Author: Nic Carter, Coinmetrics.io Source: medium Translation: Shan Ouba, Golden Finance

At this moment, stablecoins have proven to be a huge success - arguably the first "killer app" in the cryptocurrency space. The data is emerging in large quantities and becoming increasingly clear. As I have said before, stablecoins have "dollarized" the crypto market, and they are "crypto-dollarizing" many economies (especially emerging markets).

There is an important discussion about the long-term prospects of native tokens (such as Bitcoin, Solana or Ethereum) in a world where almost all on-chain transactions are settled using stablecoins, but this question is left to crypto enthusiasts to solve.

What I am interested in here is what the post-stablecoin era will look like.

In my opinion, stablecoins are becoming a truly dominant global settlement infrastructure, and are increasingly integrated with the existing financial system.

As I have laid out, I believe that stablecoins are the new “Eurodollars” and that once they reach critical mass (perhaps in the $300-500 billion range, compared to the current total of $160 billion in circulation), the Fed and other major central banks will be forced to include them in their financial toolkits rather than rudely ignoring them as they do today. This would be similar to the transformation that the Eurodollar underwent in the early 70s.

So I want to elevate the discussion from its current state, which is largely focused on whether it is prudent to create stablecoins, whether they can maintain their pegs over the long term (see, for example, this paper from the BIS), and whether they can be accepted as true money substitutes (see, for example, this study by Gorton and Zhang), to consider a world where stablecoins continue to thrive and eventually become ubiquitous.

Some former and current policymakers have begun to take this stance, considering not “should stablecoins exist?” but “assuming they do exist, what happens next?”. It is these thinkers that I want to focus on — specifically, Federal Reserve Governor Chris Waller, former Commodity Futures Trading Commission Chairman Timothy Massad, and former Office of the Comptroller of the Currency Brian Brooks. However, to get a full picture of the scope of the debate, I’ll start with the more skeptical views espoused by Rohan Grey and academics Gorton and Zhang.

1. Gray Area: Stablecoins Do More Harm Than Good Because They’re Equivalent to Unregulated Bank Deposits

I initially wanted to start with Senator Warren to represent the most dogmatic anti-stablecoin views, but since Warren is generally opposed to most things crypto, I don’t think she’s the most representative voice. Her anti-stablecoin stance isn’t particularly compelling within her broader crypto-contrarian views, so she’s not necessarily the best example of a critic.

Instead, I chose Rohan Gray to represent what I consider to be an internally consistent anti-stablecoin view. I find Gray’s views on stablecoins interesting because they seem principled, but are actually contrary to mine. Gray is a legal scholar who notably helped craft the STABLE Act introduced by Rep. Tlaib in 2020. The STABLE Act (which failed) was arguably a reaction to Facebook’s doomed Libra ambitions. It would have required stablecoin issuers to obtain a banking charter, required them to be supervised by the Federal Reserve and the FDIC, and generally behave like banks. Arguably, regulating stablecoin issuers in this way would effectively destroy the stablecoin industry.

From what I can tell, when crypto people pointed out that this would go beyond stablecoins and effectively condemn fintech companies like Paypal to bank regulation (since stablecoins and Paypal dollars are essentially the same thing), Gray and those in his camp bit the bullet and said, “OK.” My understanding of his position is that fintech and stablecoins and other near-money, non-bank deposit instruments should actually be brought into the more heavily regulated banking system. Gray has repeatedly described the issuance of stablecoins as “fake.”

Interestingly, Gray supports personal financial privacy but argues that private sector issuers are unlikely to offer that privacy; or, even if they do offer adequate privacy, the fact that this occurs outside the guardrails of the regulated banking system makes it unacceptable in terms of cost (because, in his view, stablecoin issuers will eventually need a bailout). If unregistered deposit taking will eventually be bailed out, and taxpayers will certainly end up on the hook, then why not regulate them as banks in the first place?

I will say that I understand the moral logic here. If unregulated deposit taking and issuance of dollar liabilities eventually leads to a rise in the issuer risk curve and asset-liability mismatches (like Terra’s UST), and if stablecoins reach systemic scale, then there could eventually be a shadow banking crisis that would require government intervention. The “agreement” that banks make with the government as a public-private partnership is that they are backed by the FDIC and other government liquidity facilities and must be regulated and supervised, in exchange for being allowed to engage in the lending business with the savings of ordinary citizens. Since it is politically unacceptable to allow household savings to evaporate, the government has become involved in regulating banks and providing liquidity support. Some argue that stablecoins and other unregulated issuers are taking a gamble with the deposits of individuals and companies without submitting to the other side of the transaction (regulation and deposit insurance). So they are essentially getting something for nothing.

My reaction to this is four-fold. First, stablecoin issuers appear to be getting more risk-averse over time. Tether used to hold a variety of unusual assets on its balance sheet, but now they mostly hold short-term Treasuries. Circle got into trouble with SVB and has significantly reduced its bank cash exposure. Newer stablecoins appear to prioritize bankruptcy remoteness and structures that give holders special privileges in liquidation. Paypal’s PYUSD is a standout among them, operating in a bankruptcy remote model under a New York trust license. In fact, PYUSD is so impenetrable that it’s even safer than traditional user funds held through Paypal. Stablecoins like PYUSD are regulated by a complex set of national regulators; it’s a stretch to view them as opaque shadow banks.

