Will Stablecoins Turbocharge the Exorbitant Privilege?

While in the near term the growth of stablecoins may loosen US fiscal constraints and boost the dollar’s dominant currency status, stablecoins ultimately just add a layer of complexity to the discussion about the quality of the country’s institutions. In the long term, it’s still the US’ fiscal probity and the ability of its central bank to deliver low and stable inflation that will determine the dollar’s position.

Source: Photo by SpaceX on Unsplash

The Trump administration seems to be pinning a great deal of hope on the expansion of stablecoin demand to fund the federal fiscal deficit – such demand is one of the major official justifications offered by the US Treasury for shortening the average maturity of the debt (by issuing more Treasury bills while keeping the issuance of notes and bonds constant).

(Incidentally, I maintain that shortening the average maturity of the debt is – also – a way of increasing pressure on the Fed to lower interest rates.)

There is also some evidence that demand from stablecoins is already lowering interest rates on short term US debt.

What’s more, the administration sees stablecoin demand as a major pillar of support for the US dollar’s dominant currency status.

It’s not hard to see why.

Treasury secretary Bessent sees stablecoins growing to $2 trillion (I’ve seen even larger numbers out there). With the overwhelming majority of stablecoins being pegged to the dollar, stablecoin demand looks likely to be dollar demand.

With the GENIUS Act stipulating US dollar cash, US domestic insured bank deposits, and Treasuries with residual maturities up to 93 days as permitted reserve instruments, a large part of this demand will be for federal debt.

From a purely domestic US perspective the jury is still out on whether stablecoins will actually increase net demand for treasury debt – it depends on what the stablecoins actually substitute for.

If people, instead of holding e.g. shares in money market funds, which are invested in short term US government paper, hold some of their wealth in stablecoins, the net demand for treasury bills does not actually increase.

My hunch – and it’s not much more at this stage – is that the most important channel generating net demand for dollars and US Treasury debt is an international one: the dollarization channel of stablecoin demand.

Stablecoins are making access to US dollars much easier for millions of people outside the US, particularly in countries with high inflation, weak currencies and underdeveloped banking systems.

That said, the increase in stablecoin demand from the non-US private sector could be partially offset by a decline in official demand for dollars. Why?

Stablecoins look likely to improve global financial stability by increasing the share of dollar assets on balance sheets outside the US. If so, however, that could reduce currency mismatches in emerging market countries, which are a major reason behind EM official sector precautionary dollar demand.

The dollar’s institutions - again

Yet I have a more fundamental concern about how helpful stablecoin demand will be for the dollar’s role. It has to do with the dollar itself, and the institutions that underpin it.

The US fiscal situation is well known, so I won’t belabor it here.

Source: Congressional Budget Office (March 2025)

This long-standing European admirer of America is probably not alone in diagnosing a degree of political division that has created a fiscal doomsday machine.

A key reason why this doomsday machine has so far been able to keep going is the US’ dominant currency position and the resulting demand for US government assets: the dollar’s exorbitant privilege increases fiscal space for the US federal government.

Yet that does not, ultimately, alleviate the need for fundamental fiscal reform. That reform should primarily revolve around increasing federal revenue (in contrast to Europe by the way, where fiscal reform should focus on reducing expenditure).

Now, back to stablecoins.

Higher demand for US government debt from stablecoins may well loosen the near-term constraints on fiscal policy. But it doesn’t solve any long-term problems – it doesn’t dismantle the doomsday machine.

In fact, it’s more likely to prevent the fiscal reform that is so badly needed.

In other words, I’m concerned that stablecoins could just be more rope for US politicians to hang themselves with – and with it, the exorbitant privilege.

And then there’s the Fed.

I’ve been arguing that, given the looser constraint on fiscal authorities from the exorbitant privilege, there must be a constraint on monetary policy: it must not be subservient to the needs of fiscal policy (as Trump and his movement would have it). A necessary, although not sufficient, institutional condition to avoid such a situation is Fed independence.

The point here is that stablecoins won’t, ultimately, do the dollar’s standing much good if in the meantime the Fed’s independence is eroded and it runs higher inflation.

Backing stable coins?

Ultimately, as

Pierpaolo Benigno says, what matters is how the stablecoins are backed.

In a regime of monetary dominance (where the central bank delivers price stability and the fiscal authorities alone are responsible for making debt sustainable), stablecoins and the treasuries that back them are ultimately backed by taxation: “for stablecoins to be safe, Treasury debt must itself be safe.”

In a regime of fiscal dominance, the stablecoins are ultimately backed by the central bank. In such a case, stablecoins could prove inflationary, because the Fed could be forced to monetize the corresponding issuance.

My conclusion is that while in the near term the growth of stablecoins may loosen US fiscal constraints and boost the dollar’s dominant currency status, stablecoins ultimately just add a layer of complexity to the discussion about the quality of the country’s institutions. In the long term, it’s still the US’ fiscal probity and the ability of its central bank to deliver low and stable inflation that will determine whether the dollar maintains its position.

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