The Rise of Stablecoins: A Win-Win Scenario for the United States and Developing Nations
The use of stablecoins skyrocketed after US President Donald Trump signed the GENIUS Act earlier this year. This turn of events seemed to spur European banks into action, pushing them to delve into the realm of their blockchain counterparts by producing their own version of stablecoins.
Long envying the widespread influence and robustness of the US dollar as an economic pillar, they observed the surge of dollar-backed, privately-issued stablecoins in anticipation. For the United States, this boom in stablecoins offers an avenue to fortify the dominance of its currency globally, while promoting wider access to financial resources in developing countries.
What Are the Benefits of Digital Dollars?
These digital versions of the US dollar offer numerous advantages, especially for smaller companies that grapple with traditional banking procedures. For one, they can curb fees and shorten settlement cycles. Both aspects present a newfound capacity to counteract local inflation, besides broadening the availability of trading and financial platforms.
With the market cap of stablecoins burgeoning and transactions exceeding a whopping $265 billion, it primarily rides on the back of the dollar. Given that every dollar stablecoin necessitates the support of safe assets for leverage, stablecoin issuers have to hold onto vast reserves of US dollars and Treasury bills. This change in treasury ownership from bank deposits presents an enhanced scope for potential commerce.
What Did Experts Say?
As noted by Federal Reserve Governor Christopher Waller, the more the use of stablecoins increases, the higher the demand for dollars and US debt, which intern strengthens the dollar as a reserve currency. Similarly, Secretary Scott Bessent acknowledged the ability of stablecoins in maintaining the worldwide dominance of the US dollar.
Stablecoins and Developing Countries
In many developing countries, local currencies are subject to volatile fluctuations while grappling with high inflation rates and unreliable banking systems. People often look to the US dollar as a solution, a phenomenon termed as ‘dollarization’. Earlier, securing dollars meant dealing with physical cash or expensive wire transfers. However, stablecoins are changing the game and making dollars easily accessible to anyone with a cell phone. This has lead to dramatic implications on financial inclusion.
Despite approximately 1.4 billion adults worldwide lacking a bank account, stablecoins enable users to save in a stable currency and transact globally without needing one. This sidesteps traditional hindrances such as ID checks or the need for physical bank branch access. For instance, in Sub-Saharan Africa, amidst currency instability, dollar stablecoins have become integral for payments, savings, and commerce.
Stablecoins Facilitate Commerce and Counter China’s Influence
Stablecoins not only help developing countries counter the influence of major players like China that offer loans under unrealistic terms but also holds potential to tokenize sovereign debt. Several Governments from Kenya to Brazil are considering tokenized bonds and Treasury bills that can be easily purchased and traded digitally. As a result, many believe that embracing digital dollars could lead to a more democratic and resilient global financial system.
The Limited Success of Central Bank Digital Currencies
Although dozens of central banks are developing central bank digital currencies (CBDCs) as state-controlled alternatives to private stablecoins, their success has been limited. Evidence suggests stablecoins gain more traction by meeting real user needs, countering the downward trend that usually follows when central bankers promote CBDC plans. Research has also shown that adopting CBDCs doesn’t affect macroeconomic outcomes such as GDP per capita or inflation but can have negative effects on financial well-being.
Conclusion
In conclusion, encouraging developing countries to use dollar-backed stablecoins provides both the United States with a tool to expand the influence of the dollar and developing nations with greater access to a stable currency, new investment pathways, lower transaction costs, and potential escape routes from unfavourable creditors.
By fully embracing dollar stablecoins, America can help stimulate growth in emerging economies while reinforcing its own economic might, even taking a step further to the contest for hearts, minds, and wallets around the world through the power of stable currency.
This article was written by Christos A. Makridis, an Associate Research Professor at Arizona State University and Visiting Fellow at the Heritage Foundation. Please note that this article purely presents general information and shouldn’t be considered as legal or investment advice.
