The Rise and Redemption of Stablecoins

From panic over Libra to a possible solution to the global financial cycle

The future of money is arriving faster than many observers expected. Just last month, dollar-backed stablecoins—crypto assets pegged one-to-one with safe dollar assets—were officially brought inside the U.S. federal regulatory perimeter when President Donald Trump signed the GENIUS Act into law on July 18, 2025. The legislation passed with strong bipartisan support: 68–30 in the Senate, 308–122 in the House. Among other things, the law requires stablecoins to be fully backed by high-quality liquid assets, prohibits them from paying interest, and clarifies that payment stablecoins are not securities or commodities under federal law.

To better understand this development, I sat down with Rashad Ahmed for this week’s Macro Musings episode. We discussed the political momentum behind the GENIUS Act, the macroeconomic implications of stablecoins, and the effect these instruments are already having on Treasury markets. Rashad is uniquely positioned to speak on these issues: he previously served as a financial economist at both the U.S. Treasury and the Office of the Comptroller of the Currency, and he now works at the newly launched Andersen Institute. He has emerged as a leading thinker on stablecoins, crypto spillovers, and the evolving financial architecture surrounding digital assets.

The stakes for dollar-based stablecoins are enormous. Institutions like Citibank, Standard Chartered, and the U.S. Treasury Department project that the stablecoin market could grow from its current value of about $250 billion to between $2 and $4 trillion in size by the end of the decade. This growth is expected to be global, and to the extent that it generates net new demand for dollar assets, it would expand the reach of the dollar. In this sense, stablecoin growth could serve as a boon to dollar dominance.

Treasury Secretary Scott Bessent has framed stablecoin growth as a strategic opportunity to “buttress the dollar’s status as the global reserve currency,” calling the GENIUS Act a “seminal moment for digital assets and dollar supremacy.” Other officials, such as Fed Governor Christopher Waller, have highlighted the potential for stablecoins to boost competition and improve the efficiency of the payments system. Here is Governor Waller making that case in a speech at the Dallas Fed in July:

Not everyone is thrilled about the rise of dollar-based stablecoins. European officials are deeply worried about the prospect of these assets becoming a widely used form of money in Europe. Their concern is not just about payments, it is about monetary sovereignty. If euro-area residents start transacting in U.S. dollar stablecoins, it could erode the European Central Bank’s (ECB) control over the monetary system and tether European financial infrastructure more tightly to the U.S. dollar.

Other observers, like the Bank for International Settlements (BIS), are also worried about the monetary sovereignty implications of stablecoins, but focus more on what they sees as financial stability risks. Specifically, the BIS is concerned that stablecoins are inherently procyclical and prone to runs in times of market stress. The BIS fears that stablecoins could amplify financial instability.

I will explore both of these critiques in the next two sections. My view is that the first concern is, in large part, a policy choice being made by European authorities. The second concern, while understandable, overlooks an important possibility: that widespread use of dollar-based stablecoins may actually soften the global financial cycle by reducing currency mismatch on private-sector balance sheets.

Shaking in their Boots: the Feared Arrival of Dollar-Based Stablecoins

The European fear of dollar-based stablecoins is palpable. ECB officials, in particular, have been sounding the alarm bells. Phillip Lane, member of the ECB’s Executive Board and its chief economist, had this to say:

[D]ollar stablecoins could also gain a foothold in domestic transactions in the euro area, whereby the domestic payments system becomes directly or indirectly anchored by the dollar rather than the euro… A growing prevalence of digital dollarisation would undermine monetary sovereignty by compromising the ability to control the unit of account within its jurisdiction… as the share of transactions settled in the domestic currency decreases, the capacity of the central bank to implement effective monetary policy and maintain price stability is significantly impaired.

For Lane, the issue is more than just an economic one:

For the euro area, the erosion of monetary sovereignty would also have a historic symbolic meaning. Such an erosion would affect the euro as a symbol of European identity and the perceived cohesion of the entire monetary system.

Another ECB official, Jürgen Schaaf, notes there are also geoeconomic implications to dollar-based stablecoins in Europe:

Should US dollar stablecoins become widely used in the euro area – whether for payments, savings or settlement – the ECB’s control over monetary conditions could be weakened… Such dominance of the US dollar would provide the United States with strategic and economic advantages, allowing it to finance its debt more cheaply while exerting global influence. For Europe, this would mean higher financing costs relative to the United States, reduced monetary policy autonomy and geopolitical dependency.

The US Administration… goal is twofold: to protect the US dollar’s global dominance by expanding its use on digital platforms worldwide; and to reduce borrowing costs by increasing demand for US Treasuries through stablecoin reserve holdings.

