Opinion: Christos A. Makridis, Associate Research Professor, Arizona State University, Visiting Scholar, Heritage Foundation
Stablecoins really gained momentum when US President Donald Trump signed the GENIUS Act earlier this year. And now European banks are getting in on the action by issuing their own stablecoins.
Their envy of the dominance of the U.S. dollar, a long-standing pillar of American economic strength, is understandable. In the wake of the GENIUS Act, dollar-backed privately issued stablecoins have surged in popularity, presenting a strategic opportunity for the United States.
By creating an enabling environment for stablecoins and operating under the umbrella of U.S. banking infrastructure, the United States can strengthen the dollar’s global dominance while democratizing access to finance abroad, especially in developing countries.
These “digital dollars” have many benefits. It can reduce fees, shorten payment cycles, combat local inflation, and expand access to trade and finance for small and medium-sized businesses struggling with correspondent banking.
Stablecoin price rise
The market capitalization of stablecoins has skyrocketed, with transaction value exceeding $265 billion. Almost all of its value depends on dollars. Since each dollar stablecoin is backed by a safe asset, stablecoin issuers must maintain large reserves of US dollars and Treasury bills. Demand for stablecoin reserves transfers ownership of Treasury bills from bank deposits and money market funds to issuers. The more this infrastructure facilitates commerce, the greater the ripple effects.
Federal Reserve President Christopher Waller said that expanding the use of stablecoins means increased demand for dollars and U.S. Treasuries, so if regulators “allow them to be issued, it will only strengthen the dollar as a reserve currency.” Commissioner Scott Bessent was even more blunt: “We’re going to keep America going.” [dollar] It is the dominant reserve currency in the world and uses stablecoins for that purpose. ”
Stablecoins and developing countries
For developing countries, integrating with the dollar via stablecoins will enable much-needed economic activity. Many of these countries suffer from unstable currencies, high inflation, and patchy banking systems. People often take refuge in the dollar, a phenomenon economists call “dollarization,” but until now that has meant either physical cash or expensive wire transfers.
Stablecoins change that by making dollars accessible to anyone with a mobile phone. Instead of waiting at banks and paying high exchange fees, farmers and shopkeepers can instantly deposit digital dollars into their smartphone wallets. Stablecoins make the world’s most sought-after asset, the US dollar, available on-demand around the world.
This has significant implications for financial inclusion. Approximately 1.4 billion adults around the world remain unbanked, a significant proportion of whom live in Africa and Asia. Stablecoins allow users to store in a stable currency and transact around the world without a bank account, bypassing traditional barriers such as ID checks and branch access.
Financial inclusion through stablecoins
For example, in sub-Saharan Africa, dollar stablecoins have become an essential tool for payments, savings, and commerce amid currency instability. Currently, over 40% of all cryptocurrency trading volume in Africa is in stablecoins. Users are even willing to pay a premium for stablecoins. Businesses and individuals in emerging markets may pay more than 5% of the face value just to obtain a digital dollar. This points to the dire need for a reliable store of value.
Importantly, stablecoins also facilitate commerce. Consider the example of remittances, which are the lifeblood of many developing countries. Africans abroad sent $54 billion home in 2023, but traditional channels charge senders an average of nearly 8% in fees. Stablecoins can reduce these costs.
In one pilot in Kenya, using stablecoins for cross-border micropayments reduced fees from 28.8% to just 2%, allowing gig workers to keep more of their income. Global consultants estimate that if stablecoins replaced wire transfers, more than $12 billion a year could be saved in transfer fees. The funds go directly to local households and consumption.
Stablecoin-based lending and decentralized finance can help bridge the credit gap where local banks perceive the risks to be too high or the returns to be too low to lend, playing a key role in fostering entrepreneurship and growth for small and medium-sized businesses in Africa.
Stablecoins and their superpowers
The proliferation of stablecoins in developing countries could also counter the influence of companies like China, which have spent years lending to poor countries on harsh terms. Dozens of countries are left with debts that are difficult to repay due to Chinese government loans abroad as part of the Belt and Road initiative. In extreme cases, defaulting countries have been forced to relinquish strategic assets such as ports and power plants to Chinese control.
This “debt trap diplomacy” works when a nation lacks alternative financing options.
With broader acceptance of dollar stablecoins and digital finance, developing countries can raise capital in new ways and free themselves from such predatory arrangements.
Another promising avenue is the tokenization of sovereign debt. Rather than relying solely on large foreign creditors, governments can issue bonds in small amounts on blockchain platforms, making it easier for local residents and diaspora investors to participate.
Related: Visa launches stablecoin support on four blockchains
Governments from Kenya to Brazil are already considering tokenized bonds and Treasury bills that can be purchased and traded via digital wallets. Such decentralized financing could help countries refinance or buy back expensive foreign loans, effectively crowdfunding their way out of China’s shadow. Every dollar raised from diaspora bonds and global crypto investors is a dollar that does not have to be borrowed from the Chinese government on strict terms.
CBDC in the corner
Central banks are also aware of these opportunities. Dozens of central banks are developing central bank digital currencies (CBDCs) as state-controlled alternatives to private stablecoins. Proponents argue that government-issued digital currencies can increase financial inclusion and modernize payments, but early evidence is not overwhelming.
One of the first retail CBDCs, Nigeria’s eNaira, was a huge failure. 98% of Nigerians who opened an eNaira wallet stopped using it by the end of 2023. Meanwhile, Nigerians continue to flock to dollar-backed stablecoins as a hedge against the naira’s collapse. This story is repeated elsewhere. While enthusiasm for CBDCs often comes from the top down, stablecoins are popularized from the bottom up by meeting the needs of real users. Even China has had limited success in getting other countries to use it, especially when the dollar stablecoin already has a significant head start globally.
Academic research suggests that stablecoin activity declines when central bankers push forward with CBDC plans, providing evidence that rhetoric alone can siphon momentum from the private sector. That may be a boon for competition-wary officials, but it could deprive consumers of better service.
Furthermore, the study compared countries with and without CBDC, both before and after, and found no negative impact on macroeconomic outcomes such as GDP per capita or inflation, or on fiscal health. In other words, while CBDCs have yet to deliver breakthrough improvements in financial access and efficiency, stablecoins already do.
Encouraging developing countries to use dollar-backed stablecoins is a win-win proposition, functioning similarly to the printed dollar following the hegemony of gold. For the United States, that means expanding the dollar’s influence, strengthening its position as a reserve currency in the digital age and countering rivals pushing for alternative areas of currency management.
For developing countries, it means greater access to stable currencies, new channels for investment, lower transaction costs, and refuge from powerful creditors. In a tense geo-economic climate, a digital dollar could become the linchpin of a more democratic and resilient global financial system.
The United States is taking advantage of this opportunity. By championing the dollar stablecoin and the open financial network it operates, the United States can unlock growth in emerging markets while strengthening its own economic power.
In the battle for hearts, minds, and wallets around the world, a slightly more stable currency can be a powerful force.
Commenter: Christos A. Makridis, Associate Research Professor at Arizona State University and Visiting Scholar at the Heritage Foundation.
This article is for general informational purposes only and is not intended to be, and should not be taken as, legal or investment advice. The views, ideas, and opinions expressed herein are those of the author alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.