From October 2008, when Satoshi Nakamoto released the Bitcoin white paper, to June 17, 2025, when the U.S. Congress formally passed the “Guiding and Establishing the U.S. Stablecoin National Innovation Act” (the “GENIUS Act”), the world monetary system has witnessed a continuous emergence of new entities. However, the global monetary system has never deviated from the two-tiered currency paradigm proposed by Nobel economist Friedrich August von Hayek in 1976 in his theory of pluralistic currencies, which divides currency into legal tender and private currencies. Despite the pluralistic competitive landscape of global currencies, the global monetary system does not seem to exhibit the “Gresham’s Law” phenomenon of “bad money driving out good money.” On the contrary, it has seen the coexistence of traditional fiat currencies, central bank digital currencies (CBDC), cryptocurrencies like Bitcoin, private digital currencies like JPM Coin, cross-border payment blockchain systems such as IBM’s “World Wire,” as well as stablecoins (USDT, USDC) and platform tokens (BNB). Private digital currencies/assets have become parallel currencies to traditional fiat currencies and CBDCs. As an integral part of the international monetary system, what impact does the recently discussed stablecoin have on the traditional U.S. dollar monetary system? How does stablecoin affect the dollar creation mechanism? Is stablecoin a money market fund, shadow banking, a payment system innovation, or the new starting point for global dollarization?
According to the U.S. Securities and Exchange Commission (SEC), a stablecoin is a type of crypto asset designed to maintain a stable value relative to a reference asset (such as the U.S. dollar, other fiat currencies, U.S. Treasury bonds, gold, or a basket of assets). Stablecoins track the value of the reference asset at a 1:1 ratio, with the value of the reference asset backed by reserve assets, or with mechanisms other than reserve assets to adjust the supply of stablecoins. Stablecoins have a bidirectional redemption mechanism. When the reference asset is the U.S. dollar, the issuer will sell one stablecoin for one dollar; when users redeem the stablecoins, the issuer typically uses reserve assets to redeem the stablecoin for dollars at a 1:1 ratio.
The stablecoin law passed in the U.S. in 2025 formally establishes a regulatory framework for U.S. dollar-backed stablecoins, including “licensed issuance,” “100% reserve assets,” “linking to highly liquid dollar assets,” “monthly auditing,” and “legal and compliant operation.” U.S. dollar stablecoins are a form of digital infrastructure, and the law clearly states that only “authorized stablecoin issuers” and certain “foreign stablecoin issuers” can operate in the U.S., with the latter required to be registered in a country with a recognized regulatory framework by the U.S. The law also designs a linkage mechanism, requiring stablecoin issuers to hold reserves of U.S. cash, certificates of deposit, U.S. short-term Treasury bonds, repurchase agreements, and other liquid assets at no less than a 1:1 ratio, with monthly reserves being audited by registered accountants to ensure transparency. This mechanism links traditional fiat assets (high liquidity dollar assets) with crypto assets, making stablecoins an intermediary connecting centralization and decentralization. Previously, crypto assets were not recognized by U.S. officials as reserve assets, but the current stablecoin law goes beyond the realm of digital infrastructure, allowing U.S. dollar stablecoins to connect crypto assets with official U.S. financial assets. Additionally, the U.S. Treasury Department hopes to create demand for U.S. dollars and U.S. Treasury bonds through stablecoins to solidify the U.S. dollar’s position in the global financial system.
It should be noted that although approximately 80% of global Bitcoin transactions are conducted through stablecoins like USDT, some crypto asset trading platforms can trade directly in U.S. dollars without using stablecoins. Additionally, some platforms can trade crypto assets in non-U.S. currencies, with the platform automatically converting non-U.S. currencies into USDT based on the spot exchange rate for the transaction. Therefore, crypto asset trading is not necessarily tied to stablecoins. Stablecoins provide advantages because they can be used without going through the banking system, offering a good solution for crypto asset trading in countries with strict foreign exchange controls or where crypto assets are prohibited. They also save investors the currency exchange procedures and avoid exchange rate losses.
