On election night in November 2024, the US crypto industry enjoyed a rare moment of euphoria, with investors celebrating the arrival of the first truly crypto-friendly administration in American history. Bitcoin climbed to a record high of over $75,000. Crypto-linked equities rallied sharply. Donald Trump was hailed as the first American leader who wholeheartedly believed in digital money – and with reason. “If crypto is going to define the future, I want it to be mined, minted and made in the USA,” he had declared on the campaign trail.

Only a few months later, President Trump would deliver on that promise, taking the crypto community to the promised land. Last July, he signed the ‘Guiding and Establishing National Innovation for US Stablecoins Act’ – dubbed the GENIUS Act – which ushered in the first comprehensive federal framework for stablecoins: dollar-pegged digital tokens that underpin the crypto economy. It was a landmark moment for digital money, signalling both opportunity and risk.

Private money, public worries
The Act lays down strict rules for issuers of dollar-backed digital tokens, requiring full, verifiable reserves held in cash or short-term government bonds (Treasurys), monthly attestations of these holdings, clear redemption obligations, and compliance with anti-money-laundering and consumer-protection rules. Crucially, it treats stablecoins as payment instruments rather than securities, putting an end to regulatory strife and removing litigation risk for issuers. “We are witnessing a shift of stablecoins from simply being ‘crypto’ or ‘digital currency’ to being core payments infrastructure,” says Mike Hudack, co-founder of Sling Money, a crypto-enabled money transfer app that leverages stablecoins.

Central bankers warn that a widespread shift to stablecoins could reduce their control over money creation

Underneath the exuberance lies a deeper strategic calculation: a nod to innovation, but also a deliberate alternative to a central bank digital currency (CBDC). One of Trump’s first actions in his second term was banning US authorities from issuing a digital dollar. By rejecting a government-run digital dollar, a project largely seen as a legacy of the Biden administration, Washington effectively outsourced digital money to the private sector – a move that blends ideology, market pragmatism and politics in equal measure. White House officials have argued that a digital dollar would have placed the government too close to citizens’ wallets, risking accusations of financial surveillance. By contrast, stablecoins offer a market-driven model for digital payments while maintaining the global dominance of the dollar and preserving US financial hegemony in a fast-digitising world. Roughly 99 percent of stablecoins are currently denominated in dollars, meaning that every transaction in them reinforces the greenback’s global reach.

The choice also reflects the administration’s ideological aversion to expanding federal control over money – an issue that galvanised both libertarians and the business community during the campaign. “A CBDC would concentrate financial power within the government, something this administration was never likely to endorse,” says Maghnus Mareneck, co-CEO of Cosmos Labs, a US blockchain firm behind a blockchain interoperability protocol used by banks. “The administration recognises that stablecoins can modernise the dollar without replacing it.” The legislation was greeted with enthusiasm by crypto firms, long frustrated by years of regulatory ambiguity. Many argued that the Securities and Exchange Commission (SEC) had crippled the industry with regulatory overreach. During his campaign, Trump had pledged to fire Gary Gensler, the Biden-appointed SEC chairman who had pioneered crypto regulation. Gensler stepped down in January, despite his term being scheduled to end in 2026, paving the way for a shift in the agency’s regulatory mindset. In the months following the Act’s passage, the stablecoin market exploded. Once a niche market, total stablecoin capitalisation surpassed $300bn last October, expanding twice faster than the crypto sector, while Citi analysts estimate that it will reach $4trn by 2030. Tether, the dominant dollar-based stablecoin issuer, is seeking up to $20bn of new capital in its latest funding round, which would bring its valuation close to the $500bn threshold.

Critics, however, have focused on the act’s lenient treatment of the risky aspects of stablecoins. “What the Act does is vastly expand the network effects that make it easier to launder money and operate in the underground economy. It is important for the government to be able to monitor and audit transactions, and the bill is very light on that,” says Professor Kenneth Rogoff, who teaches international economics at Harvard University and has served as Chief Economist of the IMF. “It does not guarantee timely redemption or provide federal insurance, and it lacks clear rules for dispute resolution, unauthorised transfers, or fraud recovery. Oversight is fragmented across state and federal channels, creating space for inconsistent enforcement and charter shopping,” says David Hoppe, founder of the US law firm Gamma Law, which specialises in cases involving digital assets.