ECB President Christine Lagarde also expressed concerns about dollar-based stablecoins to the European Parliament and suggested that the EU seek “globally aligned regulations for stablecoins.” Her main response, however, to dollar-based sttablecoins is to usher in an euro-based CBDC:

[A]ccelerating progress towards a digital euro is a strategic priority. Beyond addressing some of the risks posed by stablecoins, a digital euro would help safeguard Europe’s bank-based financial and monetary system.

Phillip Lane agrees:

The digital euro is also an effective tool to limit the dominance of foreign digital currencies, including the monetary sovereignty risks created by widely-adopted foreign-currency stablecoins.

As striking as these warnings may be, what I learned from my conversation with Luis Garicano and from his Hoover Conference presentation (video here) is that the potential for a dollar-based stablecoin takeover of Europe is largely a policy choice. Yes, U.S. innovation and dollar hegemony give dollar-based stablecoins a head start. But European policy choices have left the continent ill-prepared for the digital currency era.

First, the EU has not made it easy to launch euro-denominated stablecoins. The MiCA regulation, while well-intentioned, imposes significant compliance burdens that are more restrictive than their U.S. counterparts and have, so far, discouraged innovation in euro-based tokens. As a result, over 99% of stablecoins are dollar-denominated.

Second, the ECB has prioritized the development of a CBDC. But here, too, policy design has hamstrung potential. Out of concern for disrupting the banking industry, the ECB has intentionally limited the functionality and scale of the digital euro. It cannot pay interest. Holding limits (e.g., €500–€3,000) are proposed. Merchants can process it but cannot retain balances. As Garicano put it, the digital euro has been “designed to be weak.”

In short, the region has over regulated euro-based stablecoins, underpowered the CBDC alternative, and in doing so, left the door wide open for dollar-based stablecoins to dominate the European payments landscape. These are all policy choices. And they are driven by a desire to protect the domestic banking sector.

Enhancing Financial Stability Through Stablecoins?

The second group that is worried about the growth of dollar-based stablecoins are those observers concerned about their financial stability implications. The Bank for International Settlements (BIS) is a good example. In its 2025 Annual Economic Report, the BIS argued that stablecoins pose financial stability risks through procyclical flows, run-prone behavior, and fire-sale dynamics. That is, if dollar-based stablecoins are widely adopted across the world, they could be destabilizing duirng economic crises.

Their analysis, however, overlooks an important point: the widespread adoption of dollar-based stablecoins could actually help dampen the global financial cycle. This is because stablecoins have the potential to reduce currency mismatch on private-sector balance sheets, especially in emerging markets.

A key reason for the global financial cycle, as outlined by Hélène Rey, is that many firms and financial institutions in developing countries borrow heavily in U.S. dollars while their revenues, assets, and cash flows are denominated in local currency. When the Fed tightens policy, the dollar appreciates, global financial conditions tighten, and these firms suddenly find themselves squeezed by rising dollar debt burdens and falling asset values. This balance sheet shock forces cutbacks and retrenchment. This is one of the key channels through which U.S. monetary policy spills over globally.

But what Rashad Ahmed noted in our discussion is that if households and firms begin holding dollar assets via stablecoins—in addition to borrowing in dollars—they begin to build a natural hedge on their balance sheets. A stronger dollar no longer only increases liabilities; it also raises the value of their dollar assets, helping to offset the shock. In effect, stablecoins can act as a decentralized balance sheet stabilizer, muting one of the very mechanisms that drives global financial volatility.

When combined with the likelihood that the Federal Reserve will act as a backstop to dollar-based stablecoins in a future crisis, it becomes even harder to argue that dollar-based stablecoins are inherently destabilizing. In fact, they may become one of the very tools that softens the peaks and troughs of the global financial cycle.

This stabilizing role is often overlooked by critics of stablecoins. Below, Rashad Ahmed explains this possibility:

Conclusion: Coming Full Circle on Stablecoins

The irony of the stablecoin story is hard to miss. When Facebook launched its stablecoin, Libra, in 2019, it triggered a global panic among central banks. Fears of digital currency disruption pushed many to accelerate CBDC efforts—and inspired Mark Carney to propose a Synthetic Hegemonic Currency (SHC) to rival the dollar and reduce global financial volatility.

While dozens of central banks launched CBDC pilots, most remained modest in scope and domestically constrained. Libra, meanwhile, collapsed under regulatory pressure, and Carney’s SHC remained a thought experiment. But now, in 2025, dollar-based stablecoins have emerged as the dominant form of private digital money—regulated, growing, and deeply embedded in markets—and are likely to outpace any CBDC in terms of scale, adoption, and global impact.

Ironically, these are the very instruments Carney and others sought to contain. And yet, as Rashad Ahmed has argued, they may be doing exactly what the SHC was meant to do: moderate the global financial cycle by letting firms and households hedge dollar liabilities with dollar-denominated stablecoin assets.

It turns out that what had central bankers shaking in their boots may end up being what steadies the ground beneath them.