In addition, there are now a number of ratings firms—including crypto-native ones like Bluechip, as well as Standard & Poor’s and Moody’s—that help the public understand the risks of stablecoins. Overall, my assessment is that the stablecoin space has responded very well to the failure of UST and has generally become healthier over the past two years. It is not clear to me how much additional regulation is needed. The stablecoin regulation we are seeing globally seems to acknowledge this, rather than bringing stablecoins under the purview of inappropriate banking regulation.

Third, deposits and loans appear to be decoupling. Businesses and households are increasingly holding Treasuries directly because they are tempted by higher yields that are not passed through savings accounts. Banks are increasingly not lending out customer deposits, but instead parking cash at the Fed (sometimes outsourcing the capital component of the loans to private lenders, as Matt Levine points out). As a result, “narrow banking” is becoming more popular. Stablecoins and money market funds are actually a form of narrow banking. This may indeed reduce the importance of commercial banks as financial intermediaries, but this is not just a problem for stablecoins. It is a systemic change that financial regulators will ultimately have to deal with.

Finally, on privacy, I think stablecoins do offer a good blend of individual privacy and transparency for illegal actors. Because blockchain analysis is quite difficult, most on-chain deanonymization efforts in practice tend to focus on major financial crimes. Gray's preferred solution is a government-operated digital cash product that offers privacy similar to physical cash (at least for small denominations). But to me, governments don't seem to be interested in financial privacy at all (quite the opposite if you follow the Samurai or Tornado Cash cases), so I find it unlikely that the state would be a reliable sponsor of a private digital cash system. Stablecoins, in my opinion, are a reasonable middle ground. Big bad guys are often found and have their funds confiscated,

2. Gary Gorton, Jeffery Zhang's view: Stablecoins are untenable in theory and don't work in practice

Following Gray's principled rejection of stablecoins, let's look at two economists who simply refuse to include stablecoins in their world models. They are Gary Gorton and Jeffery Zhang, who co-authored the infamous 2021 paper, “Taming Wildcat Stablecoins.” Gorton is an economics professor at Yale, and Zhang, a former Federal Reserve lawyer who is now a law professor at the University of Michigan, is an important paper because it represents a deeply held belief: that stablecoins represent a return to America’s “free banking” era, which was rife with crises and bank failures. As a result, stablecoins themselves may be an inferior form of money. Nobel Prize-winning economist Paul Krugman recommended the paper, and the same argument has been echoed by St. Louis Fed President James Bullard and Senator Elizabeth Warren. Central bankers simply love to invoke the pre-war “free banking” era to attack the stablecoin industry.

The problem is: the US free banking era of the 1830s to 1860s wasn’t “real” free banking (and therefore isn’t that useful as an analogy), and stablecoins aren’t really that similar to free banking.

The only problem is: the US free banking episode of the 1830s to 1860s wasn’t “real” free banking (and therefore isn’t that useful as an analogy), and stablecoins aren’t really that similar to free banking.

As I wrote in my Coindesk article at the time, the US version of “free banking” wasn’t exactly a representative episode. Free banking is an environment where banks operate without central bank oversight and where charters are relatively open. Scotland was the poster child, and that system was stable for over 100 years.

The events in the antebellum US didn’t constitute true laissez-faire banking.

During this period, banks were forced to hold risky state government bonds and were restricted from engaging in “branching” — meaning they could not set up branches across the country. This prevented them from geographically diversifying their depositor base and from freely choosing their asset mix. No wonder bank failures were common.

Bank failures were common during the US free banking period, but this was because the banks themselves were made weak by regulation that prohibited them from diversifying their deposits and forced them to hold low-quality assets. As George Selgin has pointed out throughout his career, other forms of truly free banking, such as that found in Scotland at the time, were indeed unrestricted and more successful and stable. In fact, properly free or “laissez-faire” banking has a long history of creating stable, crisis-free financial systems. The US events that US policymakers focus on are simply not a good example of this phenomenon.

Furthermore, it is misleading to compare stablecoins to banks because they do not engage in maturity transformation or risky lending. Most often, they hold short-term U.S. Treasuries or overnight repurchase agreements, which are highly liquid, short-term assets. Stablecoins, while subject to occasional redemptions, distribute liabilities to a diverse user base around the world and are therefore less susceptible to severe liquidity crises, such as those faced by small regional banks (a problem in the U.S. “free banking” system).

Since they find that stablecoins resemble bank-issued paper money, but sometimes trade at a discount to par, Gorton and Zhang assert in their paper that stablecoins do not satisfy the “NQA” (no questions asked) principle. NQA “requires that the money be accepted in a transaction without due diligence as to its value.” For them, MoE is downstream of NQA. As they put it, “one cannot simply assume that an object will be used as a medium of exchange. To do so, the object must satisfy the NQA principle.” Therefore, they conclude that stablecoins are a poor MoE because they argue that users can never fully trust that a particular stablecoin can be exchanged or redeemed at par.

