As conversations around flight away from the dollar and trade wars gain traction following the April 2 ‘liberation day,’ financial policymakers find themselves confronted by an unexpected trend: an increasing rush toward the dollar driven by global demand for dollar-backed stablecoins.
This phenomenon has propelled financial leaders around the world to closely monitor the ongoing discussions in Congress concerning future legislation on stablecoins.
This coming week, the Senate is expected to deliberate on the GENIUS Act, legislation designed to clearly delineate the responsibilities of U.S. stablecoin issuers and outline oversight responsibilities.
Stablecoins are a specific type of cryptocurrency pegged to an underlying asset, designed to maintain a stable value.
Currently, approximately 98 percent of stablecoins are dollar-pegged, yet over 80 percent of all stablecoin transactions occur outside U.S. borders.
This reality has caught the attention of countries worldwide. In April, Italy’s finance minister, Giancarlo Giorgetti, characterized new U.S. policies around dollar-backed stablecoins as an ‘even more dangerous’ threat to European financial stability than existing tariffs.
His argument suggests that access to dollars without the prerequisite of a U.S. bank account could attract millions, thereby undermining the effectiveness of monetary policy not only in Europe but across the globe.
This development mirrors an age-old dilemma complicated by emerging technologies. Dollarization—the tendency of citizens in various nations to exchange their local currencies for dollars—has historically posed risks in emerging markets and developing economies.
In the early 2000s, countries including Ecuador, Zimbabwe, and Argentina faced significant challenges in managing strong local demand for dollars over their own currencies, resulting in years of economic strife.
Now, with the advent of stablecoins, it becomes far simpler and cost-effective for individuals globally to acquire the world’s most sought-after asset, the U.S. dollar.
Unlike prior methods requiring individuals to visit banks for currency exchange, often leading to substantial fees and prolonged processes, stablecoins make dollar access seamless—even available to those armed merely with a cell phone.
U.S. officials argue that such developments are beneficial for the United States.
During an interview with Federal Reserve Governor Christopher Waller, who oversees payment systems, he asserted that while stablecoins could indeed be tied to any fiat currency—like pounds or euros—demand continues to skew heavily in favor of dollar-denominated stablecoins.
Waller further remarked that with proper regulation, stablecoins could heighten the strength of the dollar as a reserve currency.
He elaborated that if stablecoin issuers manage to back their digital coins with U.S. Treasuries or other liquid assets, the ensuing surge in stablecoin usage worldwide will inflate demand for dollars.
The essence of stablecoins lies in their capacity for full convertibility to dollars, which necessitates that issuers possess adequate dollar reserves.
In a more forthright manner, U.S. Treasury Secretary Scott Bessent announced in March, ‘We are going to keep the U.S. the dominant reserve currency in the world, and we will use stablecoins to do that.’
Nevertheless, the United States must proceed with caution in this realm.
The expanding global presence of stablecoins opens avenues for opportunistic firms to issue products claiming to be dollar-backed stablecoins while failing to provide the necessary actual dollar reserves.
The fallout of any failure on their part wouldn’t just deplete consumers’ savings; it risked initiating a financial asset run.
Reflect back on the crash of the algorithmic stablecoin TerraLuna in 2022, which wiped out over $45 billion in value for its holders within a week’s time.
Significantly, despite this turmoil, stablecoin transactions have witnessed an over 60 percent rise worldwide since that episode.
The current lack of cohesive regulatory frameworks globally exacerbates confusion and complicates payment processes, resulting in increased consumer costs.
A recent report from the Atlantic Council GeoEconomics Center revealed that various nations are now contemplating their own central bank digital currencies in competition with stablecoins, whereas others are focusing on regulating stablecoin wallets.
Instead of waiting for new regulatory frameworks to materialize in the coming years, the U.S. ought to recognize the anxieties other nations harbor regarding dollar-backed stablecoins.
While the legislative measures being reviewed in Congress aim to enhance transparency and establish reporting requirements domestically, they do not adequately address international implications.
Enter the Group of Twenty (G20), through which the United States has a significant opportunity to influence the establishment of global standards regarding digital assets—particularly the risks and regulations tied to stablecoins—during its G20 presidency next year.
Initiating a fresh G20 payments roadmap would be a critical first step toward this end.
Although a prior roadmap was established in 2020, delivering noteworthy advancements in faster payment systems, the rapid technological evolution over the last five years signals the need for an update.
By placing a spotlight on stablecoins this year, the United States could elevate standards globally, ensuring that users of dollar-backed stablecoins across various nations receive the genuine article—a real dollar rather than a counterfeit.
Such U.S. leadership would likely be welcomed by the international community, signaling that the United States does not intend to propagate instability in the context of the dollar’s future.
image source from：https://www.atlanticcouncil.org/blogs/new-atlanticist/dollar-backed-stablecoins-international-standards/
