The rapid rise of dollar-backed stablecoins is sparking debate over whether they could strengthen America’s financial power instead of accelerating de-dollarisation, with regulators warning of risks to global stability.
Stablecoins on the Rise
Stablecoins, digital assets pegged to the US dollar, have surged in popularity, with their combined market capitalisation more than doubling in the past 18 months to nearly $280 billion. Analysts now project this figure could soar to $2 trillion within three years, reshaping the debate on the future of global finance.
Traditionally viewed as a challenge to the dominance of the dollar, stablecoins are increasingly being seen as reinforcing it. Their private-sector origins, however, are fuelling anxiety among regulators and central banks.
Much of this momentum was driven by the US Congress’s “Genius Act” passed in July, which requires stablecoins to be fully backed by liquid assets such as cash or Treasury bills. The measure has boosted investor confidence, creating a potential new demand stream for US government debt.
A Small Market with Outsized Potential
Despite their rapid growth, stablecoins still represent only around 1 per cent of global transactions, a small fraction compared with the $100 trillion global government bond market. Two giants, Tether and Circle, dominate the field, accounting for over 80 per cent of total issuance.
Crucially, around 99 per cent of stablecoins are dollar-backed, even though most of the transactions take place outside the United States. This feature has drawn close attention from policymakers, given its implications for cross-border money flows and sanctions evasion.
Stablecoins’ attributes — rapid settlement, ease of avoiding exchange controls, and reduced border tax exposure — make them particularly attractive in a world facing rising geopolitical tensions.
China and Global Concerns
Beijing, which has focused heavily on its own sovereign digital yuan, is now examining the rising use of yuan-backed stablecoins. Whether China and other governments can close the gap with dollar-backed competitors remains uncertain.
The risks are being analysed closely at the international level. Economist Helene Rey, writing in the IMF’s Finance and Development magazine, warned that regulators must act quickly to improve oversight in this opaque sector.
Risks to Stability
While acknowledging the efficiency gains stablecoins could bring to cross-border transactions, particularly in fragile economies, Rey listed a range of dangers.
“On the negative side are dollarisation and its side effects, financial stability risks, potential hollowing out of the banking system, currency competition and instability, money laundering, fiscal base erosion, privatisation of seigniorage, and intense lobbying,” she wrote.
One key concern is the risk of reduced demand for non-US government bonds as investors favour Treasuries. The co-existence of multiple private-sector networks, she added, could also undermine the global financial system, creating an “inherently fragile” structure.
A Reinforced Greenback
For now, the stablecoin industry remains relatively small. But its growth trajectory has forced policymakers in Europe and elsewhere to begin contingency planning, particularly as the EU prepares its own digital euro legislation.
Ironically, a technology originally designed to sidestep the dollar’s dominance may end up entrenching it further. If projections are realised, stablecoins could reboot the very “exorbitant privilege” that underpins America’s position in the global financial system.
