Author: Spyros Andreopoulos
Translation: TechFlow
In the short term, the growth of stablecoins may ease US fiscal constraints and further consolidate the dollar’s position as the dominant currency. However, in the long run, stablecoins only add another layer of complexity to the discussion about the quality of US institutions.
Ultimately, what determines the status of the dollar is still the fiscal soundness of the US and its central bank’s ability to maintain low and stable inflation.
Source: SpaceX on Unsplash photo
The Trump administration seems to have high hopes for expanding stablecoin demand to make up for the federal fiscal deficit—this demand is one of the main official reasons for the US Treasury to shorten the average maturity of debt (by issuing more Treasury bills while keeping the issuance of notes and bonds unchanged).
By the way, I think shortening the average maturity of debt is also a way to increase pressure on the Federal Reserve to lower interest rates.
There is also some evidence that the demand for stablecoins has already lowered the interest rates on US short-term debt.
In addition, the government regards the demand for stablecoins as a major pillar supporting the dominant status of the US dollar.
The reason is not hard to understand.
Treasury Secretary Bessent predicts that the scale of stablecoins will grow to 2 trillion dollars (I have even seen higher numbers). Since the vast majority of stablecoins are pegged to the US dollar, the demand for stablecoins is very likely to be demand for the dollar.
According to the GENIUS Act, US dollar cash, insured domestic bank deposits, and Treasury securities with a remaining maturity of no more than 93 days are listed as permitted reserve instruments, so a large part of this demand will flow into federal debt.
From a purely domestic US perspective, it is still inconclusive whether stablecoins will actually increase net demand for Treasuries—it depends on what stablecoins actually replace.
If people do not hold shares in money market funds invested in short-term US government bonds, but instead hold part of their wealth in stablecoins, then the net demand for Treasury bills will not actually increase.
My intuition—so far no more than that—is that the most important channel for generating net demand for the dollar and US Treasuries is the international channel: the dollarization channel of stablecoin demand.
Stablecoins make it easier for millions of people outside the US to access dollars, especially in countries with high inflation, weak currencies, and underdeveloped banking systems.
That said, the growth in demand for stablecoins from the non-US private sector may be partially offset by a decline in official demand for dollars. Why?
Stablecoins seem likely to improve global financial stability by increasing the share of dollar assets on balance sheets outside the US. 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 precautionary demand for dollars by official sectors in emerging markets.
Revisiting the Institutional Foundation of the Dollar
However, I have deeper concerns about the contribution of stablecoin demand to the role of the dollar. This is related to the dollar itself and the institutions that underpin it.
The fiscal situation of the US is well known, so I will not elaborate here.
Source: Congressional Budget Office (March 2025)
As a European who has long admired the US, I may not be alone in diagnosing a “fiscal doomsday machine” triggered by political division.
One key reason this “doomsday machine” can keep running is the US’s dominant currency status and the resulting demand for US government assets: the “exorbitant privilege” of the dollar expands the fiscal space of the US federal government.
But ultimately, this does not reduce the necessity of fundamental fiscal reform. This reform should mainly focus on increasing federal revenue (by the way, this is the opposite of the situation in Europe, where fiscal reform should focus on cutting spending).
Now, back to stablecoins.
The increased demand for US government debt from stablecoins may relax fiscal policy constraints in the short term. But this does not solve any long-term problems—it cannot destroy this doomsday machine.
In fact, it is more likely to hinder the much-needed fiscal reform.
In other words, I worry that stablecoins may just be the rope US politicians use to hang themselves—and the resulting exorbitant privilege.
And then there is the Federal Reserve.
I have always believed that, given the relatively loose constraints of exorbitant privilege on fiscal authorities, monetary policy must also be constrained: monetary policy cannot yield to the needs of fiscal policy (as Trump and his campaign have claimed). 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 independence of the Federal Reserve is weakened during this period and leads to higher inflation, then stablecoins will ultimately be of no help to the status of the dollar.
The Endorsement of Stablecoins
Ultimately, as Pierpaolo Benigno said, the key lies in how stablecoins are endorsed.
Under a monetary-dominant regime (i.e., the central bank provides price stability while fiscal authorities are solely responsible for debt sustainability), stablecoins and the Treasuries behind them are ultimately supported by taxes: “To make stablecoins safe, Treasuries themselves must be safe.”
Under a fiscal-dominant regime, stablecoins are ultimately supported by the central bank. In this case, stablecoins may trigger inflation because the Federal Reserve may be forced to monetize the corresponding issuance.
My conclusion is that while in the short term, the growth of stablecoins may ease US fiscal constraints and enhance the dollar’s dominant currency status, in the long run, stablecoins only add another layer of complexity to the discussion about the quality of US institutions. Ultimately, what determines whether the dollar can maintain its status is still the fiscal soundness of the US and its central bank’s ability to provide low and stable inflation.