This is an interesting example of armchair reasoning. While stablecoins have historically faced crises, if you asked stablecoin users today if they looked at Tether or Circle’s balance sheet before every transaction, they would laugh at you. It is empirically observable today that stablecoins are being used as dollar substitutes not only for crypto purposes but also for general digital dollar activity by tens or hundreds of millions of people around the world. The vast majority of the time, major stablecoins trade at par on highly liquid markets, both on DeFi and on centralized exchanges around the world. Deviations from the peg are quickly eliminated by arbitrage.

Also, G&Z’s dogmatism regarding the NQA is questionable. Few doubt the quality of commercial bank money, and it is often viewed as functionally identical to central bank money (cash). However, the quality of deposits held by certain banks above the FDIC’s $250,000 limit did come into question during the 2023 banking crisis. There are certainly questions being asked about Silvergate, Signature, SVB, and others. Does this mean that commercial bank money is forever doomed to be considered unreliable? No, it just means that users need to factor the possibility of a bank run (and the likely government response) into their risk models. Similarly, the depegging of the UDSC due to the questioning of its fractional reserves in the SVB in March 2023 does not doom it forever.

As we often see from cryptocurrency critics, G&Z argue that because a system doesn’t work in (their) theory, it doesn’t work in practice. Yet in practice, stablecoins are thriving and growing, and becoming more and more integrated into the real economy. Clearly, they are increasingly being viewed as a form of money, and it’s time for central bankers to acknowledge that — or change their definition of money.

3. Massadism: We Should Engage with Stablecoins Because They Threaten Sanctions Enforcement

Recently, the Brookings Institution published an article by Timothy Massad titled “Stablecoins and National Security: Learning Lessons from the Eurodollar.” I encourage you to read it in its entirety.

Massad’s article is one of the most compelling discussions of stablecoins to date, not only because of its substance but also because of its author. Massad, a Democrat who served as Chairman of the Commodity Futures Trading Commission under Obama, is not a supporter of cryptocurrencies. Yet he betrays a deep and realistic understanding of the stablecoin industry. His attitude is not to ignore or write off stablecoins as an alternative form of money invented by their crypto brethren, but to acknowledge their success and consider how their emergence affects U.S. interests. (Compare him to certain progressives who just want stablecoins to cease to exist, or to central bankers who think stablecoins will be easily replaced by CBDCs.) Massad’s article focuses on the realities of stablecoins today, and sees them as the successor to the Eurodollar. This is a comparison also made by the likes of Izabella Kamiska and myself, belatedly.

Masad makes a series of important observations. He points out the similarities between the emergence of the eurodollar and stablecoins:

• They represent dollar liabilities issued by entities outside the banking system (primarily but not limited to stablecoins)

• They both arose out of concerns about the use of U.S. banks by entities looking to reduce their onshore risk (in the case of the eurodollar, Cold War adversaries, and in the case of stablecoins, cryptocurrency traders who have been systemically unbanked)

• They were both initially ignored by policymakers and, in the case of the eurodollar, ultimately accepted once they became systemically important

• A large part of their growth stemmed from the opportunity to offer and earn higher yields than onshore

• They both solidified the international role of the dollar and provided strategic leverage to U.S. policymakers (although this is less certain for today’s stablecoins)

Massad points out an important distinction between the two systems. He notes that Eurodollars ultimately still need to clear transactions through U.S. banks, which establishes a control relationship that can be used for strategic purposes. His main concern about stablecoins is their use for illicit finance, and specifically their potential to undermine our established sanctions regime. Massad acknowledges that known illicit stablecoin flows are still relatively small, but he worries about their future, when they become more widely used. Unlike some of his Democratic colleagues, Massad rejects the “let crypto burn” view held by many post-FTX. He says that “cryptocurrencies are not going away” and believes that stablecoins “arguably have greater potential to become a widely accepted medium of exchange for international payments than CBDCs.” As such, he urges Congress to seriously consider stablecoin regulation, with the understanding that the United States would have greater influence if more stablecoins were issued by responsible, domestic companies. He understands that U.S. cryptocurrency regulation must be placed within a global framework of competitive regulators. As he puts it: “Ignoring the market as if it is small and can be contained can be risky, especially as other jurisdictions begin to allow for wider use of stablecoins.” This view does not stem from any fondness for cryptocurrencies, but rather a serious recognition of their success and likely trajectory. I expect Massad’s views to become increasingly popular with members of his party as they realize that cryptocurrencies did not die after a 22-year crash, and that stablecoins are indeed thriving. Today, nearly every stablecoin metric (except supply) is at an all-time high. The empirical reality of stablecoins’ continued success, coupled with active regulation elsewhere, means that the United States cannot choose to do nothing. Massad ends his article by pondering several ways that stablecoins could be made to comply with sanctions enforcement, though he does not identify any single policy or technology. But it is encouraging that Massad does not take the drastic approach of fellow Democrat Elizabeth Warren. On stablecoin freezing and seizure, he suggests “a balance between having adequate tools to detect and prevent illicit activity on the one hand, and preventing unreasonable searches and seizures and protecting privacy on the other.”