Banks on guard
For the banking sector, the rise of state-approved stablecoins poses both opportunity and existential risk, notably through disintermediation. Few stablecoins currently pay interest, yet if issuers begin offering yield and businesses adopt them for payrolls, trade and settlements, deposits could drain from banks, weakening their traditional model of deposit-funded lending and threatening credit creation. Their balance sheets, already squeezed by digital payment platforms, could shrink further. Up to $6.6trn in deposits could leave bank coffers if crypto exchanges are allowed to offer interest payments or similar financial incentives, estimates a recent US Treasury report, a prospect US banks are urging policymakers to prevent.

Banks may look to position themselves as the infrastructure and control layer for stablecoin custody

Legacy lenders are taking a cautious approach, recognising they still retain certain advantages. “If banks issue their own stablecoins directly, they would be safer, because they have direct access to central bank reserves,” says Lucrezia Reichlin, an economist at the London Business School. JPMorgan Chase and Citi are exploring issuance of their own dollar-pegged payment tokens, while nine European financial institutions, including UniCredit and ING, have a euro-denominated stablecoin in the pipeline. “Banks may look to position themselves as the infrastructure and control layer for stablecoin custody, settlement, and on-chain treasury, providing KYC, segregation, and policy controls, so they can capture fee revenue as liquidity and payments migrate on-chain,” says Susana Esteban, Managing Director of the Blockchain and Digital Assets practice at FTI Consulting, a US business consultancy firm. Their end game, she adds, could be tokenised deposits while offering the same ‘24/7, programmable experience’ that stablecoins offer.

At stake is not merely efficiency but sovereignty. The growing role of privately issued dollars could diminish the influence of most central banks, transforming the architecture of international finance. “Stablecoins do not create base currency, so they don’t directly erode the Federal Reserve’s ability to set short-term rates or influence market liquidity,” says Jonathan Church from TransferMate, a fintech payments infrastructure firm. Yet central bankers warn that a widespread shift to stablecoins could reduce their control over money creation and interest-rate transmission, forcing monetary policy to operate through less predictable channels. As more money circulates outside the regulated banking system, interest-rate adjustments might take longer to filter through the economy. The governor of the Bank of England, Andrew Bailey, has recently warned that stablecoins could “separate money from credit provision,” as non-banks assume a greater role in financial intermediation.

Many in Europe appear to be focused on protecting banks rather than embracing technological innovation

International payments group Swift is also racing to adapt, building a shared blockchain ledger with Bank of America, Citi and NatWest to facilitate transactions, notably settlement of tokenised assets, including stablecoins. The rise of stablecoins threatens Swift’s traditional role by allowing instantaneous transfers that bypass intermediaries. Transactions that once took several days and required multiple compliance checks can now occur within seconds, disrupting decades of financial infrastructure building. Swift’s fight for survival serves as a metaphor for the whole financial system. In a world of programmable, borderless money, legacy institutions must evolve or risk irrelevance.

The Trump effect
As with much of the Trump presidency, the boundary between public policy and private interest is blurred. Members of the President’s family have launched crypto ventures, including World Liberty Financial, issuer of the USD1 stablecoin, and American Bitcoin, a mining company co-founded by Donald Trump Jr and Eric Trump. A meme-token, $TRUMP, is named after the President himself. Such interweaving of political and commercial interests is hardly new for the Trump administration, but the stakes are higher in this case. Stablecoins, unlike hotels or golf courses, touch the foundations of the financial system.

For supporters, the symbolism is potent: the self-styled deal-maker who once built skyscrapers now aims to anchor American influence in digital money. Critics argue that this alignment of public policy with private profit risks eroding confidence in the neutrality of US financial regulation. Lawmakers and ethics experts have called for clearer safeguards, including restrictions on digital-asset ownership by politicians and senior officials and stronger blind-trust requirements. “The president directs agencies responsible for implementing the Act, while his family benefits from a company whose success depends on those same regulations,” says Gamma Law’s Hoppe. “Even if lawful, such circumstances create the perception that private gain could influence public policy, which risks undermining confidence in fair enforcement and market integrity.”

