Stablecoins and the U.S. Dollar

Introduction

Stablecoins have become a significant force in global finance, expanding from a niche tool for crypto trading into a major financial instrument. By 2024, the total supply of fiat-backed stablecoins surged from $5 billion in early 2020 to over $200 billion (BVNK, UBS). These digital assets function as digital proxies for the U.S. dollar or U.S. Treasury securities, reinforcing global demand for USD and influencing the broader financial ecosystem.

Stablecoins and Investment in U.S. Securities

Most major stablecoins maintain a 1:1 peg to the U.S. dollar by holding reserves in dollar-denominated assets. This means stablecoin issuers invest heavily in liquid U.S. securities-primarily Treasury bills and cash-to back the coins in circulation.

Stablecoin Issuers as Major Treasury Holders

• Tether (USDT): The largest stablecoin issuer held approximately $97.6 billion in U.S. Treasury bonds as of mid-2024, ranking it as the 18th largest holder of U.S. government debt, surpassing Germany and the UAE (EconLib).
• USD Coin (USDC): Circle, the issuer of USDC, keeps about 80% of its reserves in short-term U.S. Treasuries, with holdings surpassing $40 billion (Circle).

As stablecoins grow, their issuers allocate more capital to U.S. safe assets, making them significant players in the U.S. Treasury market. Policymakers have noted that requiring issuers to hold Treasuries against stablecoins guarantees liquidity and demand for USD-denominated sovereign debt (Atlantic Council). This dynamic strengthens the dollar’s role in global finance.

Implications for Other Global Currencies

Stablecoins carry significant risks for non-USD currencies, raising concerns among policymakers worldwide:

1. Diminished Role of Other Currencies

Currency network effects are even more pronounced in the digital realm. Over 99% of stablecoin market capitalization is USD-pegged (BVNK). The euro, yen and other major currencies lack equivalent adoption in the stablecoin ecosystem, reducing their presence in crypto finance.

2. Pressure on Other Currencies to Adapt

Some governments have explored issuing state-backed stablecoins or Central Bank Digital Currencies (CBDCs) to compete with USD-pegged digital assets. However, achieving mass liquidity comparable to USD stablecoins remains a challenge. Countries failing to offer compelling digital alternatives face the risk of increased capital outflows and erosion of monetary sovereignty. This also revisits key traditional finance question-once thought to be fully understood-such as whether the costs of not maintaining a peg to the US dollar will rise.

3. Stricter Regulatory Responses

To safeguard sovereignty, non-US policymakers are likely to impose stricter regulations and monitoring on both crypto and capital outflows. The European Union’s MiCA framework, for instance, enforces strict reserve and licensing requirements on stablecoin issuers. In major markets, such as the EU, where enforcement tools exist but the ability to match US dollar stablecoins remains limited, increased stablecoin legislation is likely. However, these measures have costs too, particularly on innovation and their impact remains to be seen.

Conclusion

As stablecoins continue to expand their influence in global finance, their deep ties to U.S. dollar liquidity and Treasury markets reinforce the dollar’s dominance. Meanwhile, non-U.S. economies face mounting pressure to adapt, regulate, or compete-decisions that will shape the future of digital finance and monetary sovereignty.