a newly extended term of 30 years.
From the borrower’s perspective, the incentive to participate is rooted in immediate financial relief, not principal forgiveness. While the nominal amount owed remains $10,000, their monthly payment would drop dramatically, from approximately $85 per month to around $37 per month. This more than 50 percent reduction in monthly cash outflow provides a crucial lifeline for individuals struggling with their financial obligations. Furthermore, they would be locking in a very low interest rate, protecting them from any potential future rate increases.
The government benefits through a fundamental devaluation of the liability on its balance sheet. This occurs because the economic value of a loan is not based on its principal alone, but on the present value of its future cash flows. By converting a high yield, short duration asset into a low yield, long duration one, the government significantly reduces the net present value of that asset. In practical terms, that $10,000 loan on its books can be revalued to something closer to $7,500. This creates a measurable reduction in the government’s reported liabilities without an outright default or principal forgiveness, achieving a fiscal improvement through a restructuring of terms that is voluntarily chosen by citizens in need of relief.