Recently, developments in the digital currency sector, particularly regarding U.S. dollar stablecoins, have attracted widespread attention.
Since returning to the White House, the Trump administration has made numerous statements on digital currencies, including developing stablecoins pegged to the U.S. dollar, opposing the Federal Reserve’s issuance of a central bank digital currency, and advocating for incorporating Bitcoin and other crypto-assets into reserve assets. Recently, U.S. Treasury Secretary Bessent stated at the first White House Digital Assets Summit that the United States “will maintain the U.S. dollar’s status as the world’s leading reserve currency” and will “leverage stablecoins to achieve this goal.”
Other countries and regions around the world have also responded. ECB President Lagarde recently stressed at a hearing the need to swiftly establish a legislative framework to pave the way for a potential digital euro (CBDC) to address the challenges posed by the rapid development of stablecoins and crypto-assets. Interestingly, she did not propose the idea of using a euro stablecoin as a response.
Stablecoins are not only a globally watched hot topic but also an actual economic development unfolding, potentially having significant impacts on the global economic and financial landscape. To better understand the economic logic and policy implications of stablecoins, this article attempts to provide an analysis.
I. What Are Stablecoins—and What Are They Not?
Stablecoins are a type of cryptocurrency pegged to specific assets and designed to maintain a relatively stable value. Currently, U.S. dollar stablecoins (such as USDT and USDC) backed by highly liquid assets account for over 90% of the total market value of all stablecoins. This article focuses exclusively on this type of dollar stablecoin. Stablecoin transactions can be divided into primary and secondary markets. In the primary market, issuers usually promise to redeem one stablecoin for one U.S. dollar, but participation thresholds are high and generally limited to institutional users who must also meet KYC requirements, and redemptions are subject to processing delays. In the secondary market, market participants trade autonomously, and stablecoin prices may deviate from the pegged value of one U.S. dollar due to supply and demand. Stablecoins possess both technological and monetary characteristics, and several points merit attention.
(1) Digital technology improves payment and settlement efficiency but is not fully decentralized
In theory, stablecoins operate on blockchain distributed ledgers, with decentralized attributes. Additionally, stablecoins can be embedded in smart contracts to support DeFi applications such as lending and trading, allowing for automatic execution without traditional financial intermediaries and enabling fast, low-cost settlement. However, in reality, the decentralization of stablecoins is limited. For example, the issuers of USDT and USDC control issuance, redemption, and management of reserve funds, resulting in a certain degree of centralization.
(2) From the holder’s perspective, stablecoins are private money, not government money
According to the U.S. “Guiding and Establishing National Innovation of Stablecoins Act (GENIUS Act)” proposed in 2025 (draft), stablecoin issuers are prohibited from paying any form of interest to holders. The Act also requires issuers to hold no less than a 1:1 ratio of highly liquid assets as reserves. From a monetary perspective, stablecoins are essentially private money based on the credit of the U.S. dollar and the issuing institution.
(3) From the issuer’s perspective, the stablecoin model resembles “narrow banking” and is not merely a liability
The operation of stablecoins is similar to the concept of narrow banking. Traditional banks use a “short-term borrowing, long-term lending” model, i.e., they make long-term loans using short-term deposits, which can cause liquidity crises, as seen in historical bank panics and runs. Modern central banking systems enhance financial stability through multilayered regulatory frameworks, including liquidity tools, deposit insurance, capital and liquidity requirements, and macroprudential policies. By contrast, stablecoins align with the idea of narrow banking, strictly limiting business scope to holding low-risk, highly liquid assets such as cash and short-term government bonds. By maintaining sufficient or even excess assets, they ensure redemption guarantees for stablecoins, avoiding crises caused by maturity mismatches, credit risk, or excessive speculation. In this model, the functions of money creation and credit issuance are separated: under proposals like the “Chicago Plan,” narrow banks act merely as “money warehouses,” safekeeping deposits and providing payment services, while business lending and other credit issuance are handled by non-bank financial institutions (such as specialized lending firms), with strict legal and financial separation between the two.