Yet for now, the administration appears unfazed. In Washington’s calculus, the digital future of money must be denominated in dollars – even if those are minted by private actors. In that sense, the GENIUS Act is a geopolitical statement. Both officials and Trump family members frame the policy as a response to de-dollarisation efforts led by China. “Crypto is actually going to be the thing that preserves dollar hegemony around the world,” said Donald Trump Jr at a crypto conference in Singapore, adding: “As stablecoins start becoming the markets and treasuries, that’s going to replace China and Japan and some of these places that say, ‘You know what? We don’t want America to have that power anymore.’”

China’s digital yuan gamble
One way China is seeking to undermine the dollar is by rolling out its CBDC, an effort intensified after sanctions against Russia targeted Chinese banks accused of helping Russia secure weapons parts. Beijing has also encouraged the use of its cross-border payments system, Cips, while overseas lending in renminbi has also increased dramatically, with outbound renminbi loans, deposits and bond investments by Chinese banks quadrupling since 2020. China is also a main driver behind m-CBDC Bridge, a multi-CBDC platform that facilitates cross-border payments, controlled by the central banks of China, Hong Kong, Thailand, Saudi Arabia and the UAE.

“China’s ambition is not to replace the dollar or make the yuan an alternative to it. They know that it would be unrealistic,” says Reichlin, the economist from London Business School. “But they want to defend the payment system in their financial ecosystem and one way to do it is to control the rails for cross-border payments via digital solutions.”

China approaches stablecoins with much more caution. Last summer, the Hong Kong Monetary Authority started accepting applications for stablecoin issuers, a move interpreted as China’s response to the US GENIUS Act. Chinese officials argued that China should respond to US promotion of stablecoins with a renminbi-pegged stablecoin that would boost the yuan’s use abroad. Since then, several Chinese regulators, including the country’s central bank, have poured cold water on yuan-based stablecoins, citing concerns that private stablecoins could undermine the CBDC. The regulatory crackdown forced Chinese tech giants such as Ant Group and ecommerce group JD.com, expected to participate in Hong Kong’s pilot programme, to pause their stablecoin issuance plans. “Beijing wants every digital yuan transaction, whether it is domestic or international, to move through systems it can oversee. Stablecoins inherently create alternative payment networks that the state cannot easily legislate, and that introduces risk and potential fragmentation of issuance for this government,” says Mareneck of Cosmos Labs, an expert on Asian stablecoins.

Europe accelerates its de-dollarisation efforts
The US drive for stablecoin supremacy has also unsettled European policymakers and the European Central Bank (ECB), which is pressing ahead with the introduction of the digital euro. Despite being the first major economic power to establish a comprehensive stablecoin regulatory framework with its Markets in Crypto Assets regulation (MiCA), the bloc does not currently prioritise stablecoins. Experts warn that Europe risks repeating past mistakes by over-regulating a nascent market, allowing American platforms to capture it. “MiCa has a number of restrictions and many in Europe appear to be focused on protecting banks rather than embracing technological innovation. Stablecoins enable easy access to US short-term government bonds from all parts of the world, which also diverts capital flows from the EU and the UK to the US,” says Gilles Chemla, who teaches finance at the Imperial Business School and is co-director of the university’s Centre for Financial Technology. Concerns over sovereignty are driving the EU’s CBDC programme, as it seeks to reduce reliance on US payment companies such as Visa and Mastercard.

However, experts question whether this goal is achievable if dollar-denominated stablecoins are widely used in Europe, and whether a digital euro is the most effective tool to address the issue. “The digital euro in its current design is narrowly focused on the euro area as a means of payment only for private households and with holdings limited to €3,000, while stablecoins offer an international payment scheme that can be used by global companies,” says Peter Bofinger, an economist at Würzburg University and former member of the influential German Council of Economic Experts. A better option for the EU, Bofinger adds, would be integration of its existing national payment systems.

If dollar-backed stablecoins are adopted by the public in the Eurozone, the ECB will be faced with stark choices. “There is a risk of dollarisation. Dollar-backed stablecoins could become what the eurodollar market is now: a big offshore dollar-based market,” says Reichlin from the London Business School, a former ECB director general of research, adding: “If Europe doesn’t develop euro-pegged stablecoins, the old payment system could be dollarised, especially large cross-border payments. Europe is complacent about this risk.” Others, however, consider warnings about dollarisation to be exaggerated. “The ECB is raising the risk of dollarisation to justify the need for a digital euro,” says Bofinger. “There’s no such risk, because currencies are like languages: to switch from a domestic currency to a foreign one, the domestic currency has to be in a terrible state, like in some Latin American countries.”

