Bipartisan politicians want to accelerate the development of stablecoins to support the dollar's dominance as the world's reserve currency.
Unlike speculative assets with value fluctuations, stablecoins are designed to always be worth $1, hence the name. Stablecoins have the potential to solve problems in the U.S. payment system, but debates over their use occur only against the backdrop of cryptocurrency policy and alleged conflicts of interest involving the Trump family.
With the support of the Trump administration, major cryptocurrency proponents are pushing hard for changes to U.S. laws to establish a national charter for issuing stablecoins.
If stablecoins expand into a multi-trillion dollar market as these proponents hope, it could widen the trade deficit, harm small businesses, give more power to large tech conglomerates, and diminish the influence of the U.S. and its allies in global security.
Discussions about stablecoins are often conflated with the cryptocurrency market, where cryptocurrencies are the most commonly used products. However, they have a range of uses in both the real economy and the digital economy. They could help create a new set of faster payment rails, making transactions more instantaneous.
Retailers are already seeking to circumvent the high fees charged by monopolistic networks by adopting new payment methods. Digital dollars could complement 'bank payments' tools and other innovations. If stablecoins prove to be a cheaper and faster way to transfer funds, they could help the dollar maintain its dominance.
Stablecoins are not issued by the U.S. Treasury or the Federal Reserve, but stablecoin issuers (such as large tech companies or retail giants) can exchange digital currencies for real money. However, pending legislation will allow these digital dollars to exist outside the banking system, which is where some of the issues arise.
When we deposit money in a bank, the bank does not keep it in a vault. Banks lend money to businesses, home buyers, farmers, and others. These depositors are confident they can access their cash because banks can always collateralize loans on their books to obtain cash from the Federal Reserve.
If banks fail, federal deposit insurance will kick in, as long as the amount is within the statutory limits (which, by the way, have not been increased in a long time), and depositors can retrieve their money.
The so-called GENIUS Act for stablecoins will not require issuers to pay for deposit insurance; it will create a completely different scheme. Unlike banks, issuers will not use the funds they collect to issue traditional loans; instead, they will back stablecoins with liquid assets such as government bonds, offshore dollars, and money market fund assets.
Today, a major stablecoin issuer has an exposure to U.S. Treasury bonds of approximately $120 billion. These purchases of U.S. government bonds appear to be part of the Trump administration's push for stablecoins. Treasury Secretary Scott Bessent believes that stablecoins could attract $2 trillion in new demand for U.S. government debt securities, thereby funding deficit spending. However, where will this trillions of dollars in new demand for U.S. Treasuries come from?
Some of this trillions will come from overseas. Since most global trade is priced in dollars, trading partners will certainly increase the volume of payments made through stablecoins. However, if this truly generates new demand from foreign investors, it will drive up the value of the dollar, accelerating the process of global de-dollarization, which seems contrary to the government's wishes.
After all, a stronger dollar will reduce the export competitiveness of U.S.-made goods, leading to a larger trade deficit.
Most of these demands may also come from within the United States, but this will still pose problems. American households and businesses will transfer cash from banks to digital dollars issued by non-bank companies. If there is a significant outflow of bank deposits, it will make it more difficult for domestic businesses that depend on bank loans.
While big companies have various borrowing options, local and regional businesses and farms primarily borrow from banks. As deposits that can be converted into loans decrease, this will raise credit costs for these businesses. (Many of these businesses rushed to obtain cash to stockpile inventory before tariffs took full effect.)
Of course, all of this is a boon for America's large tech giants, who have long envied their Chinese counterparts' foothold in the digital payment space and have been pushing for the issuance of digital currency in the U.S. Chinese companies WeChat Pay and Alipay have had the opportunity to capture a significant share of retail purchases in the Chinese economy.
Meanwhile, Google and Apple have penetrated much of the U.S. digital payment market. The Justice Department is currently battling Apple in court over antitrust abuse allegations regarding its Apple Pay service. But issuing their own currency would allow tech companies to directly control their funds, further empowering them to direct business toward partners and advertisers, and even allowing them to dynamically price products based on user monitoring data.
There are other consequences. If Congress weakens the requirements for non-bank companies engaged in stablecoin transactions to detect terrorist financing and money laundering, it will undermine global security. Following the invasion of Ukraine, Washington and its allies deployed a series of sanctions, but if these sanctions become less effective, America's allies will lose influence, making it more likely for Washington to deploy non-economic weapons.
For consumers, it’s even trickier. Trump administration officials are also pushing to stimulate demand for long-term government bonds and securities. But unlike short-term treasuries, a devaluation of these long-term bonds could trigger panic or a run — as we saw during the collapse of Silicon Valley Bank in 2023.
Without deposit insurance, consumers may need to go through bankruptcy proceedings to retrieve any funds. Or more likely, because it may be difficult to distinguish between insured bank balances and uninsured digital dollars, the Fed may trigger another bailout — as is routine in the case of money market funds, which exist as another similar deposit outside the insured banking system.
In 2019, Facebook proposed creating a new global currency, Libra, to operate on its platform and with partners. Libra was abandoned, but something similar may emerge soon. At the time, Trump tweeted that if Facebook or other companies wanted to do this, they should obtain a banking charter and comply with banking laws. Perhaps he has always had the right answer.
Rather than allowing large tech conglomerates and retail chains to issue digital dollars, stablecoins should be developed through banks. This would mitigate the risks of panic and unexpected devaluation while ensuring that funds can be lent for housing construction, small business expansion, and other purposes. Of course, banks that are too big to fail should not become larger, but small and medium-sized banks can increase deposits by adopting new payment methods like stablecoins.
While it’s easy to think that issuing dollar-denominated stablecoins is a niche policy issue about cryptocurrency, it is not. The implications for trade and the financial system, the global sanctions regime, the role of large tech companies, and the power of the dollar as a reserve currency cannot be ignored.