II. As a Payment Tool, What Costs Can Stablecoins Reduce—and What Costs Can They Not?
At present, stablecoin usage in routine retail payments is very limited and application scenarios are constrained. Third-party payment platforms such as WeChat Pay, Alipay, Apple Pay, and PayPal have already achieved network effects and economies of scale, enjoying first-mover advantages. Within the same currency area, in terms of convenience and security, stablecoins offer no clear advantage over existing third-party payment systems. The potential for stablecoins to lower transaction costs mainly lies in cross-border payments.
What factors give stablecoins a low-cost advantage in cross-border payments? A relatively competitive market structure is likely an important reason. Traditional banking systems provide U.S. dollar cross-border remittance and payment services, but settlement systems are highly centralized. The Clearing House Interbank Payments System (CHIPS), one of the core infrastructures for U.S. dollar cross-border payment clearing, handles about 96% of global dollar cross-border payments. Card network clearing is dominated by a few oligopolies like Visa and MasterCard, whose first-mover advantage and scale effect create high entry barriers and industry concentration, thereby driving up transaction costs.
In contrast, third-party digital payment platforms have lower peer-to-peer transaction costs and more transparent fees than traditional cross-border payment systems. These platforms typically integrate digital wallet functions, and diversified user demand pushes providers to iterate and upgrade payment services, creating differentiated competition across regions and scenarios. Many platforms have carved out niches, such as Stripe, which offers low-cost cross-border services and customizable solutions mainly for large-volume or international online businesses. However, from the merchant’s perspective (the payee), transaction fees for third-party payment services remain relatively high.
Stablecoins’ openness and underlying infrastructure make it more likely for them to foster a highly competitive market landscape and bypass existing payment systems to enable low-cost cross-border payments. First, the digital economic nature of stablecoins allows new technologies to help lower fees, for example, public chain competition and optimization can reduce gas fees. Second, the stablecoin market is relatively competitive globally, with multiple existing or potential issuers competing, helping keep transaction fees low. Finally, compared to banks and third-party digital payment platforms, stablecoins face looser regulation, allowing for regulatory arbitrage. In contrast, established payment methods are governed by mature regulatory frameworks: banks face strict constraints on capital adequacy, deposit insurance, liquidity management, anti-money laundering (AML), KYC, etc., while third-party payment platforms have clear regulations on payment licenses, fund custody, AML, and cross-border settlement. In comparison, stablecoins are relatively anonymous and can bypass traditional bank cross-border settlement systems without strict foreign exchange or capital flow controls.
It is worth noting that while stablecoins can reduce the cost of cross-border payments in the same currency, for payments involving currency exchanges, the situation is more complex. Stablecoins do not eliminate the exchange fees between two different currencies, which involve the local banking system and regulatory requirements such as AML and capital controls that add to transaction costs. Of course, as a transaction currency, the dollar benefits from economies of scale, and exchanges between other currencies are usually conducted via the dollar. This cost advantage comes from the dollar’s role as an international transaction medium. From a purely digital technology perspective, U.S. dollar stablecoins do not inherently have an advantage over other currencies’ third-party payment tools or CBDCs. One important implication is that stablecoins of other currencies have much more limited effects in reducing cross-border economic activity costs compared to dollar stablecoins.
III. Stablecoin Supply Is Highly Elastic, and Circulation Is Mainly Driven by Demand
From the supply perspective, stablecoin issuers’ profits come from the interest spread between assets and liabilities. On the liability side, issuers pay zero interest, while on the asset side they hold interest-bearing safe assets such as government bonds and bank deposits. The larger the net interest margin (interest spread minus operating costs), the greater the incentive for issuers to supply stablecoins. In theory, as long as the net spread is positive, the supply can be unlimited. The market capitalization of USD stablecoins has grown from several billion USD in 2020 to over USD 220 billion in Q1 2025, accounting for 99.8% of all fiat-pegged stablecoins. Notably, during these years, the U.S. short-term interest rate rose from near zero during the COVID-19 pandemic to around 4% now, bringing stablecoin issuers an almost risk-free substantial spread. This may explain why more and more institutions are willing to issue stablecoins.