Another concern for the ECB is that dollar-backed stablecoins could erode the euro’s global role, while their widespread adoption in Europe might weaken the ECB’s control over monetary policy. “Every tokenised dollar transaction strengthens the dollar’s global position, even beyond US borders. A euro CBDC cannot match that momentum, and will likely be slower, more limited, and less compatible with global blockchain systems,” says Mareneck of Cosmos Labs. “It was a mistake of the ECB to think of CBDCs as an alternative to private stablecoins. These are two different things,” Reichlin adds. “CBDC is similar and complementary to cash, whereas stablecoin is complementary to deposits. There is no reason why CBDCs and stablecoins could not coexist.”

Bubbly stuff
Almost two decades after the 2008 credit crunch, policymakers are still haunted by its effects. Stablecoins are expected to be backed with safe, liquid assets and users will be able to redeem their stablecoins at par. “Because stablecoins are not lent out the way bank deposits are, you can argue that in some respects they are likely to be at lower risk than bank deposits, though governments are more likely to bail out banks than stablecoin companies,” says Paul Brody, a blockchain expert at professional services firm Ernst & Young. Yet economists warn that stablecoin issuers effectively function as shadow banks, but without the same capital requirements, access to central bank liquidity or oversight from regulators. Should confidence in their reserves falter, the unwinding could spill into bond markets and cause liquidity crises, echoing panic seen in 2008 and 2020, and once again forcing governments into politically unpopular bailouts. “If a major stablecoin issuer is unable to meet redemptions or discloses reserve weaknesses, trust could unravel quickly, prompting mass withdrawals. The impact would extend beyond digital assets, affecting wider financial markets that rely on tokenised instruments for settlement and liquidity,” says Krishna Subramanyan, CEO of Bruc Bond, a cross-border banking and payments provider.

One major concern is that speculation could once again outweigh regulatory caution. Although the GENIUS Act prohibits issuance of interest-bearing stablecoins, it does not explicitly ban third parties from offering interest-bearing financial products that involve stablecoins. Experts warn that the creation of such reward-based products could create a parallel deposit market that competes on yield with only a flimsy guarantee of one-to-one convertibility, making monetary control more difficult. “Because stablecoins are vulnerable to runs, a fire sale of their reserve assets – such as bank deposits and government debt – could spill over into bank deposit markets, government bond markets, and repo markets,” the IMF warned in a recent financial stability report. “A practical safeguard is integration rather than prohibition: preserve monetary control by including stablecoin flows in the liquidity toolkit using facilities such as the Standing Repo Facility and Reverse Repo Facility to absorb shocks while supervisors treat major issuers as systemically important payment institutions subject to stress testing and live disclosure,” says Susana Esteban from FTI Consulting.

Security remains a critical factor. Some experts warn that, like other forms of crypto, several stablecoins could be used for illegal activities such as money laundering and are also vulnerable to cyberattacks and technical glitches. Stablecoin issuers will need insurance to reimburse holders in the event of cyberattacks and to cover operational risks, which would add to their costs. Political uncertainty may also fuel volatility, as a future Democratic administration could impose stricter regulation on stablecoins. “Expect a revisit of the CBDC ban, stricter consumer protections, and tighter perimeter rules for issuers regarding resolution, interoperability and wallet safeguards,” says Maja Vujinovic, CEO of Digital Assets at FG Nexus, a digital assets holding firm.

By the next presidential election, however, America’s financial experiment with stablecoins may be too big to fail. The wager is bold: that the profit motive of dollar-denominated token issuers will align neatly with national interest. In this sense, the GENIUS Act represents a paradox: it enhances dollar supremacy while simultaneously weakening Washington’s control over money creation. Can this hybrid model of monetary sovereignty – one where Wall Street and Silicon Valley pull the strings of global finance, rather than the Federal Reserve – live up to the expectations of crypto enthusiasts, including the Trump administration, or will it sow the seeds of the next financial crisis?

The answer depends on the same forces that have long defined finance: confidence, liquidity, and the belief that the system, whatever its flaws, will hold.