While Massad and I almost certainly disagree on the merits of the current U.S. sanctions regime and the Bank Secrecy Act, his paper is a great example of pragmatic engagement with the stablecoin space. I hope he can make that case to more of his Democratic colleagues.

4. Wallerism: Crypto via Stablecoins Benefits the Dollar

Moving to the Republican side, but remaining within the establishment, is Fed Governor Chris Waller.

Waller’s comments in a February speech titled “The International Role of the Dollar” caught my eye. The speech was meant to allay fears that the dollar was losing its status. Like Massad, he is interested in maintaining the soft power that comes with the ability to sanction, but he also emphasizes other benefits of the dollar’s ​​global nature, such as lower borrowing costs for governments and individuals and insulating the U.S. economy from macroeconomic shocks.

Although his comments on cryptocurrencies were brief, they caught my attention. In his speech, he said:

It is often speculated that cryptocurrencies like Bitcoin could replace the U.S. dollar as the world’s reserve currency. But most decentralized finance transactions involve transactions using stablecoins, whose value is pegged one-to-one to the U.S. dollar. About 99% of the stablecoin market capitalization is pegged to the U.S. dollar, meaning that crypto assets are actually traded in dollars. Therefore, any expansion of transactions in the DeFi world will likely only strengthen the dominance of the U.S. dollar.

On this point, Waller is absolutely right. Roughly 60-80% of all value settled on blockchains is done via stablecoins, with over 99% of stablecoins using USD as the unit of account (these stablecoins are often backed by USD assets). New blockchains are launched with native stablecoin integrations, and this is a priority for every new L1 and L2 I know of. Even Bitcoin enthusiasts are now paying attention to stablecoins after ignoring their importance for about a decade. From a data perspective, the overwhelming dollarization of the stablecoin industry has been consistent since we first pulled data in 2020. Today, that number is even higher, over 99% USD. To summarize the argument:

1. Crypto activity (whether DeFi, perp trading, or spot trading) typically utilizes stablecoins as both a MoE and core collateral type

2. 99% of stablecoins reference USD, and that number has actually been growing over time

3. Therefore, crypto is good for the USD.

As with Massad’s comments, the argument itself isn’t necessarily that interesting, it’s who’s saying it that’s interesting. In fact, anyone active in the crypto space should be aware of this line of reasoning, which is contrary to the previously popular “Bitcoin is replacing the dollar” view. But this is the first time I’ve seen someone at the Fed explicitly make this point. (As I was writing this, I found some of Waller’s more prescient comments on stablecoins from 2021 — this guy knows his stuff).

Waller is a Republican, nominated by Trump, but he’s no crank. He was confirmed by the Senate at the same time that gold standard enthusiast Judy Shelton was rejected. His approach to monetary policy seems fairly traditional, albeit somewhat dovish.

Regarding Waller’s argument, it’s worth imagining some scenarios in which it might break down. Starting with the first premise, cryptocurrencies are becoming dollarized, and I don’t see how that trend will reverse. When I first pulled the data in 2020, stablecoin settlement value had grown to around 40% of total blockchain settlement value, and I think that trend will continue. I pulled this data again in 2023 for a series of talks, and recently refreshed it again in 2024. By 2023, stablecoins will account for 80% of on-chain settled value. Keep in mind that this data is subjective and requires a lot of de-noising and spam removal, so these numbers are not exact. But the general trend is clear - while Bitcoin and Ethereum have historically been the medium of exchange in cryptocurrencies, stablecoins are gradually replacing them. This makes sense. Trading in volatile crypto assets is more complicated from an accounting perspective. Everyone who traded before 2017 remembers that Bitcoin was the unit of account for altcoin transactions, but no one does that anymore because the volatile UoA is too mentally taxing to track. If you use Bitcoin or Ethereum to buy something, you need to do tax accounting, and if the price goes up during your holding period, you have to recognize capital gains. If you want to use a volatile crypto asset as a bridge currency for remittances, for example, you will be exposed to foreign exchange risk during the transfer. These are the frictions that naturally drive people to use stablecoins. As major stablecoins such as Tether and USDC have recovered from crises and regained their pegs after one turbulence after another, they have become highly trusted in the crypto space. Newer stablecoins can even provide real-time interest from the underlying Treasury portfolio, eliminating the opportunity cost of using a stablecoin.

I can imagine that if stablecoin settlement guarantees are seriously compromised, this could undermine confidence in the stablecoin industry and drive crypto users back to choosing BTC or ETH as a medium of exchange. This could happen if the rate of stablecoin seizures increases from a few hundred to thousands or tens of thousands per year, depending on the government’s edits. If any particular stablecoin transaction has a 0.5% chance of being reversed, users might abandon them en masse in favor of the settlement guarantees of digital bearer assets like Bitcoin. Unless the stablecoin industry is completely wiped out, I don’t see the dollarization of blockchain reversing any time soon.