Given the high supply elasticity, the circulation of stablecoins is essentially driven by demand. As a non-interest-bearing payment instrument, no one wants to hold an amount of zero-interest assets significantly exceeding their transaction needs. Because transaction demand is uncertain, people are willing to hold some balance for contingencies, and this demand partly depends on the opportunity cost of lost interest. When the yield on bank deposits or other safe assets (like government bonds) rises, the opportunity cost for holders increases, reducing demand for balances. In other words, the recent rise in U.S. interest rates should have dampened stablecoin demand. So how do we explain the rapid growth of dollar stablecoins during the same period?
Looking at it another way, the foregone interest by stablecoin holders is the price paid for the convenience they gain. Higher interest rates should reduce stablecoin balances, but the utility per unit stablecoin rises with the convenience it brings. So, what kinds of convenience benefits can offset the higher opportunity costs due to rising rates?
One possibility is the currency substitution effect. The dollar, as an incumbent international currency, provides liquidity and safe assets, especially for economies with high inflation or persistent local currency depreciation, where the dollar substitutes local currency. Studies show that people in developing countries like Turkey, Argentina, Indonesia, and India have shown increased willingness to hold stablecoins. In Turkey, for example, where inflation is high, purchases of stablecoins using local currency in 2023 amounted to 3.7% of GDP. But this currency substitution effect should be limited: from a savings perspective—especially considering higher dollar rates—dollar substitution for local currency should mainly appear in interest-bearing safe assets, like local dollar bank deposits. Another possible substitution is dollar stablecoins replacing physical dollar cash, but there is no clear evidence that this option is significant. Comparatively, both cash and stablecoins pay no interest, but stablecoins are more convenient to carry and avoid the risk of physical deterioration, and they are advantageous for large transactions. However, physical cash has the benefit of no redemption risk.
A second possibility lies in traditional cross-border trade payments. Conventional cross-border payments have long suffered from high costs and low efficiency, mainly due to highly centralized infrastructure creating monopolies, complicated processes, and layered compliance costs. In this context, stablecoins provide an alternative that bypasses or simplifies traditional hierarchical structures, using digital means to enable more direct cross-border payments, breaking the old structure and reducing transaction costs. For cross-border e-commerce sellers and individuals or businesses engaged in frequent small cross-border trades, this cost saving is highly attractive and may drive demand for stablecoins. However, reducing cross-border payment costs is not unique to stablecoins; digital payment platforms like PayPal also have the potential to break traditional cross-border payment monopolies.
A third possibility is related to crypto-asset trading. In recent years, the sharp rise and high volatility of Bitcoin and other crypto-assets have increased demand for dollar stablecoins as settlement balances for crypto trading. Stablecoins are not only the main intermediary for crypto transactions but also an ideal safe haven during periods of large price swings in major crypto-assets like Bitcoin. Whether the Bitcoin market is rising or falling, the existence of derivatives such as futures and perpetual contracts keeps market demand for stablecoins as collateral consistently high.
A fourth possibility involves underground economic activities, regulatory arbitrage, and demand for transactions evading financial sanctions. The anonymity of stablecoins makes transactions difficult to trace and regulate, facilitating illicit and non-compliant transactions, especially in cross-border payments. They can be used to bypass capital account controls and complicate tax collection and AML efforts. The returns gained by circumventing regulations can be seen as the convenience benefits stablecoins provide to holders, creating demand for stablecoins. Stablecoins can also help bypass the current U.S.-dominated international payment system, enabling parties in geo-economic competition to evade financial sanctions. For example, Russia has turned to using stablecoins to facilitate oil trade with other countries, using USDT as a bridge currency for non-dollar settlements. Iran, Venezuela, and others have also used crypto-assets for trade settlements.
