Recently, discussions about the decline of the U.S. dollar's dominance have increased, amid escalating trade wars and heightened tensions related to tariffs, causing a significant sell-off of U.S. Treasury bonds.
However, a recent report from Standard Chartered Bank pointed to the possibility of a strong return of demand for the dollar, driven by a noticeable recovery in the cryptocurrency market.
Regulation of stablecoins could enhance the dominance of the U.S. dollar and increase demand for Treasury bonds.
Analysts at Standard Chartered Bank expect that the regulation of stablecoins will lead to a significant increase in the supply of these currencies, which are pegged to external assets, potentially increasing demand for U.S. Treasury bonds and enhancing the global position of the U.S. dollar.
Jeff Kendrick, an analyst at Standard Chartered, noted in a recent memo that the assets of stablecoins – which often rely on U.S. Treasury bonds as collateral – could reach a value of $2 trillion by the end of 2028, if President Donald Trump signs legislation clarifying the regulations governing them this summer. This jump, from the current market size of $230 billion, could generate new demand worth $1.6 trillion for short-term Treasury bonds, covering all expected new issuances during Trump's second term.
The report clarified that the increasing use of dollar-denominated stablecoins will create additional demand for the U.S. currency, noting that this growth will contribute to strengthening the dollar's dominance, despite potential challenges from network effects in the digital asset market.
Unlike cryptocurrencies like Bitcoin, stablecoins are characterized by their stability in value against assets like the U.S. dollar, and their market value has increased by about 11% this year, and 47% last year, with USDT$ and USDC$ leading the scene.
Stablecoins are primarily used in trading and decentralized finance (DeFi), and are monitored as an indicator of market activity and liquidity.
Stablecoins have seen a notable increase in trading volume this year, driven by growing investor confidence that the U.S. market is nearing the approval of the first legislation regulating this category of digital currencies.
In March, the Senate Banking Committee approved a bill known as "GENIUS," while the House Financial Services Committee passed another bill called "STABLE" earlier this month. Both bills aim to establish a clear regulatory framework governing the operation of stablecoins in the United States.
In a 9-page report released last week, Kendrick indicated that the stablecoin market may be forced to purchase approximately $1.6 trillion in U.S. Treasury bonds over the next four years, at a rate of $400 billion annually.
Kendrick explained that this figure makes the stablecoin sector the largest potential source of demand for these bonds, surpassing even foreign buyers who have, since the COVID pandemic, represented the largest category of buyers, but have diversified their investments across multiple financial instruments such as bonds and securities.
Unlike short-term securities, Treasury bonds and notes have maturities ranging from two to 30 years.
Kendrick explained that the increase in stablecoin reserves is expected to boost demand for the U.S. dollar, which would support its position as a dominant currency in global payments, despite the pressures from recent trade tensions that have weakened the dollar's value and raised questions about the sustainability of its dominance.
Kendrick added: "Given the pivotal role that the U.S. dollar plays as a primary currency in international transactions, facilitating its use through stablecoins will likely lead to increased demand for dollar-denominated assets to support those currencies."
He added that; "The primary goal of international finance is to find an alternative to the U.S. dollar that provides the same flexibility and liquidity it enjoys.
Initially, the development of stablecoins may enhance the appeal of dollar-linked assets, especially if the innovation in these currencies is tied to the dollar. The network effects in digital assets show that once the dollar establishes its dominance, it will be difficult to challenge it.