The Mechanism and Channels Through Which Stablecoins Affect the Dollar Creation Process
First, U.S. dollar stablecoins, through global crypto asset demand and the expansion of stablecoin demand, create a supply of dollars and U.S. short-term Treasury bonds, which is akin to “cryptocurrency version of quantitative easing.” In 2024, global stablecoin transaction volume surpassed that of Visa and MasterCard for the first time. As of the end of May 2025, the total global stablecoin market reached $247.4 billion. Stablecoins pegged to the U.S. dollar account for over 95% of the total stablecoin market, far outpacing other types such as crypto asset-backed stablecoins, algorithmic stablecoins, and commodity-backed stablecoins. Citing U.S. Treasury Secretary Bessent’s data on social media: “By 2030, the global stablecoin market may grow to $3.7 trillion, with the stablecoin ecosystem driving demand for U.S. Treasury bonds from the private sector.” This means that, relying on U.S. dollar stablecoins and the credit creation function of the crypto asset market, the U.S. Treasury Department is injecting $3.7 trillion of liquidity into the market. Furthermore, U.S. dollar stablecoins are just the infrastructure connecting U.S. assets with crypto assets. While they have some attributes of currency, they are not strictly money in the general sense, as their value measure, circulation means, payment means, and store of value only apply to the crypto asset market, not the broad public use of a general equivalent.
The source of credit creation in the crypto asset market lies in crypto assets themselves. A large portion of global crypto asset transactions must be conducted through stablecoins, and the expansion of global crypto assets through stablecoins creates demand for U.S. dollars and U.S. Treasury bonds, with the current issuance of U.S. crypto assets resembling an infinite supply. Apart from the crypto asset sector, cryptocurrencies are closely related to technology sector application scenarios. With breakthroughs in applications such as artificial intelligence, decentralized finance (DeFi), and decentralized physical infrastructure networks (DePIN), new cryptocurrencies will emerge continuously. The crypto asset sector will also see ongoing inflows of funds, and the number of users in the crypto sector will continue to grow. It is not difficult to foresee that the market size and value of crypto assets will continue to expand. In 2024, as blockchain solutions are increasingly applied, the total market value of cryptocurrencies reached a historic high of $3.8 trillion. According to Forbes’ 2025 seven predictions for crypto, the cryptocurrency market is expected to surpass $8 trillion.
Secondly, the investment approach of stablecoin accounts determines the currency and credit creation mechanism of stablecoins. Is the nature of stablecoins akin to a demand deposit, a money market fund/money market fund ETF, or shadow banking? According to the U.S. dollar stablecoin law, the dollar stablecoin must comply with the “100% reserve” requirement. If the dollar-pegged stablecoin is 1:1 pegged to the dollar, for every stablecoin issued, the issuer must deposit an equivalent of $1 in a designated custodial institution for full custody, with the custodian holding U.S. cash and U.S. short-term Treasury bonds as highly liquid assets. If the reserve assets are entirely in dollars, the dollar stablecoin mechanism will absorb significant amounts of deposits from the banking system. If these reserve assets are rigorously regulated and audited, the stablecoin account would be similar to zero-interest demand deposits or digital wallets. If these reserve assets are invested in low-risk assets such as certificates of deposit, short-term U.S. Treasury bonds, and repurchase agreements within the legal boundaries of regulatory audits, then the stablecoin account would resemble a money market fund or a money market fund ETF. Additionally, it cannot be ruled out that in some cases, the stablecoin account might invest in non-standardized assets, such as asset-backed securities, which would make the stablecoin account resemble a shadow bank.
Thirdly, stablecoins will indirectly create demand for U.S. short-term Treasury bonds. Short-term Treasury bonds are primarily created through the credit creation channel of stablecoins, while the issuance of U.S. Treasury bonds is mainly handled by the U.S. Treasury Department. This credit creation mechanism differs from the Federal Reserve’s money creation mechanism. If stablecoin reserve assets are entirely in U.S. short-term Treasury bonds, on one hand, U.S. short-term Treasury bonds provide liquidity for stablecoins and crypto assets; on the other hand, the expansion of stablecoins and crypto assets further creates demand for U.S. short-term Treasury bonds. As of the week ending June 18, 2025, the Federal Reserve held $4.21 trillion in U.S. Treasury bonds, of which $195.42 billion were short-term bonds, a relatively small proportion of the total. However, a larger proportion of short-term Treasury bonds is issued in the primary market by the U.S. Treasury. According to U.S. Treasury data, since 1980, short-term bonds have accounted for the majority of the Treasury’s bond issuance (in January 1980, short-term bonds represented 86.02% of all Treasury bond issuance; in June 2025, the share was 80.13%). As the expansion of stablecoins and crypto assets continues, the demand for U.S. short-term Treasury bonds will keep growing, and the U.S. Treasury will use the funds raised from short-term Treasury bonds to balance fiscal imbalances. This is also an important channel for the expansion of the U.S. broad money supply credit. Additionally, it is worth mentioning that although stablecoins’ reserve assets are required to be U.S. short-term Treasury bonds, the perpetually rolling U.S. short-term bonds are effectively equivalent to perpetual bonds.