Of these four possibilities, the third and fourth are currently the more plausible explanations—and they are somewhat interrelated. Crypto-asset trading and gray-area transaction demand reinforce each other in the lightly regulated environment of offshore exchanges. Most crypto exchanges are based in offshore financial centers, making regulatory enforcement difficult and international cooperation hard to implement.
IV. Future Development Potential: What Stablecoins Can and Cannot Do
How should we view the growth potential of stablecoins going forward? Like cash, bank demand deposits, and third-party payment balances, the circulation of stablecoins is mainly driven by transaction demand—this has an important implication. In purely domestic scenarios, since none of these instruments pay interest, stablecoins do not have a clear advantage over cash, demand deposits, or existing third-party payment systems. Although their anonymity makes stablecoins suitable for underground economic activities, this may in turn promote shadow financial systems for gray-area transactions. Such a feedback loop could fuel regulatory arbitrage for illicit purposes, and it is hard to imagine that monetary authorities would indefinitely tolerate this. Therefore, the real growth potential for stablecoins lies in cross-border economic activity.
(1) The growth potential of USD stablecoins first benefits from the dollar’s status as an international currency
At the international level, the network advantage of the incumbent means that the dollar is most likely to benefit from the market mechanism of stablecoins. In other words, the rapid growth of USD stablecoins is primarily a result of the dollar’s role as an international currency. But can stablecoins in turn strengthen or even expand the dollar’s influence? This depends on how stablecoins perform in the three major functions of money—unit of account, medium of exchange, and store of value—and on where currency substitution happens within these functions.
For sovereign currencies, their credibility as units of account comes from government backing and is a core aspect of national economic sovereignty. The extent to which an official unit of account extends internationally or is eroded domestically is reflected in the market competition for its payment and store-of-value functions.
As discussed, in terms of payment efficiency, USD stablecoins benefit from the dollar’s incumbent status. Additionally, regarding regulatory arbitrage, the degree of financial liberalization in the U.S. is higher than in many other countries, so the regulatory arbitrage brought by stablecoins has less negative impact on the U.S. than on other economies, giving USD stablecoins a favorable position.
So, where does the dollar’s competitiveness as an international currency come from? The key is its role as a store of value. The U.S. financial market is large, deep, and broad, and it is the most open among major economies, attracting global investors. In particular, U.S. Treasury securities provide safe assets for global markets. USD stablecoins benefit from the dollar’s status as the primary reserve currency and, as a new technological tool, provide an additional channel for the dollar’s role as a store of value to expand globally.
(2) USD stablecoins may in turn promote dollarization, but two constraints remain
Globally, competition among currencies is a zero-sum game: the dollar’s gain in the international currency market comes at the expense of other currencies. Based on the above logic, the countries most affected by USD stablecoins are mainly two types: developing countries with weak financial systems, small economic scale, and high inflation and exchange rate volatility; and countries with capital account controls. The loss for other countries mainly occurs in two ways. First is the loss of seigniorage and related income—interest earnings forgone by stablecoin holders are captured by the stablecoin issuers and the U.S. government, with the latter benefiting because the demand for safe assets generated by stablecoins lowers the U.S. government’s borrowing costs. Second is the reduced effectiveness of monetary management. As a new payment tool, the total scale of stablecoins is still relatively small, so regulators remain watchful. But as issuance grows, negative effects will become more apparent, and the relevant authorities in other countries may respond by tightening regulation to curb demand for USD stablecoins.
Secondly, stablecoins themselves have vulnerabilities. Although stablecoins are pegged to the dollar, they are essentially private “currencies” issued by private entities. Compared to payment methods under central bank oversight (including third-party payment tools), stablecoins led by private issuers may lack sufficient capacity and incentive to invest in security. This involves both technical aspects—such as consensus mechanisms and smart contracts on blockchains, which may have loopholes—and economic issues, especially the redeemability of stablecoins.
