A coin has two sides, so does stablecoin

Muhhamad Zamir Assadi

Since Circle, the world’s second largest dollar stablecoin company, went public at the beginning of this month, its stock price has risen from the IPO price of $31 to $180 (as of June 27). At a time when the status of the US dollar as the largest reserve currency is being questioned, is the stablecoin a digital rocket booster to consolidate the dollar’s domination, or a spark that will weaken its hegemony?

USD stablecoin dominates

As a cryptocurrency with an anchored attribute, the US dollar stablecoin, which is anchored to the US dollar at a 1:1 ratio, currently accounts for more than 95% of the global stablecoin market share, which is to a large extent related to the relaxed supervision of stablecoins by US regulators.

 According to the World Bank, existing cross-border small-value remittances by banks usually take about 3-5 working days to settle, with an average cost rate of 6.35%. However, blockchain-based stablecoin payments support global 7*24 real-time payments, with the fees are very low. The average cost of sending stablecoins through blockchains such as Solana is less than $1. With the improvement of the payment ecosystem, stablecoins have rapidly developed from the initial transaction settlement of the crypto asset market to diversified applications in cross-border trade payments, daily transaction payments, financial investment settlements, employee salary payments, and prevention of local currency depreciation.

In this case, the issuance scale of stablecoins has also continued to expand. At present, the market size of stablecoins exceeds US$260 billion, and the number of active stablecoin holding addresses in the past 12 months has exceeded 240 million.

Among the assets that the US dollar stablecoin is anchored to, 90% is short-term U.S. Treasury bonds, which is essentially a dual support for the dollar and U.S. bonds.

Due to stablecoins are anchored, unlike encrypted digital currencies such as Bitcoin, they have gotten rid of the defect that digital currencies are prone to large fluctuations in price to a certain extent, which means they could be applied to more scenarios, which is its positive side.

On June 17, the US Senate passed the GENIUS Act, establishing the first federal framework for dollar-pegged stablecoins. The legislation grants sweeping authority to Treasury Secretary Scott Bessent, who told a Senate appropriations subcommittee in a hearing that the U.S. stablecoin market could grow nearly eightfold to over $2 trillion in the next few years.

Since the share of US dollar stablecoins in stablecoins is much higher than the share of the US dollar in international payments, foreign exchange reserves, international bond issuance and other fields, the expanding application of stablecoins has strengthened the US dollar's position as the world's most important payment, pricing and reserve currency. As Bessant has repeatedly stressed, a US dollar stablecoin will “support continued demand for U.S. Treasuries” as well as “maintain the dollar’s status as the world’s dominant reserve currency.”

Two sides of a coin

However, even if the US dollar stablecoin continues to maintain its dominance in global market, could it really reverse the trend of the United States’ own declining international status?

The latest data released by the IMF shows that as of the third quarter of 2024, the US dollar’s share in global official reserves fell to 57.4%, a decrease of 1.8 percentage points from the same period last year, the lowest level in nearly 30 years since 1995.

On June 30, the U.S. dollar index fell below 97, hitting a new low since March 2022. The U.S. dollar has suffered its worst start since the era of free-floating currencies began in 1973. Bank of America believes that de-dollarization is still ongoing, “this crowded dollar position reflects the intention of international investors to reduce their effectively unhedged exposure to U.S. assets and their sense that American exceptionalism is fading.” More than that, Bank of America found that investors are currently underweight the dollar to the highest extent in the past 20 years, indicating growing market concerns about U.S. macroeconomic risks and long-term competitiveness. The role of the dollar as the global reserve currency remains unchallenged, but these data suggest that the dollar’s reputational appeal among institutional capital allocators is weakening.

If the situation in the United States such as the deterioration of political governance and rule of law, the continued accumulation of fiscal risks and the abuse of dollar financial sanctions cannot be changed, the market will lose confidence in the dollar, and stablecoins alone will certainly not be able to turn the tide.

On the one hand, the international community is increasingly questioning the creditworthiness of the U.S. dollar. For example, Trump’s erratic trade policy and even interference with the independence of the Federal Reserve are undoubtedly a reflection of the decline of the U.S. governance environment. The high U.S. fiscal deficit has also increased the risks of the U.S. economy and financial markets. On May 17, Moody’s just downgraded the U.S. sovereign credit rating due to “deteriorating fiscal indicators.”

The excessive use of financial sanctions by the US government has also caused some countries to actively reduce their dependence on the US dollar. Countries including China, India, and Brazil have continuously increased their foreign reserves of non-US dollar assets such as gold and reduced their dependence on the US dollar in bilateral settlements. These negative factors cannot be overcome by issuing US dollar stablecoins.

As an emerging financial instrument that is still underdeveloped, stablecoins essentially represent the latest trend of financial liberalization in the United States. As for the US dollar stablecoin, it is more of a disguised form of speculation rather than being used in areas such as cross-border payments. Since it is speculation, there is a probability of bubbles appearing. In the medium and long term, it may trigger another financial crisis in the United States.

On a macro level, the most deterrent aspect of the traditional dollar hegemony is its weaponization for economic sanctions, which creates a “fear of system collapse” - the cost of overthrowing the system is much higher than the cost of enduring exploitation. On the one hand, countries within the system cannot change the rules alone, and this situation is unlikely to change fundamentally in the short term; on the other hand, although countries face increasing costs such as fluctuations in the dollar exchange rate, contradictions between monetary policy and economic cycles, and often face various monetary and financial risks, the cost of overthrowing the system is greater. Now, stablecoins have created a new opportunity for the global monetary system, that is, many tools and facilities of the traditional dollar system are useless for stablecoins. That is to say, the dollar stablecoin represents two sides of a coin.