Waller’s second premise also seems solid. The dollar has been strengthening relative to most fiat currencies, as the U.S. economy is generally stronger than other developed countries. As China lurches into crisis and the EU shrinks its role in the world economy, a real competitor to the dollar seems to remain out of reach. From experience, it seems that no one wants a euro stablecoin. I do expect that as crypto becomes more entrenched and regulators pass protectionist legislation (such as the EU has done with its MiCA), we may see limited non-dollar stablecoins flourish. But crypto is a global market, and the overwhelming dominance of dollar stablecoins proves that when sovereign walls come down, the distribution of outcomes takes on an extreme Pareto distribution. After a decade of stablecoins and $160 billion floating around,

it seems to me that the crypto market is a natural experiment that shows that if there weren’t national-level monetary barriers, there would be far less money than there is today. As we’ve seen in Nigeria, nation-states may try to reassert their waning monetary privileges by banning stablecoins or liquidity nexus like exchanges, but this doesn’t seem to be very effective. Crypto financial infrastructure is simply too pervasive, with grey and black markets creating peer-to-peer crypto liquidity almost everywhere, even with bans. So while I think the USD share of stablecoin UoA could drop to the 90-95% range in the coming years as we see more crypto protectionism at the national level, I believe the USD will continue to dominate.

The most questionable part of Waller’s argument is actually the idea that the stables are good for the USD. In an abstract sense, they are good for the USD because they distribute USD (and USD assets like US Treasuries) in a frictionless manner to almost everyone on the planet with a smartphone. This could cause weaker fiat currencies to collapse as crypto dollarization occurs. However, they may be detrimental to the dollar system, just as they are to the set of entities that benefit from the current configuration of the dollar system. As Massad argues, stablecoins (if issued abroad through less cooperative issuers) may undermine the dollar sanctions regime of today’s dollar system. If stablecoins are able to retain their current permissive pseudonymous privacy model (most network transactions are P2P and largely unmonitored), it may be detrimental to government officials who seek to express power by creating political conditions for traders. If stablecoins are truly successful and create a high-tech form of “narrow banking”, then stablecoins may accelerate the disintermediation of commercial banks, which is detrimental to the domestic banking system. Therefore, stablecoins may well put the dollar into the hands of more people around the world, or even turn the dollar into an apex predator, allowing many weaker fiat currencies to collapse, but this may not be good for the Washington Consensus - the dollar institutions in Washington today. I will introduce more winners and losers in the stablecoin world in the last section. 5. Brian Brooks: Stablecoins Can Help Maintain the Dollar’s ​​World Reserve Status Brian Brooks should be a familiar name to almost anyone who follows cryptocurrency policy. He served as Coinbase CLO, was Trump’s Comptroller of the Currency, passed a rule prohibiting banks from engaging in “choke point”-style practices, and created a federal charter for crypto and fintech companies. He may be the most pro-crypto executive this country has ever seen. Brooks wrote an op-ed in the Wall Street Journal last year titled “Stablecoins Could Make the Dollar the World’s Reserve Currency.” Brooks’ argument is simple, and one that I agree with (and that I echo in my speeches). The dollar is the world’s reserve currency, even though its status is under threat. Trade is increasingly denominated in other currencies (especially after sanctions were imposed on Russia and the emergence of the Russia-Iran-China axis), and major holders of dollar assets, such as China and Japan, are divesting.

By contrast, stablecoins represent about $160 billion in new net dollar exposure, much of which is held by foreigners. Generally speaking, these dollar liabilities are backed by dollar assets such as short-term Treasuries or overnight repos. All else being equal, the more pressure there is to buy debt, the cheaper it is to repay, and vice versa. The United States is running historically high deficit spending and a relatively high debt-to-GDP ratio, so we need all the buyers of debt we can afford. Stablecoins are about 99% dollarized—a trend that has held true for the roughly 10 years they have been around. As such, they exist as native collateral for cryptocurrencies, and in the long run, they are the dominant form factor for global digital currencies, good for the spread of the dollar, and creating potentially large buyers of federal debt. Cryptocurrencies are increasingly synonymous with stablecoins. Historically, assets such as Bitcoin or Ethereum have been used as crypto collateral types (SoV), mediums of exchange, and even units of account. This is no longer the case. Stablecoins now dominate margin and collateral on exchanges, quote currencies on those exchanges, and account for 70-80% of all value settled on-chain (as I showed in my talk at Token2049 last year). Stablecoins have won the MOE race in the crypto space, even if the most idealistic crypto natives don’t realize it yet. Blockchain is all about the dollar. This turns a common narrative for crypto natives on its head. Cryptocurrencies – via stablecoins – don’t seem to be undermining the use of the dollar globally, but rather extending it into new digital realms. We are seeing crypto-dollarization events happening, particularly in Venezuela, Argentina, Turkey, and Nigeria. (Castle Island is currently conducting a field survey to get a more quantitative understanding of what is happening in certain high-adoption emerging markets). Stablecoins are instruments that can be held directly in a fully sovereign manner without intermediaries, and for individuals in these countries seeking dollar exposure, stablecoins appear to be more credible than dollarized bank liabilities at local banks. They are also highly liquid and can be traded on centralized exchanges, through money changers or local OTC networks. For many in the Global South, stablecoins offer a dollar liability that is far more credible than dollar deposits in banks, are more accessible than physical dollar cash, and can be easily deployed to earn interest in DeFi or U.S. Treasury rates (via an emerging crop of natively interest-bearing stablecoins). Stablecoins have global liquidity and can serve as a remittance channel or settlement medium for cross-border trade without the hassle of banks and other expensive intermediaries.

