Stablecoins: Policy, sovereignty and backstops

Abstract

No jurisdiction can ignore stablecoins. They can be banned outright only in the most effectively authoritarian countries, or accommodated and even encouraged, which suits the United States and hub countries. For most countries, benign neglect is the best course of action. But countries where monetary sovereignty is already under threat are more vulnerable to stablecoin-linked risks.

Introduction

Stablecoins are private digital money pegged to a fiat currency, overwhelmingly the US dollar. While controversial, currently they should be of little public concern in most jurisdictions. However, their growing use in cross-border transfers and as a store of value in countries already facing dollarisation is more of a problem.

Most financial authorities find responding to stablecoins challenging: they have emerged rapidly and promise to radically alter payment systems. This threatens incumbents and undermines government control over the payment system. At the same time, they also promise to increase efficiency by bypassing outdated and rent-seeking incumbents. These rapidly emerging threats and opportunities naturally lead to diverse views on what the policy response should be.

Most putative threats arising from stablecoins relate to hypothetical future outcomes, not to clear and present dangers. This frustrates policy planning. Meanwhile, the pull factors are undeniable: cheap and lightly regulated currency transfers, both domestic and international, aid crime and help legitimate economic activity to bypass inefficient payment infrastructure.

Monetary sovereignty

The hardest policy question is monetary sovereignty, the undisputed ability of a country to manage its own currency. At the most basic level, it means the legal right to issue money. More generally, it means effective control of the currency in circulation, which is used for transactions and held as a store of wealth. That control is what allows a central bank, and through it the state, to influence domestic financial conditions and transmit policy to the real economy.

Many countries have expressed concerns over monetary sovereignty, usually on rather slender grounds. When inflation targets are credible, payment systems are effective and banking is widely available, trustworthy and efficient, the financial system works well, and monetary sovereignty will not be seriously challenged. However, in countries where monetary sovereignty is already under threat, as indicated by widespread existing dollarisation, stablecoins are likely to accelerate this by offering the cheap and easy use of dollars to all citizens.

Backstops

By contrast, there has been little discussion on state support and bailouts for stablecoin operators and exchanges, which we expect to become an important issue in those jurisdictions where stablecoins will play a significant role.

History offers many examples of state backstops that were unthinkable until they were not. The modern lender-of-last-resort doctrine dates from the Overend Gurney collapse in 1866, the most severe global banking crisis of the 19th century. The Bank of England refused to rescue Overend Gurney, with disastrous consequences. Bagehot (1873) later codified the principle that became the guiding doctrine for state support of banks. In the United States, the Panic of 1907 – when there was no federal regulation or backstop – was so damaging that Congress created the Federal Reserve. The bank runs of the Great Depression produced the FDIC and deposit insurance. In the early 1990s, Argentina explicitly promised not to support its banks, only to be forced to do so within a couple of years when the Tequila crisis hit.

Chwieroth and Walter (2019) argue that bailouts become inevitable through political rather than economic logic. Once an asset is widely held, it becomes a middle-class good, an entitlement that the state is expected to guarantee. Few governments can accept the political price of citizens losing access to their savings, or of a preventable financial crisis tipping the economy into recession.

The consequence is that if and when stablecoin entities become sufficiently enmeshed in day-to-day financial transactions, they become, like banks, too big to fail. In a crisis, if stablecoins are widely held, a state backstop will be demanded.

A stablecoin backstop looks unthinkable today. No central bank has an explicit mandate to rescue a stablecoin, and no resolution regime governs what happens when a large issuer fails. That will change. If stablecoins become embedded in everyday payments and savings, as their operators intend, then in a crisis, regulators will be unable to resist the political pressure to provide a backstop.

We have already seen a state backstop for stablecoins in action. When SVB failed in March 2023, USDC de-pegged because Circle, the issuer of USDC, had $3.3 billion on deposit at SVB. The peg was restored only after US authorities invoked a systemic risk exception to guarantee all SVB deposits, including Circle’s.

The eventual demand for such a backstop, and the capability and willingness to provide it, separate the countries that can afford to embrace stablecoins from those that cannot.

Who benefits from stablecoins?

The impact of stablecoins is not uniform. The United States benefits substantially since they create a demand for Treasuries from foreign holders, generate privatised seigniorage for issuers tied to the US financial system, and deepen global dependence on US-controlled infrastructure. For the United States, the question is not whether to allow stablecoins but how to manage the domestic consequences of doing so.

Hub jurisdictions – major financial centres exporting financial services, such as Singapore, Hong Kong, the UAE and the United Kingdom – can also benefit by capturing stablecoin infrastructure without significant dollarisation or bailout risk. Their monetary frameworks are credible. Their position as financial centres allows them to attract exchanges, custodians, compliance functions and licensing revenues. Their own citizens see little need to use stablecoins, which mitigates bailout risk.

For any hub jurisdiction, the judgement comes down to weighing measurable benefits against the unknowable but potentially large contingent costs of a bailout, which it would be compelled to provide. Given this uncertainty, different hubs will reach different answers. Those with the largest domestic economies, and hence the largest potential bailout costs, will be the most cautious.

Meanwhile, to the extent that users are in other jurisdictions, the hub countries face limited pressure to provide state backup.

Countries that can show benign neglect

Most countries are not seriously threatened by stablecoins. Their currencies are credible, and financial infrastructure sound, no overwhelming pull factors drive adoption, and stablecoin firms prefer to operate from the hubs.

