A decade ago, stablecoins were conceived as a bridge for speculators to travel between risky digital assets like Bitcoin and the less turbulent world of fiat money. That is changing fast. In the hands of a crypto-loving Trump administration, these dollar clones are shaping up as a highway that will carry America’s influence around the world. China’s President Xi Jinping is not taking this new front of geopolitical competition lightly.
It’s a fundamental rewiring of the post-World War II monetary architecture, in which the US is no longer keen to play its historical role of supplying safe assets to the rest of the world.
Large-scale purchases of Treasuries by foreign central banks are adding to international demand for the dollar as a store of value. Its perverse effect is to make the US uncompetitive in trade. Or that’s the position articulated in a provocative paper last November by Stephen Miran, head of President Donald Trump’s Council of Economic Advisers. He’s now on the Federal Reserve board. “From a trade perspective, the dollar is persistently overvalued, in large part because dollar assets function as the world’s reserve currency,” Miran wrote. “This overvaluation has weighed heavily on the American manufacturing sector while benefiting financialized sectors of the economy.”
Enter dollar stablecoins, regulated under the recently passed Genius Act. Since they are prohibited from paying interest, these virtual representations will by themselves not be an attractive store of value. That’s intentional. As long as they convert at par into dollars, they will still go global as means of payment. In countries with high inflation, capital controls, or unstable governments, people may want to use these tokens to send and receive money over the blockchain. With US stablecoins going mainstream, the cost of international remittances, disproportionately high for small firms and individuals, is expected to tumble from its current average of 6.5%, drawing in yet more everyday users.
To Beijing’s alarm, this will launch a new wave of dollarization just when it’s pushing for a greater role for the yuan in international payments.
Take Pakistan, a flagship destination of the Belt-and-Road program and a recipient of billions of dollars of Chinese investment. The Trump administration has signed up Islamabad as an enthusiastic supporter of its global crypto initiative. Since May 2021, the local rupee has lost nearly half of its value against the greenback. Although inflation has cooled from the 2023 high of 38% and the currency has stabilized, that’s largely because of assistance from the International Monetary Fund — the nation’s 24th bailout in 75 years. It’s a no brainer that between a domestic bank deposit and a blockchain wallet stuffed with digital dollars, most Pakistanis may eventually choose the latter.
And that’s just one example. Standard Chartered Plc estimates that these tokens will suck $1 trillion of deposits from emerging-economy banks over the new few years. The wrath of the so-called “debasement trade,” in which investors are souring on fiat money and seeking safety in gold and crypto, won’t spare the banking system.
Paradoxically, though, this is not the end of the dollar’s dominance, but its revival in a new conception that won’t depend on foreign institutions’ accumulation of safe assets, according to Jean-Pierre Landau, a former deputy governor at the Bank of France.
Since US stablecoin issuers will be required by law to back their tokens with bank deposits, short-dated Treasury bills, and repurchase agreements backed by Treasuries, US budget shortfalls will still get funded. As Landau said in a recent conversation with Princeton University economist Markus Brunnermeier, instead of drawing power from its reserve status, the digital dollar will garner its ability to fund fiscal deficits through a digital network effect, where every new user of the payment instrument anywhere will make it more attractive to others. As they put more of their coins in circulation, issuers will have to buy more Treasury bills.
But what happens to those fiscal authorities whose currencies lose out to US stablecoins? Concerned with what withdrawal of deposits could mean for bank financing, Europe will seek to counter the American crypto assault with an official digital euro, which will probably come with limits on how many tokens one could hold in a wallet.
China will very likely adopt a different strategy. Not having had much success in pushing a tokenized version of the state-backed yuan, or e-CNY, in domestic use, it might switch its focus to letting the private sector run with virtual copies of the offshore yuan. But given its long-held mistrust of the asset class — crypto trading is banned on the mainland — Beijing may rely on Hong Kong’s new stablecoin law to test the waters first.
The challenge confronting China is far more real than Mark Zuckerberg’s utopian 2019 idea of Libra, a brand-new world currency that promised to meet the “daily financial needs of billions of people” and one day rival the greenback. By making it possible for the debasement trade to coexist with a new form of technological dominance, US stablecoins will square the circle in a different way. Even if people and institutions globally lose faith in the dollar, they may still need its private-sector clones to pay for bread. Trump might relish that dream, but not Xi.
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