Brooks’s view stands in stark contrast to Waller, whose comments reflect a more passive view that even if cryptocurrencies succeed, it is unlikely to threaten the dollar (which, anyway, is not really threatened). In contrast, Brooks takes a more proactive stance, arguing that stablecoins should be encouraged because they can actually help save the troubled dollar.

The Brooke doctrine is the position I agree with most, but there are a few issues that bother me.

The first is the inherent assumption that the dollar as a global reserve is a desirable condition. Following Pinkett Smith and Lynn Alden, I don’t actually believe that the dollar as a global reserve currency is actually good for most Americans. In fact, I believe that dollar reserves are good for coastal elites who work in finance, people in government (and the recipients of this funding), but bad for the working class. The structural feature of the system is that the United States, as the issuer of the global reserve, must run a constant trade deficit in order to supply dollars to the world, which leads to the accumulation of US debt and the offshoring of manufacturing. (This concept is too complex to be fully treated here, but you can read Lyn Alden, BIS, or This setup leads to an accumulation of dollars (and dollar assets such as US Treasuries, US stocks, bonds, real estate, stocks, etc.) around the world, which benefits those working in the financial or those industries. At the same time, the relatively strong dollar makes US exports uncompetitive relative to our suppliers, causing our industrial sector to gradually become irrelevant, leaving a large portion of the population in dire straits.

So, while I sometimes promote the view that continued dollar dominance is generally beneficial to US interests, the fact is that we need to be clear about what interests we are specifically interested in. Sure, dollar dominance is good for US policymakers (for countries in Washington's periphery, the US's ability to continue to impose sanctions, and for individuals (like me) who work in the US financial sector (essentially globalized capital) who can spend more freely). But from what I can tell, it is not particularly good for the working class or for inequality in general.

I assume that this system will persist even if it generates discontent and populism, for the simple reason that it is extremely convenient for the U.S. government to retain oversight of the global linkages of all financial transactions, especially because it gives policymakers the ability to project power (through sanctions) without exerting power. But that may not be an incentive, especially given that our sanctions power has been significantly weakened in recent years.

So it could be argued that if the petrodollar system were rethought, more goods were denominated in other currencies, the world deglobalized, mercantilism reemerged, the U.S. industrial base was rebuilt, and we became a competitive exporter again, and if we rethought our debt-financed, consumerist economy that relies on China, the prospects for the American middle class might actually improve meaningfully. To be sure, stablecoins probably wouldn’t have much of an impact on that either way. But I always keep this possibility in mind when I think about the topic of “stablecoins promote dollar dominance (which is good)”. It may well be that dollar dominance isn’t really good for most Americans — and the negatives are no longer offset by the perceived benefits of our sanctions power, etc.

My second misgiving is simply a matter of scale. While I’ve made exactly the same case as Brooks in some of my talks (see my talk on Messari Mainnet 2023), the fact is that stablecoins are still relatively small in the grand scheme of things. At $160B in circulation, they’re still a small (but growing) buyer of debt. If they were sovereigns themselves, they’d be the 16th largest sovereign holder of U.S. debt. If they were money market mutual funds, they’d be 14th. But they’re not making progress in reducing the cost of monetizing deficits at this point. Stablecoins, at around $160b, account for just 88bps of US M1, and their holdings account for just 47bps of total U.S. government debt ($34T). Large foreign holders of US Treasuries like Japan ($1.1T) and China ($0.85T) still hold multiple times more debt instruments than all stablecoins. And there could be a new class of stablecoins that aren’t backed by US Treasuries and dollar assets. For example, the value of Ethena (the fifth largest dollar token today—they prefer “synthetic dollars” to “stablecoins”) is derived from Ethereum and Bitcoin collateral and offset by short positions. Its success may not do much for U.S. interests.

Of course, all this may change as cryptocurrency balance sheets continue to expand and stable floating rates grow as they become dominant payment systems. But for now, the notion that “stablecoins make it cheaper to monetize Treasuries” remains a relatively speculative topic.

