The geopolitics of stablecoins

Abstract

Stablecoins are private digital money pegged to a fiat currency, overwhelmingly the US dollar. Dollar stablecoins reinforce American monetary and political hegemony, delivering fiscal and strategic benefits to the United States and hub jurisdictions while user countries absorb both the risks and the costs without corresponding control.

Introduction

Stablecoins are private money tokens pegged to fiat currencies and backed by reserve assets: cash, bank deposits and short-dated government securities. They are predominantly dollar-based. The largest current issuers either directly operate under US regulation or depend on the US financial infrastructure.

The total amount of outstanding stablecoins is relatively small, around $310 billion. They are almost all US dollar-denominated, whereas euro-, yen-, sterling- and Singapore dollar-denominated stablecoins remain marginal.

The dollar’s dominance is not incidental. Three interlinked factors sustain it:

1. The dollar is the unit of account for crypto markets.
2. It is the default outside option when local currencies are weak.
3. It is the settlement currency for most cross-border commerce.

Stablecoins are the on-chain analogue of the traditional offshore Eurodollar system – private dollar liabilities circulating beyond the US financial system. Both help non-US entities to engage in US dollar transactions, largely without oversight by their own national authorities.

One consequence is that stablecoins reinforce the dollar’s reserve-currency role by creating a new demand for US sovereign debt, embedding foreign savings in dollar-denominated instruments, and deepening dependence on US financial infrastructure. Aldasoro et al. (2026) argue that they reinforce existing currency hierarchies.

These benefits echo what Giscard d’Estaing, then French finance minister and future president, called the dollar’s “exorbitant privilege” in the 1960s. Under Bretton Woods, member countries had to hold dollar reserves to sustain their monetary system – foreigners funded US debt while reinforcing dollar dominance. At scale, the effect may compound further. If stablecoin issuers achieve broad payment acceptance, they gain money-creation capacity that was historically reserved for central banks, reinforcing this exorbitant privilege (Borio et al. 2026).

Hubs

Some hub jurisdictions – most notably Singapore, Hong Kong and the UAE – as well as countries with large, sophisticated financial systems such as the UK, benefit from dollar stablecoins for two reasons.

The first is that they have limited exposure to the risk of destabilisation via private dollarisation. Hong Kong’s currency board, Singapore’s exchange-rate regime and the UAE’s dollar peg are all credible, well-established arrangements – stablecoins do not threaten their monetary frameworks. The UK is different in kind but similar in effect: its monetary sovereignty is not at risk from dollar stablecoins, whereas its deep capital markets position it to capture stablecoin-related activity much as the Asian hubs do.

The second is the position of hub jurisdictions as international financial centres with deep infrastructure for clearing, custody and compliance. That lets them capture the upside by attracting the supporting infrastructure – exchanges, issuers, custodians, compliance functions and settlement – to their jurisdictions. The benefits are licensing and supervisory revenues, financial-services employment, regulatory influence over infrastructure standards, and intermediation rents from sitting between dollar capital markets and the regional demand for stablecoins.

But these benefits are not entirely free. Hub jurisdictions profit from stablecoin infrastructure only while they remain aligned with US regulatory and foreign-policy priorities. The same dependence on US-regulated reserves, compliance frameworks and dollar clearing that makes stablecoins attractive to hubs also gives Washington leverage over these hubs. They retain regulatory autonomy, but that autonomy operates within a dollar-centred system whose foundational infrastructure – reserves, clearing, compliance standards – remains under US control.

Adoption and crisis amplification

Citizens in countries with unstable currencies have long dollarised, using the US dollar for everyday transactions and as a store of wealth. This traditional dollarisation relies on paper money, domestic US dollar deposits and foreign bank accounts. All are expensive and risky. Paper money is bulky and hard to secure. Domestic US dollar deposits can be confiscated or controlled, and access to foreign bank accounts can be restricted.

International transfers are part of the problem. Sending money to sub-Saharan Africa costs nearly 9% of the transferred amount. Importers and exporters routinely struggle to obtain foreign exchange for cross-border trade because correspondent banks have limited activity in many of the jurisdictions that need them most. Stablecoins offer a cheap, accessible alternative. They let people transact in US dollar even where dollar use would otherwise be difficult or prohibited, and move funds seamlessly across borders without the involvement of the domestic banking system.

Not surprisingly, countries with weak currencies and political and social instability have seen the highest rate of adoption of stablecoins. In Turkey, for example, stablecoin purchase volumes reached an estimated 4.3% of GDP in 2023–24. Similar patterns of stablecoin-mediated dollarisation appear in Argentina, Nigeria, Lebanon and Cambodia, among others.

The countries that drive stablecoin adoption are also those most at risk of financial crises. Stablecoins are not the underlying cause of these countries’ problems, but they could exacerbate them. When a confidence shock hits, stablecoins become the natural conduit for currency flight (Danielsson and Macrae 2026a) because they can be purchased around the clock through offshore exchanges, and held outside the domestic banking system and, potentially, outside capital controls. The result could be faster outflows, sharper exchange-rate pressure, and greater strain on reserves.

Meanwhile, the authorities’ existing policy levers are less effective with stablecoins than with traditional banking channels. When a crisis hits, countries may seek outside assistance – dollar liquidity, help to enforce capital controls, and technical support for monitoring flows. Such assistance has historically been slow, operating over weeks or months rather than hours.

