Will stablecoins help sustain the dollar's reign? Don't count on it

The assumptions behind that hope are weak. The US may be betting on the wrong horse to retain the greenback's dominance

- BARRY EICHENGREEN

The US dollar is under scrutiny from investors around the world. Banks, firms and governments that rely on it as an international means of payment and store of value worry about the policies of an erratic and hostile “America First” president.

They fear further steps to weaponize the American currency. They fret that US government debt is on an unsustainable path and that the Federal Reserve, whose independence hangs in the balance, will feel pressure to inflate away those obligations.

The dollar may be the dominant global currency for the moment, but there are real questions about how long this moment will last.

And now to the rescue come—wait for it—dollar-linked stablecoins, blockchain-based digital tokens pegged one-to-one to the greenback. The Guiding and Establishing National Innovation for US Stablecoins (GENIUS) Act signed into law by President Donald Trump in July promises to let a thousand stablecoins bloom. The US Treasury and its regulatory partners will spend the next year fleshing out the rules, after which they will start licensing private stablecoin issuers. To all appearances, there will be no shortage of licensees.

The domestic implications have been much discussed. Will stablecoins actually be fully backed by safe liquid collateral, or will the regulated, who have every incentive to hold higher-yielding assets, stay one step ahead of the regulators?

Will stablecoins always and everywhere trade one for one with the dollar?