Stablecoins cannot save the dollar's hegemony

# The Impact of Stablecoins on U.S. Fiscal Constraints and the Dollar's Status

Written by: Spyros Andreopoulos  

Compiled & Translated by: DeepFlow TechFlow  

In the short term, the growth of stablecoins may ease U.S. fiscal constraints and further consolidate the U.S. dollar’s position as the dominant currency. However, in the long run, stablecoins only add another layer of complexity to discussions about the quality of U.S. institutions.  

Ultimately, what determines the dollar’s status remains the fiscal prudence of the United States and the ability of its central bank to maintain low and stable inflation.  

Source: Photo by SpaceX on Unsplash  

The Trump administration seems to place high hopes on expanding stablecoin demand to offset federal fiscal deficits—and this demand is one of the key official justifications for the U.S. Treasury to shorten the average maturity of its debt (by issuing more Treasury bills while keeping the issuance of notes and bonds unchanged).  

Incidentally, I believe shortening the average debt maturity is also a way to increase pressure on the Federal Reserve to cut interest rates.  

There is also some evidence that stablecoin demand has already lowered the interest rates on U.S. short-term debt.  

Furthermore, the government views stablecoin demand as a major pillar supporting the dollar’s status as the dominant currency.  

The reason is not hard to understand.  

Treasury Secretary Bessent predicts that the scale of stablecoins will grow to $2 trillion (and I have even seen higher figures). Since the vast majority of stablecoins are pegged to the U.S. dollar, stablecoin demand is likely equivalent to demand for the dollar.  

Under the provisions of the GENIUS Act, U.S. dollar cash, insured domestic bank deposits in the U.S., and Treasury securities with a remaining maturity of no more than 93 days are classified as permitted reserve assets. Therefore, a large portion of this demand will flow into federal debt.  

From a purely U.S. domestic perspective, it is uncertain whether stablecoins will actually increase net demand for Treasury securities—it depends on what stablecoins actually replace.  

If people hold stablecoins with part of their wealth instead of shares in money market funds that invest in short-term U.S. government bonds, the net demand for Treasury bills will not actually increase.  

My intuition—for which there is no more evidence so far—is that the most important channel for generating net demand for the U.S. dollar and U.S. Treasury securities is the international channel: the dollarization channel of stablecoin demand.  

Stablecoins make it easier for millions of people outside the U.S. to access U.S. dollars, especially in countries with high inflation, weak currencies, and underdeveloped banking systems.  

That said, the growth in stablecoin demand from non-U.S. private sectors may be partially offset by a decline in official demand for the U.S. dollar. Why?  

Stablecoins seem likely to improve global financial stability by increasing the share of U.S. dollar assets on balance sheets outside the U.S. However, if this is the case, it may reduce currency mismatches in emerging market countries—and currency mismatch is one of the main reasons for the preventive demand for U.S. dollars by the official sectors of emerging markets.  

## Revisiting the Institutional Foundation of the U.S. Dollar  

Yet I have a deeper concern about how stablecoin demand helps the dollar’s role. This relates to the U.S. dollar itself and the institutions that underpin it.  

The U.S. fiscal situation is well-known, so I won’t elaborate on it here.  

Source: Congressional Budget Office (March 2025)  

As a European who has long admired the United States, I may not be alone in identifying a "fiscal doomsday machine" driven by political polarization.  

One key reason this "doomsday machine" can continue to operate is the U.S. dollar’s status as the dominant currency and the resulting demand for U.S. government assets: the dollar’s "exorbitant privilege" expands the fiscal space of the U.S. federal government.  

But this ultimately does not reduce the need for fundamental fiscal reform. This reform should mainly focus on increasing federal revenue (which, incidentally, is the opposite of the situation in Europe, where fiscal reform should focus on cutting spending).  

Now, let’s return to stablecoins.  

Increased demand for U.S. government debt from stablecoins may relax the constraints on fiscal policy in the short term. But this does not solve any long-term problems—it cannot dismantle this doomsday machine.  

In fact, it is more likely to hinder much-needed fiscal reform.  

In other words, I worry that stablecoins may end up being just a noose that U.S. politicians use to hang themselves—and the exorbitant privilege that comes with it.  

Then there is the Federal Reserve.  

I have long argued that given the looser constraints on fiscal authorities due to exorbitant privilege, monetary policy must also be constrained: monetary policy cannot be subordinated to the needs of fiscal policy (as claimed by Trump and his movement). A necessary (though not sufficient) institutional condition to avoid this is the independence of the Federal Reserve.  

The key point here is that if the Federal Reserve’s independence is undermined during this period, leading to higher inflation, stablecoins will ultimately do nothing to help the dollar’s status.  

## The Backing of Stablecoins  

Ultimately, as Pierpaolo Benigno put it, the key lies in how stablecoins are backed.  

In a monetary-dominant regime (i.e., where the central bank ensures price stability and the fiscal authority alone is responsible for debt sustainability), stablecoins and the Treasury securities behind them are ultimately backed by taxes: "For stablecoins to be safe, Treasury securities themselves must be safe."  

In a fiscal-dominant regime, stablecoins are ultimately backed by the central bank. In this case, stablecoins may trigger inflation, as the Federal Reserve may be forced to monetize the corresponding issuances.  

My conclusion is that while the growth of stablecoins may ease U.S. fiscal constraints and enhance the dollar’s status as the dominant currency in the short term, in the long run, stablecoins only add a layer of complexity to discussions about the quality of U.S. institutions. Ultimately, what determines whether the U.S. dollar can maintain its status is still the fiscal prudence of the United States and the ability of its central bank to deliver low and stable inflation.  

## Disclaimer  

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