Even if stablecoin issuers hold 100% liquid assets as redemption guarantees, it is difficult to completely avoid scenarios where holders lose confidence in the peg. Since their emergence, stablecoins have repeatedly faced situations where large numbers of users simultaneously redeem or sell off in a short time, overwhelming the support mechanisms and causing the value to deviate from its peg (e.g., de-pegging from the dollar). For instance, when Silicon Valley Bank (SVB) collapsed in 2023, USDC quickly lost its peg. In the digital and smart era, information—including misinformation—spreads fast, and any rumor about insufficient reserves can trigger panic redemptions, which can quickly become a herd effect.
Looking further ahead, stablecoin issuers also face a potential temptation to leverage up for profit, holding lower-liquidity risky assets. This trait means stablecoin issuers could become the “wildcat banks” of the new era. For example, Tether’s reserve assets are not entirely composed of safe, highly liquid cash and cash equivalents; they also include Bitcoin, precious metals, and secured loans and other investments that are not fully disclosed or transparent. Some argue that, compared to Circle’s USDC, which meets the 100% reserve compliance standard, about 20% of Tether’s reserves do not comply with the Stablecoin Guidance and Innovation Act (GENIUS Act), yet this portion is Tether’s main profit source.
It is worth noting that the narrow banking model as a concept for financial reform has never been fully realized in practice, mainly because financial institutions naturally have an expansionary function. Stablecoins are still in an early stage of development and currently benefit from a favorable environment with high interest spreads. Looking ahead, if the Fed cuts rates and U.S. Treasury yields decline, the interest income for stablecoin issuers could shrink significantly. The profit motive may drive these “narrow banks” to expand into broader activities, increasing credit risk and maturity mismatches on the asset side, and further amplifying the issuers’ credit risks.
V. From Crypto Assets to Reserve Assets?
Recently, another topic related to USD stablecoins (cryptocurrencies) has emerged: the U.S. government’s plan to establish a “Strategic Bitcoin Reserve” and a “U.S. Digital Asset Reserve” that includes digital assets beyond Bitcoin. There are various reasons to be bullish on Bitcoin. More than a decade ago, many people believed Bitcoin, as a digital currency (cryptocurrency), could replace the dollar and serve as the monetary foundation for future decentralized finance. Today, few still hold this view. The new narrative is that Bitcoin is a reserve asset—a form of digital gold—that can support a fiat-currency-centered monetary system. In this sense, the transformation from cryptocurrency to crypto asset, with the latter serving as the reserve for the former, forms a closed loop, potentially constructing a new monetary framework for the digital era.
This issue can be analyzed from three perspectives.
First, the closed loop from cryptocurrency to crypto asset does not actually exist. Although stablecoins employ digital technology, economically they are private currencies pegged to the dollar—an extension of the dollar—and are debt-based money. They have no direct economic mechanism linking them to Bitcoin and other crypto assets.
Second, modern economies have long evolved from commodity money typified by gold to credit/debt money—this equally applies to today’s so-called “digital gold.” The core feature of credit money is that its value depends on the creditworthiness of its issuer (usually a government or central bank), making money inherently linked to debt. Modern economies rely on “credit-based payment” (e.g., trade credit, consumer loans, bond transactions), which demands that money be transferable and enable deferred payment. Debt money naturally suits this need through “creditor-debtor relationships.” For example, a bank deposit is essentially a “claim on the bank,” and a stablecoin is a claim on its issuer, transferable to third parties at any time.
Keynes famously called the gold standard “a barbarous relic,” criticizing its rigid rules for clashing with modern economic needs. The gold standard tied money directly to gold reserves, making money supply inflexible and monetary policy incapable of adapting to economic cycles—often amplifying economic fluctuations and even triggering social inequality. Keynes’ monetary theory helped shift 20th-century monetary policy from the “gold standard constraint” to a system “backed by national credit,” laying the theoretical foundation for modern central banks’ “counter-cyclical adjustment” tools like rate cuts and quantitative easing.
