Stablecoins Are A Growing Force in Global Finance

As the US national debt continues to climb to historic heights, an unexpected player is stepping up to purchase US Treasuries: stablecoin issuers. These private companies, who release dollar-pegged digital assets onto crypto networks [1] , now collectively hold nearly  0.5% of the $35 trillion US debt — a modest yet growing amount. Now the 16th-largest group of US debt holders, stablecoin issuers have surpassed countries like Saudi Arabia and are only narrowly trailing behind France.

In the past five years, stablecoins have advanced from a niche cryptocurrency product to an indispensable financial instrument in both emerging and developed markets. Their growing importance to the US debt market and adoption in regions with limited access to dollar banking puts them in a position to actually shape the future of the global financial system, in terms of both fortifying dollar hegemony and shifting economic controls outside the traditional banking system. Allow me to explain. 

Stablecoin Issuers’ Demand for U.S. Debt is Mounting

A relatively recent entrant into the US debt market, stablecoin issuers’ demand for Treasuries is natural and changes with the market size of stablecoins. Their foundational structure depends on maintaining reserves that are liquid and stable to service any redemption request that comes their way, sending US dollars in exchange for their digital asset.

This means issuers must hold dollar-equivalent assets against the supply of stablecoins in circulation, with US Treasuries being a popular choice—not just for their liquidity but for their ability to capture interest given the miniscule risk of US government default.

As natural buyers of treasuries, issuers' ownership of US debt has grown with the stablecoin market — up tenfold in under five years, reaching about $100bn today. 

The role of stablecoins in the U.S. debt market is particularly striking when viewed against the backdrop of a relative decline in foreign holdings of US debt. Over the past decade, foreign ownership has shrunk from 34% to 23%, with strong historical players like China and Japan also reducing their treasury positions in an absolute sense. In this context, the arrival of stablecoins is helping to fill a gap left by retreating foreign governments. For the US, stablecoin-backed Treasury investments is not only an offset but also marks a broader shift in the types of institutions and entities holding US debt.

While Japan and China still hold the top spots on the US debt holder list, the prospect of stablecoins as a long-term source of demand raises intriguing questions. Projecting current levels of growth forward over the next 5 to 10 years, stablecoins would advance to 5th in the current rankings of foreign holders, positioning themselves among the world’s largest central banks. 

It is precisely this phenomenon that could bring about a reshaping of financial power, where stablecoin issuers—private companies rather than national governments—become meaningfully more prominent stakeholders in US financial stability.

It may already be that these private companies, with their $100+bn in US treasuries, have grown to the extent that any regulatory actions forcing them to liquidate their holdings would destabilise the Treasury market. In October this year, the Treasury Borrowing Advisory Committee discussed this issue publicly. It poses an interesting question that is out of scope for this post: Could the implications of a Tether collapse be severe enough that it is already “Too big to fail”? (for those interested, read this)

Stablecoins are a Substitute for Dollar Banking in Emerging Markets

In many emerging and developing markets, banking options for US dollar accounts are scarce or extremely difficult to access. Stablecoins have thus been bridging this gap, providing an alternative to conventional dollar banking that, mainly, is simply accessible vis-a-vis the internet, but also reliable and at a relatively low-cost. 

Stablecoins are, of course, highly used for the speculative trading of crypto assets, but not exclusively. In a survey conducted in Emerging Markets by Castle Island Ventures earlier this year, 47% of participants listed ‘saving in dollars’ as their stablecoin objective. It found that, particularly across India, Brazil, Nigeria, Turkey, and Indonesia, there are many popular use cases of stablecoins: efficient currency conversion, payments, and savings.

In these regions, which collectively have much higher populations than western developed nations, and tend to be middle-income, US dollar stablecoins are an attractive and competitive alternative to government currency. 

Instead of facing high fees or stringent regulations to open and maintain offshore dollar accounts, users can simply download an online wallet, bypassing the hurdles tied to traditional financial systems. It has successfully offered the stability of the dollar to a far greater number of people than traditional banking allows — which, as an aside, is a global economic benefit that we believe should not be glossed over lightly.

The implication is that stablecoins are boosting dollar expansion offshore as a kind of shadow dollar in “grey” markets. As others have said before us, it isn’t so different from the Eurodollar market forming throughout Western Europe following the Marshall Plan. Although, rather than an American initiative to fund the recovery throughout Western Europe in the aftermath of WW2 wreckage, stablecoins are a grassroots development, by profit-seeking private enterprise playing a game of regulatory arbitrage. They risk a targeted crackdown by US regulators, but the profit opportunity is exceptional (see Tether Q3 2024 net profit outpacing Blackrock and Visa, and even Fed officials are starting to notice that stablecoins align with US interests.

Monetary Competition Will Drive Continued Success of Stablecoins in Emerging Markets

The demand for stablecoins show no sign of slowing down. In the past year, 57% of users reported increased stablecoin usage, with 72% expecting their usage to rise further, according to the Castle Island Ventures survey. 

As monetary competition naturally unfolds, governments globally will be faced with the decision to expend ongoing resources to restrict stablecoin usage or allow dollarization to run its course. In our view, given the level of surveillance and enforcement necessary to restrict usage, these tactics will be too costly to sustain. However, on the other hand, if regulatory frameworks were to adapt in a positive way, stablecoin growth could accelerate, driving them closer to the mainstream. 

There is another, third path, whereby central banks execute a strategy that positions their local government currencies at a competitive advantage to the US dollar. While possible, and perhaps likely in at least one country, we find it extremely unlikely to be a common outcome… see the many examples of post-gold standard hyperinflationary events.

Stablecoins Will Shift Global Financial Power and Expand Monetary Access

Stablecoins are already reshaping the global financial landscape, carving out a role that would have seemed inconceivable just a decade ago. They’re not only filling gaps in the US debt market left by retreating foreign investors but also providing millions in emerging markets with access to the stability of the dollar. As the influence of stablecoins grows, so does the prospect of a world where financial power is increasingly distributed — dispersed from governments to private issuers operating on digital networks.

The shift presents both a challenge and an opportunity. Governments may attempt to curb stablecoin adoption or compete with stablecoins by strengthening their own currencies. Regardless, the demand for dollar-backed assets is now undeniable, and should stablecoins force the hand of central banks to better execute monetary policy with the result of reducing stablecoin adoption, that would still be an overwhelming victory for the general public. 

For the US, growing adoption could also mean material financing should stablecoin issuers continue to absorb Treasury demand. Meanwhile, populations in unstable economies receive a viable alternative that traditional banking has yet to deliver.

Lastly, and importantly, it should be noted that stablecoin users overcome many of the technical and conceptual hurdles that Bitcoin faces with first-time users. Thus, stablecoins adoption makes the path to bitcoin adoption considerably smoother — an avenue that could become quite positive for bitcoin investors. 

As we look forward, the growth of stablecoins is a promising reshaping event, where national boundaries matter less in monetary matters, technology dominates, and access to reliable money is just a few clicks away. If stablecoin issuers continue to expand, we may soon find ourselves in a world where private, digital dollars become nearly as integral to the economy as central bank reserve dollars—a change that would redefine the very nature of currency and economic power. And probably for the better.

[1] They are currently 99% pegged to the US dollar, but stablecoins can be representative of any outside asset should the correct setup be undertaken.