Stablecoins make that mismatch worse because the crisis is likely to move faster. Also, the relevant stablecoin-related infrastructure sits in private companies inside the United States’ and hub countries’ regulatory perimeter. Multilateral support mechanisms have little control in this case.

A stablecoin failure would add a further dimension. If a major issuer were to break its peg, countries that had dollarised through it would face losses the United States currently has no mechanism to address. The Fed’s swap lines reach sovereign counterparties, not retail holders of private tokens. The result would be a crisis propagating through a dollar-denominated instrument, generating a demand for a US response, without any of the bilateral infrastructure through which such responses have historically been coordinated.

How stablecoins shift control

In the early days, stablecoin issuers had wide latitude over how they held reserves, but this is changing. Under the 2025 GENIUS Act, US-regulated issuers are required to back stablecoins with liquid safe assets such as Treasuries, Treasury-backed money-market funds and commercial bank deposits. Reserve regulation also gives authorities indirect control over the primary dealers and custodians that interact with issuers.

Once a stablecoin is issued, the holder can transfer it to anyone without intermediation. Although issuers can freeze wallets and blacklist addresses, the reasonable expectation would be that they would only do this in response to US regulatory and law-enforcement demands. So control sits with private firms operating within the US compliance perimeter, not with sovereign authorities.

Local jurisdictions can try to regulate on-chain transfers through intermediaries but are unlikely to have much success. They may have better luck regulating the on- and off-ramps – how an entity converts local fiat into or out of stablecoins.

Blockchains are publicly visible, and a number of firms and governments already monitor on-chain activity. However, most authorities will find it difficult to monitor stablecoin use when users want to stay under the radar. Monitoring the intermediaries, exchanges and brokers over which the authorities have regulatory leverage will provide some information, particularly on retail transactions.

How the United States benefits

Dollar stablecoins benefit the United States in three ways.

The first is fiscal. Every additional dollar of stablecoin outstanding creates a demand for short-dated Treasuries or entities that will hold these.

The second benefit is privatised seigniorage. Stablecoin issuers capture the yield on reserve assets and provide the United States with taxes, dividends, employment and technology investment. Their dependence on US-regulated reserves ties global stablecoin activity to the American financial system.

The third benefit is geopolitical, because dollar stablecoins increase dependence on US-controlled infrastructure. Even when an issuer is incorporated offshore – Tether, the largest issuer, is now domiciled in El Salvador – its viability depends on accessing US financial markets, banking relationships, custodians, payment rails and the compliance perimeter shaped by the US Office of Foreign Assets Control.

While stablecoins extend the dollar’s reach, they also reduce oversight of dollar flows. Correspondent banks, SWIFT messaging and direct supervisory relationships have historically given financial authorities visibility and control over currency flows. Stablecoins route around some of these channels, reducing that visibility.

The United States retains the ability to regulate, monitor and control global stablecoin activity because key parts of the infrastructure stack, such as issuance, settlement and compliance, remain within the US jurisdiction and its regulatory orbit. So, for the United States, the change from traditional payment rails to stablecoins is from one well-observed route to another. This is not the case for authorities in jurisdictions with widespread stablecoin use, as they lose transparency. A country on the receiving end of a run has limited options. It might be able to control the on-ramps because it controls the fiat infrastructure, but even that is likely to be limited in many jurisdictions.

In contrast, hub jurisdictions and the United States can shape how a run plays out through their authority over the stablecoin firms, primary dealers and, often, the off-ramps. Whether they choose to do so will be a political and economic calculation. Two precedents illustrate the point.

The first relates to the US dollar swaps that the Federal Reserve provides to selected central banks. When such countries face a liquidity crisis, as in 2008 and 2020, access to US dollar swaps can be essential for crisis containment. Access is narrow and discretionary, and most central banks do not have it.

The second relates to access to dollar clearing. Most cross-border dollar payments settle through CHIPS, a private clearing system with only 42 participating banks, 25 of them foreign. Banks outside this group must work through those that are in it. The threat of being cut off from dollar clearing is one of the most powerful tools in the US arsenal for enforcing compliance, as the cases of BNP Paribas, Iran and Russia have demonstrated.

Stablecoin firms are regulated in the United States, giving Washington direct control over the entities through which dollar stablecoins flow. An unstable country with a large stablecoin footprint becomes dependent on the willingness of the United States and hub jurisdictions to support it in a crisis. This dependence will inevitably influence political and economic decisions. The pattern echoes the Eurodollar system.

Conclusion

John Connally, then Treasury Secretary, told European finance ministers in 1971 that the dollar was America’s currency, but their problem. Stablecoins are much the same. They do not cause weak-currency problems, but they reduce the frictions that slow private dollarisation and shift benefits and costs across borders. The benefits accrue to the currency issuer, private issuers and hub jurisdictions. The costs fall on user countries that do not control the reserves and cannot provide the backstops that crises may require.

At the current scale, this is already visible and will become harder to manage as stablecoins grow. Ultimately, private dollarisation becomes more tightly coupled to, and dependent on, decisions taken in Washington and a few financial hubs. That reinforces US hegemony.

But private money can fail in ways sovereign money does not, and when it does, the hegemon will be expected to respond – with no current framework for doing so.

The exorbitant privilege may become an exorbitant obligation.