America's promotion of stablecoins could have global consequences

Mint

10 hours ago

Donald Trump has imposed stiff tariffs on Indian goods entering the US market. This part of his disruptive mercantilist agenda to bring US trade with the rest of the world back into balance has quite naturally dominated news headlines over the past few months.
The US is our biggest trading partner and economists have been sweating their spreadsheets to give us some initial estimates of how these higher tariffs will affect the Indian economy.
Also read: As dollar gains ground, will India's high-net-worth individuals switch to stablecoins?
Less attention is being paid to another ongoing shift in US policy. Trump wants to harness the growing popularity of digital finance to strengthen US economic power.
His administration seeks to build a regulatory framework around stablecoins, or cryptocurrencies whose value is backed by fiat currencies such as the dollar. Trump has already signed into law the Guiding and Establishing National Innovation for U.S. Stablecoins Act (GENIUS Act).
A stablecoin maintains a fixed rate of exchange with an underlying asset, unlike cryptocurrencies such as Bitcoin or Ethereum, whose price fluctuates every day, sometimes wildly.
The reason for their price instability is that the supply of these cryptocurrencies is determined by a rigid algorithm, so prices bounce around depending on demand conditions.
In contrast, since the main attraction of a stablecoin is its stable value against an underlying asset, issuers mint new tokens when there is higher demand for the stablecoin. That by definition means that issuers have to buy more of the underlying asset such as the US dollar.
In other words, the growing use of stablecoins will create extra demand for their underlying assets. US Treasury Secretary Scott Bessent estimates that the value of dollar-backed stablecoins could hit $2 trillion in the next few years, nearly eight times their current value.
The move to promote the use of stablecoins seeks to strengthen the dominance of the US currency in the global economy. The stablecoins that are currently available on crypto exchanges are predominantly backed by US dollar assets, according to data from the Bank of International Settlements.
All this matters because national power depends not just on economic size, military power and technological dominance, but also on monetary heft. The US move to use cryptocurrencies to consolidate the importance of the dollar thus also deserves more public attention.
Monetary affairs have been central to the Trumpian agenda. The widely read paper written by Stephen Miran, now chairman of the US council of economic advisors, argues that the American economy has paid a heavy price for providing the rest of the world its global reserve currency.
Miran wrote his paper when he was working at Hudson Bay Capital. According to him, the demand for US dollars from countries that run trade surpluses keeps the US currency overvalued despite its trade deficit. In Miran's view, the overvalued dollar played a role in hollowing out US manufacturing.
Also read: Reduce friction: Let regulated stablecoins transform India's remittance economy
The Miran Doctrine in effect calls for a grand re-adjustment of exchange rates. The US dollar needs to weaken to reflect its trade balance. However, the move to provide a formal regulatory framework for stablecoins will have exactly the opposite effect.
It seeks to increase the investment demand for US dollar assets such as government treasury bills. This is a profound contradiction that lies at the heart of Trumpian mercantilism.
It also takes us back to an earlier paradox in international economics—the Triffin Dilemma—which shows that a country seeking to provide the global reserve asset needs to run a trade deficit.
The Trump administration appears to believe that growing demand for stablecoins that have a fixed exchange rate with the dollar will maintain demand for underlying assets such as US government bonds.
The flow of money into stablecoins backed by the dollar will lead to more buying of US government bonds, pushing down market yields. The current annual interest bill of the US government is close to a trillion dollars.
If stablecoins backed by the US dollar get used more intensively in the coming years for international payments, remittances and private sector savings, then it will pose new challenges to monetary policymakers in other parts of the world.
One issue is the future of central bank digital currencies that have been launched with much fanfare. They are claims on the national central bank, while a dollar-backed stablecoin will be a claim on the US Federal Reserve. That has consequences for the balance of monetary power.
Another important challenge is the potential loss of monetary sovereignty. Research shows that stablecoin usage increases sharply during episodes of high inflation or financial stress, and so the ability of a central bank to manage money may be compromised in such situations.
Capital controls will also be more difficult to protect in case people in a country begin to hold more international assets via stablecoins. Remittances could also begin to come into a country without flowing through the traditional financial system.
Also read: Stablecoins are on the rise: Bond investors should pay attention
The manic price volatility of regular cryptocurrencies such as Bitcoin make them poor monetary units for transactions and do not serve as useful units of account for the same reason.
Stablecoins promise to avoid such problems by tethering their value to an underlying asset, even though there have been cases when their prices have diverged from their underlying asset values. The GENIUS Act will have implications for monetary management in other countries, including India.