When the reserve assets of stablecoins are a combination of U.S. dollars and U.S. Treasury bonds in certain proportions, the currency and credit creation mechanisms of stablecoins will operate through both of the above channels, i.e., through the banking/shadow banking channels and the government bond credit creation channels.
The Root Cause of Instability in the U.S. Monetary System from Dollar Stablecoins
If the supply of crypto assets and crypto currencies is unlimited, the credit creation increases the broad money supply beyond the Federal Reserve’s control. Additionally, if the U.S. Treasury, under pressure from the rapid expansion of crypto assets, limits the issuance of short-term Treasury bonds, this would lead to a shortage of U.S. short-term bonds, causing a surge in short-term bond rates. The rise in short-term Treasury bond yields would constrain the Federal Reserve’s monetary policy, affecting the transmission of short-term rates to long-term rates. Furthermore, stablecoins and cryptocurrencies may partially weaken the Federal Reserve’s role in monetary policy, as crypto assets’ circulation could have a certain crowding-out effect on traditional currency circulation, and the amount and velocity of money circulation will affect the money multiplier. Generally, increased demand for short-term bonds signals a decrease in market risk appetite. If large amounts of funds flow into U.S. short-term bonds due to stablecoin reserve asset requirements, it will distort signals in the U.S. short-term bond market. Moreover, when stablecoins and crypto assets bring funds into the U.S. Treasury bond market, it could distort signals in money market funds based on short-term Treasury bonds and certificates of deposit, leading to traditional financial institutions losing pricing power over U.S. short-term Treasury bonds and potentially causing the Federal Reserve to lose control over short-term rates, disrupting the effectiveness of its monetary policy. The decentralized nature of crypto assets and stablecoins makes it difficult for institutional behavior to be monitored, presenting a significant challenge to the U.S. regulatory system. Crypto asset investors, in effect, become investors in U.S. Treasury bonds, making the issuance of short-term Treasury bonds by the U.S. Treasury Department passive. The decentralized nature of cryptocurrencies and stablecoins exacerbates the Triffin dilemma in the USD market.
Finally, in extreme cases, when a particular stablecoin faces severe redemption and run pressures, the short-term bond market could experience significant selling pressure, especially when investor behavior is synchronized. Furthermore, the massive volatility of crypto assets will make the US short-term bond market unstable. It is also worth noting that, so far, the Federal Reserve’s stance on stablecoins and crypto assets has not been as proactive as that of the US Treasury, making the likelihood of a USD and US government bond crisis more probable in the absence of a lender of last resort and primary dealers. In extreme conditions, crises in the crypto asset market could easily spread to the US bond market.
How Stablecoins Affect the USD’s Position in the Global Monetary System
Stablecoins further expand the application of the USD, strengthening its position in global payments and settlements. Stablecoin payments allow for faster settlement times and bypass intermediaries in cross-border payments, offering secure, efficient, and diversified payment solutions. Additionally, stablecoins optimize the process of multi-currency conversion in foreign exchange operations, reducing foreign exchange fees for cross-border businesses. Based on blockchain technology’s distributed ledger system, stablecoins surpass SWIFT in terms of transaction efficiency. As stablecoin applications expand, they could disrupt the global cross-border payment system.
However, due to the blockchain technology used by stablecoins, there is an inherent risk of money laundering in on-chain transactions, which could turn USD-backed stablecoins into an important channel for international money laundering.
The pegging mechanism of stablecoins further strengthens and extends the USD’s dominance in the global monetary system, pushing countries that legally adopt cryptocurrencies and crypto assets to deepen their dollarization.
Despite these developments, the future of USD-backed stablecoins remains uncertain. If a president hostile to crypto assets comes into power in the future and assembles an anti-cryptocurrency cabinet, a major reshuffling in the crypto space could occur.