The Significance of Stablecoins

It is important to decouple the normative from the descriptive (i.e., what should happen from what could happen). Where some of these thinkers (e.g., Gorton and Zhang) go wrong is that they focus on the “should” rather than the “is.” Stablecoins are dismissed because they shouldn’t work (according to G&Z) or because if they do work then it’s bad (according to Grey). But the plain fact is that they are working, and in my opinion, they have reached exit velocity.

It is clear to me that stablecoins are not going away. They are by far the most important application of public blockchains. What started out as a hacky solution to Bitfinex’s banking problems has become the most important development in financial technology in decades, and our best chance to create a true form of digital cash and reclaim the ground we have lost in financial privacy over the past half century.

By my estimate, stablecoins are settling around $10 trillion per year, similar to Visa’s levels (you can question whether this is an apples-to-apples comparison). Today, nearly 100 million addresses on-chain hold stablecoins. They are increasingly being integrated into major payment networks, such as those operated by Visa, Stripe, Checkout, Paypal, Worldpay, Nuvei or Moneygram. With stablecoins as a beachhead, the mythical convergence between crypto and tradfi is finally and truly happening.

While the United States continues to be hostile to stablecoins on almost all fronts, new jurisdictions are embracing them. In most cases, regulators recognize that the vast majority of stablecoins are backed by dollars and allow local issuers to issue dollar stablecoins. This growing list includes Singapore, Hong Kong, Dubai, Japan, Bermuda, and others. Some places, such as the European Union, have taken a more cautious approach and passed stablecoin regulations while aiming to limit the inflow of dollars through this channel. But what matters most to stablecoin issuers is that there are safe havens willing to provide a reasonable regulatory environment for issuers to operate. This does seem to be the case.

So, objectively speaking, it seems that stablecoins are here to stay and will likely continue to grow unchecked unless global policymakers launch a coordinated campaign to destroy them.

On the regulatory side, my synthesis of the above views is that each policymaker's view is based on their own political goals and fundamental views. Gorton and Zhang prefer the state's monopoly on money. Many of the critics listed here tend to support the use of financial infrastructure for political purposes to varying degrees. Any cash-like network, especially one that is particularly unaccountable, is therefore hostile to this agenda. Massad (who seems to be a more moderate, Obama-esque Democrat) has a more nuanced approach. He acknowledges the importance and historical significance of stablecoins, but is concerned about sanctions evasion. Brooks is a libertarian-leaning Republican, and therefore strongly supports stablecoins. Waller is a Republican-appointed Fed governor

Normally, I am sympathetic to libertarianism and a firm believer in individual liberty, the reversal of the trend toward financial regulation that began 50 years ago with the digitization of finance, and financial self-determination. I am also skeptical of the United States' ability to continue to broker financial railroads for political purposes; that status quo appears to be coming to an end (and I do not particularly lament its departure). I generally support dollarization as a policy that promotes restrictions on untrustworthy jurisdictions, and therefore see the welfare benefits of the spontaneous bottom-up dollarization of cryptocurrencies that we are seeing today.

Stablecoins disintermediate banks, remitters, and when combined with other forms of crypto-financial infrastructure like exchanges, give billions of savers around the world direct access to digital dollars that they may not have been able to access before. In each case, disintermediation means cheaper transactions. We see this on the ground directly through remittances. Settling stablecoin remittances through exchanges can significantly reduce global remittance rates, which still average 6.2% according to the World Bank, although the specifics vary by channel. For billions of people in the global south, this has significant implications.

So, to me, stablecoins — especially those that are truly cash-like (i.e., exhibit minimal embedded surveillance) — are a very powerful tool and represent a strong force for good on a global scale, particularly in countries with immature or unstable financial sectors. As issuers more actively implement “freeze and seize” policies, and law enforcement builds sophistication around blockchain analysis, the downsides of stablecoins (such as more scalable illicit flows) can be managed.

So who are stablecoins for?

As with any disruptive technology, there will be winners and losers in any transformation. Rather than broadly labeling stablecoins as “good” or “bad,” I will instead divide my views on who stablecoins are good or bad for based on stakeholders.

Stablecoins create opportunities for:

Individuals living in unstable monetary regimes: The existence of this market is well established. If you look at data from the IMF or Chainalysis, it’s clear that cryptocurrency adoption is strongly correlated with inflation, unstable monetary regimes, and past sovereign default histories. Stablecoins offer self-custodial, trusted USD liabilities outside of the banking system, which is obviously attractive to individuals in countries with unreliable currencies and banking systems like Argentina, Nigeria, and Turkey.

Sophisticated financial centers outside the U.S.: Just as the UK flourished as a hub due to the advent of the Eurodollar, certain jurisdictions have begun to view stablecoins (and cryptocurrencies more broadly) as an opportunity, especially when compared to the U.S.’s reluctance to effectively regulate the sector. We are already seeing founders and capital fleeing from the U.S. to these emerging centers. The default location for launching stablecoins today is outside the U.S.

Digital nomads: Stablecoins make savings more portable on a cross-border basis. They also serve as payroll only, especially for businesses with employees spread across the globe. It is already common for crypto-native employees to request payment in U.S. dollar stablecoins, both because of lower transaction costs and because their local currency may be unreliable.