The ultimate backing of credit money is national credit. For the U.S. dollar, a key manifestation of this is that base money is a liability of the Federal Reserve, with its asset side corresponding to its holdings of U.S. Treasury bonds. Bank money (broad money, i.e., deposits) derives its credibility from government backing and supervision, including the central bank’s lender-of-last-resort role, deposit insurance mechanisms, and even full guarantees during crises—these make it an extension of government debt. Internationally, the dollar’s status as the world’s main reserve currency is rooted in America’s national credit, which encompasses being the world’s largest economy and having the largest and deepest financial markets.
Third, there may be a scenario where a government holds assets with potential for appreciation to bolster its own credit. For a small economy with limited domestic assets and insufficient long-term growth potential, holding external assets can be reasonable—examples include Norway’s and Singapore’s sovereign wealth fund models, or emerging markets and developing countries that hold dollar assets to strengthen the external value of their local currencies. However, it is difficult to imagine that a large economy—especially one providing the world’s reserve currency—could effectively shore up its sovereign credit through external asset holdings.
More broadly, beyond monetary reserves, can Bitcoin and other crypto assets serve as strategic government investments? Long-term returns on assets generally fall into two categories: cash flow-driven returns (stocks, bonds) and price volatility-driven returns (gold). The former can achieve wealth accumulation through “compound interest effects,” where compounding depends on economic growth; the latter relies solely on price fluctuations caused by market supply and demand and partly depends on speculative “buy low, sell high” activities.
Specifically, for a government’s strategic investment in Bitcoin or other crypto assets, one possible rationale is that such crypto assets involve blockchain and other cryptographic technologies, and government support could stimulate innovation in this sector. The spillover effects of innovation might benefit society at large—creating a positive “compound interest effect.” However, this positive externality must be weighed against Bitcoin’s negative externalities. Bitcoin’s “non-economies of scale” mean that rising demand can only be balanced by higher prices, crowding out other investments, especially in the real economy. In this sense, a government’s strategic investment in Bitcoin or other crypto assets is not inherently superior to investing in equity or stocks or funding basic research—and therefore is not necessarily justified.
VI. Policy Implications
Based on the above analysis, there are three areas of policy implications worth discussing.
First, USD stablecoins embody an inherent contradiction between the public-good nature of payment systems and private profit motives, which will inevitably compel stronger regulation due to their impact on macroeconomics and financial stability. Currently, USD stablecoin development hinges on private entities issuing private “money” and profiting from interest spreads. This model fundamentally conflicts with the public-good attributes of payment systems, which require safety, stability, and inclusiveness. Throughout monetary and financial history, the public-good features of bank money were gradually perfected under financial regulation and government guarantees. The success of China’s digital payment models, such as WeChat Pay and Alipay, hinges on combining market-driven operations with effective oversight to preserve the payment channel’s public-good characteristics. The general pattern of “market innovation first, regulation follows” in finance should apply to stablecoins as well.
Second, from the perspective of international currency competition, the United States is the main beneficiary of the stablecoin mechanism. As private money provided by narrow banks, USD stablecoins benefit from the dollar’s status as an international reserve currency and its incumbency in financial markets. The expansion of USD stablecoins extends the dollar’s reach as a reserve currency, and its network effects and regulatory arbitrage could in turn reinforce the dollar’s international standing. For other non-U.S. economies, facing the incumbent advantage of the dollar in market competition, developing local currency stablecoins to counter USD stablecoins is not necessarily optimal. This is not only because other countries lack comparative advantage in finance but also because doing so may introduce new complexities and risks—such as undermining monetary management and capital account controls. This may explain why the ECB emphasizes developing a digital euro (a central bank digital currency) to counter USD stablecoins.
Of course, stablecoins represent an emerging payment technology and model, which could yield positive externalities that are not yet fully visible—so outright rejection is also not optimal.