Countries without a large existing export-oriented financial-services sector will not capture much international wholesale stablecoin business. They can still gain from allowing stablecoin operations through modest reductions in frictional costs and wider, cheaper retail access to financial services. The cost of supporting stablecoins in a crisis is unknowable in advance, but there is no particular reason to expect it to exceed the cost of supporting incumbent providers.

For these jurisdictions, the appropriate response is benign neglect, neither ignoring stablecoins nor overreacting. Their authorities retain considerable control because stablecoin activity that touches domestic banks, exchanges and payment rails already sits inside the regulatory perimeter. Enforceable KYC and AML rules, restrictions on non-compliant issuers, and monitoring of on- and off-ramps give them the tools they need. The authorities in these countries should neither pull stablecoins fully into banking regulation nor restrict them so heavily that they signal hostility to innovation and competition.

Some commentators, such as Borio et al. (2026), worry that as stablecoins gain payment acceptance, their issuers will gain money-creation capacity analogous to that of banks. This will make banking-like oversight inevitable, especially if reserves fall short of 100%. Van ’t Klooster et al. (2025) argue for EU vigilance that would promote the euro’s international role and multilateral payment systems as a counter to what they call US cryptomercantilism.

Those concerns matter, but they do not imply that every jurisdiction should treat stablecoins as banks from the outset.

Stablecoins promise more efficient payments and tokenised transactions. Countries that wish to avoid private stablecoins therefore have an incentive to provide CBDCs, improve payment infrastructure, and create a legal framework for tokenised transactions, weakening the case for stablecoin adoption.

Countries most vulnerable to stablecoins

Stablecoins pose the most serious threat where inflation credibility is weak, banking access is constrained, financial inclusion is limited, and governance is poor. These are exactly the countries whose residents already see dollars as superior to their domestic currency and whose monetary sovereignty is in question.

Stablecoins lower the frictional cost of holding dollars in these places. Dollars can be bought and sold cheaply on-chain or through offshore exchanges. These transactions sit outside the domestic banking system and are harder to subject to capital controls. In a crisis, stablecoins can drive faster outflows, cause sharper exchange-rate pressure and create greater strain on reserves, as we discuss in our companion piece (Danielsson and Macrae 2026a).

The most enthusiastic adopters, such as Cambodia, Turkey, Lebanon and Argentina, were dollarising long before stablecoins existed. Stablecoins are not undermining their monetary sovereignty; weak institutions have already done that. However, by accelerating the dollarisation, stablecoins make an existing problem worse.

Countries like these will be in a difficult position in a crisis amplified by stablecoins, precisely because adoption is likely to be most rapid when the pull factors are strongest. They are not well placed to provide backstops. The same weaknesses that drive dollarisation also interfere with effective crisis resolution. The fallout therefore lands where crisis-management capacity is weakest. That makes these countries particularly vulnerable to geopolitical pressure from the jurisdictions that control the stablecoin infrastructure (Danielsson and Macrae 2026b).

Banning or strictly regulating stablecoins is tempting but unlikely to work. Citizens dollarise in response to policy weakness and are adept at evading regulation. Forcing stablecoin activity into the black economy may even reduce state control by pushing it underground, beyond monitoring.

The appropriate response is not to ban or to ignore, but to remove the pull factors. Make the existing financial system good enough that the demand for stablecoins weakens. Good examples to follow are Brazil’s PIX and India’s UPI: instant, cheap domestic payment systems that remove one of the main use cases for stablecoins. Regional payment linkages extend the same logic across borders. Credible local money, low inflation and payment systems that work are the strongest defence. Stablecoin’s most lasting legacy may be to force central banks to improve their payment infrastructure (Danielsson 2023).

If authorities do not respond, unregulated stablecoin intermediation will outcompete and further undermine the domestic banking system in these countries. As retail deposits migrate to stablecoins and fiat transactions lose relevance, the state’s ability to tax economic activity weakens and regulatory oversight thins. The threat to revenue alone cannot be ignored indefinitely. Pressure will build to bring stablecoins inside the regulatory perimeter, most likely after a major crisis or other disorderly transition.

Conclusion

Stablecoins offer considerable fiscal and strategic benefits to the United States. The risks are substantial but not fundamentally different from those of the existing fiat banking system, and the benefits justify their use.

For hub countries, the benefits are smaller and come with bailout risk, especially if backstopping US-domiciled entities requires domestic currency. However, their monetary sovereignty is not in question. For those that can absorb the risk, accommodating stablecoins in existing regulatory frameworks is tenable and brings worthwhile gains in financial-services activity, tax revenue and regulatory influence.

Most countries are less exposed to stablecoins than commonly suggested, so benign neglect remains appropriate. When an active response is warranted, it should focus on reducing the pull factors by supplying CBDCs, improving payment infrastructure, and creating a regulatory framework for tokenised transactions if demand emerges.

The most serious risks arise in countries where stablecoins matter most – where monetary sovereignty is already weak and dollarisation is widespread because of economic disorder, ineffective authorities and/or high inflation. In these countries, stablecoins accelerate dollarisation. The problem is not the stablecoin. It is the currency it replaces, and dollarisation is the symptom, not the cause. The appropriate response is to remove the pull factors and make the domestic currency worth holding. Where that is not possible, countries and the multilateral organisations that support them should prepare for financial crises amplified by stablecoins.

While outright prohibition or heavy restrictions on stablecoins might be a tempting course of action, it is unlikely to succeed. It is better to recognise this reality, reduce the pull factors and prepare for an eventual crisis than to assume that a crisis can be avoided simply by preventing stablecoin use.