U.S. government (from a fiscal perspective): As mentioned above, stablecoins back themselves primarily with short-term U.S. government debt. They rank 16th among sovereign debt holders and 14th among U.S. money market mutual funds. While the scale of this activity is relatively small at the moment, it is not inconceivable that stablecoins could collectively become a top three holder of Treasury bills. This would significantly improve the U.S. fiscal outlook.

Stablecoins present challenges for:

Foreign governments with unstable currencies: Stablecoins make spontaneous dollarization (like we saw historically in Ecuador in 2000) more efficient. I expect to see multiple episodes of crypto-dollarization over the next decade, with savers engaging in currency substitution in a bottom-up fashion, accelerating the debasement of weak local currencies. We have already seen cryptocurrency exchanges and stablecoins blamed for waves of dollarization and naira inflation in Nigeria.

Banks: Stablecoins accelerate the rise of narrow banking, or the shift to banks as the default savings vehicle for individuals and businesses. They are part of a broader trend toward fintech, money market funds, direct holdings of treasuries, and crypto instruments. If interest rates remain high (and as stablecoins increasingly pass on interest), low-yield savings accounts will seem less attractive relative to money market funds or interest-bearing stablecoins.

Traditional financial gatekeepers: Any financial business that benefits from regulatory barriers to entry (banks are the epitome of this) is likely to face margin compression due to the growing popularity of stablecoins. For example, the business model of traditional remitters that rely on a correspondent banking system will be challenged as they are forced to compete with digital native remitters who can provide transfers more cheaply through crypto financial infrastructure.

Enforcement: Stablecoins present a paradox for law enforcement. They are very clear, and once an on-chain address is linked to an illegal entity, the record of illegal transactions will exist forever on the blockchain. However, they also facilitate (relatively) final cross-border value settlement at scale in a peer-to-peer manner. Physical cash faces the limitation of being expensive to move and store, and therefore presents physical limitations to its use in illicit finance. For example, you can put a large amount of banknotes in a luggage bag and take it on a commercial flight.

Stablecoins have no such scale limitations. But stablecoins are also subject to intervention by issuers who maintain the ability to "freeze and seize". When law enforcement discovers these issuers engaging in illegal activity, they do often stop it on an increasingly large scale. (For example, $225 million in USDT was seized last year tied to criminal groups.)

Unlike cash, illegal stablecoin flows can be frozen at a distance. Currently, it is easier for law enforcement or the courts to contact individual stablecoin issuers than to try to fight the network of banks through which illegal funds flow. There are only a handful of major stablecoin issuers (and they are in active dialogue with law enforcement); there are thousands of banks.

It is important to understand stablecoins as an evolving tool in the cat-and-mouse game between illegal actors and law enforcement. In the short term, illegal actors may feel that stablecoins provide them with greater flexibility and convenience in terrorist financing, fraud, or money laundering, but as the sophistication of global law enforcement increases, I expect they will be increasingly viewed as relatively poor mediums for illegal flows. However, since we are in a transition period, governments are right to be concerned that stablecoins may be used for criminal activities. But in the long run, the fundamentally higher legibility of stablecoins coupled with the freezing and seizure quality of these networks should make them less favorable to crime overall than cash (and possibly traditional digital railroads).

US National Security Establishment: Similarly, stablecoins will force a rethinking of the standard sanctions toolkit used for foreign policy objectives. Personally, I am very skeptical of the current state of US sanctions policy. In the case of Russia, it has clearly failed. As far as I can tell, the US seizure of Russian reserves and attempts to interrupt the flow of commodities to Russia through the dollar network will only accelerate de-dollarization. According to JPMorgan, by 2023, 20% of oil trade volumes will be settled in currencies other than the dollar. This is mainly driven by the emerging Russia-China-India-Iran commodity axis.

Meanwhile, sanctions do not seem to have stopped Russia's imperial ambitions or significantly weakened its ability to wage war. Still, Washington has not changed its approach to sanctions, and you can see this thinking in Massad's remarks, where his main concern is that stablecoins will interfere with the US's ability to sanction.

In my opinion, Massad closed the barn door long after the horse had escaped. Nonetheless, if U.S. policymakers wish to replace their deteriorating sanctions regime with stablecoins, they still can. They must encourage onshore issuance through sensible stablecoin legislation and encourage responsible, regulated financial institutions to become issuers (rather than walling off banks from the industry and making stablecoins toxic through edicts such as SAB121). Their current attitude, which pushes stablecoin issuers offshore, will only make it more challenging to enforce national security directives through stablecoins. It is already an open question how the U.S. will exert pressure on Tether, the world's leading stablecoin.

The U.S. Treasury increasingly seems to believe that any U.S. dollar liability, regardless of where its issuer, end user, or domicile of the backing asset is located, falls under U.S. jurisdiction. But this would call into question the nature of the entire offshore market, which, in my opinion, constitutes a significant change in policy and could accelerate the de-dollarization that is already underway.