Stablecoins, sovereign debt, and global monetary power
Jean Barthelemy, Justine Pedrono, and Julia Schmid examine whether the US policy of promoting USD-backed stablecoins (as embodied in legislation like the GENIUS Act) strengthens or undermines long-run fiscal sustainability and the dollar’s international role.
The authors build a theoretical macro-financial model of the global monetary system, extending a well-known framework from Farhi & Maggiori (2018). The setup involves three actors:
- A hegemonic government (think: the US) that decides how much sovereign debt to issue and sets the interest rate, aiming to maximize the financial rents from being the world’s sole safe-asset supplier.
- Two types of foreign investors: those who already have access to the hegemon’s bond market, and a second group or “new entrants,” excluded from it (e.g. due to capital controls), who can only access the hegemon’s currency indirectly through stablecoins.
- A monopolistic stablecoin issuer that meets demand passively and backs its coins partly or fully with sovereign debt, earning a profit from the gap between the return on reserves and the (zero or low) yield paid to stablecoin holders.
The model analyses how various policy levers affect outcomes: the non-monetary benefits stablecoins provide (e.g. faster payments), network effects, the size of the excluded investor base, stablecoin remuneration rules, backing requirements, and how much the government values stablecoin industry profits. The model is solved first assuming the hegemon can fully commit to never devaluing its currency, and then relaxed to allow for the possibility of a confidence crisis. Finally, the model is extended to a two-hegemon world (e.g. US and China/EU) where stablecoin issuers compete.
Findings
If stablecoins simply reshuffle existing investors’ portfolios, are fully backed by government bonds, and the government has no stake in stablecoin profits, then stablecoins change nothing: debt levels and interest rates remain the same. This “neutrality” result breaks down under three important real-world conditions.
- Channel 1 — Expanding the investor base raises debt
When stablecoins give previously excluded investors access to dollar-denominated safe assets, this creates new demand for US Treasuries. The hegemon responds by issuing more debt and accepting lower interest rates. While this looks like a fiscal benefit in the short run, it also means debt grows beyond what it would have been. - Channel 2 — Stablecoin-Profits-Driven Issuance
When a government favors stablecoin profits, it faces a trade-off between maximizing sovereign debt rents and maximizing stablecoin seigniorage — which can either push it to issue more debt (if stablecoin demand is strong ) or less debt (if demand is limited ), while simultaneously making currency devaluation more costly and thus disciplining fiscal behavior and improving IMS stability. - Channel 3 — Partial backing raises borrowing costs
If stablecoins are not fully backed by government bonds, investing part of reserves in riskier assets, the substitutability between stablecoins and sovereign debt breaks down. This forces the government to offer higher interest rates to attract debt buyers, increasing both borrowing costs and the overall debt level.
A new form of private privilege
Stablecoin issuers capture a form of “private exorbitant privilege” i.e. profits arising from investors willingly forgoing interest in exchange for the convenience of stablecoins. Even if a sovereign debt crisis erases the government’s own financial advantage, stablecoin issuers can continue to earn these rents as long as their coins remain useful.
The International Monetary System: Are Stablecoins Game Changers?
Authors: Jean Barthelemy, Justine Pedrono, Julia Schmidt
From: Banque de France, HEC Paris
How stablecoins reshape global currency politics
In this brief, Jón Danielsson and Robert Macrae argue that dollar-backed stablecoins are not merely payment tools but strategic instruments that reinforce US monetary and political hegemony, delivering fiscal and strategic benefits to the United States. By embedding the dollar into the digital payment rails of global finance, they deepen dollar dominance in ways that are structurally difficult to reverse.
- Currency flight and financial instability
A central concern is that stablecoins are “run-optimised instruments” : when confidence shocks hit, they become the natural conduit for currency flight precisely because they can be purchased around the clock and transferred instantly across borders. This makes them a potential amplifier of financial instability, especially in countries with weak monetary credibility. - Threat to weaker states’ monetary sovereignty
In countries with high inflation, capital controls, low banking access, or fragile currencies, stablecoins enable rapid currency substitution away from the domestic currency. While this may benefit individual users seeking stability, it weakens monetary policy transmission and erodes the policy space of smaller or more vulnerable states. - Regulatory asymmetry and strategic contest
The GENIUS Act creates a US regulatory framework that locks in dollar-backed stablecoin design globally, while other jurisdictions, particularly in Europe and emerging markets, face the choice of either accepting dollar-denominated digital instruments or developing costly alternatives. The brief frames stablecoin regulation as a strategic contest over who writes the rules for digital finance. - No jurisdiction can opt out
A key conclusion is that stablecoins can only be effectively banned in the most authoritarian states. All other countries must find a policy response, whether through promoting domestic stablecoin alternatives, fast-payment systems, CBDCs, or regulatory frameworks, to manage the risks to monetary sovereignty while preserving the efficiency gains stablecoins can offer.
The geopolitics of stablecoins
Authors: Jón Danielsson, Robert Macrae
From: LSE
