With the U.S. dollar hitting parity with the euro for the first time in
But strong exchange rates shouldn't distract from the dollar's emerging vulnerability. The International Monetary Fund's latest survey shows that the share of dollars in foreign exchange coffers around the globe has hit a
If using the dollar becomes slower, more expensive and less stable than other currencies, a replacement will quickly and definitively fill the void. The global geopolitical and economic consequences would reshape the world as we know it.
Until now, the dollar has gone largely unchallenged (at least successfully) as the world's go-to reserve currency because of its merit. Its relative strength, stability and liquidity have set the international standard. And while that merit still stands, the market in which it operates has evolved. Blockchain technology offers newfound efficiency via stablecoins — an asset class that allows for dollars to be converted into various forms of crypto, and vice versa. With stablecoins, users can send money around the world faster, more affordably and more securely than ever before.
Unsurprisingly, the appeal of superior digital settlements has caught the attention of the very same challengers who seek to disrupt dollar dominance. Both China and Russia have a yearslong head start on the development of their own form of a government-led, fiat-backed legal tender: central bank digital currencies, or CBDCs. And while private stablecoins and government CBDCs can coexist — perhaps even symbiotically — in Western democracies, it's unlikely that decidedly anti-crypto, authoritarian regimes will allow market-driven innovation to take root when it threatens their own grip on financial systems.
But there's a workable path forward that taps into the dollar's existing strength, while upgrading it through private innovation to remain the world's premier reserve currency.
That's because where the U.S. government lags behind, the private sector has already laid the groundwork for the next chapter of U.S. dollar hegemony — through the development of market-tested, private stablecoins. The innovation that has been unleashed by private stablecoin development — and the recent volatility that has hardened those assets — has resulted in a number of dollar-denominated stablecoins that are leaps and bounds ahead of the competition.
Better still, they can fit squarely within existing regulatory regimes applied to fiat reserves in traditional markets. U.S. policymakers can both bolster the U.S. dollar's status — and preempt foreign competition arising via CBDCs — by supporting U.S. dollar-backed stablecoins with prudent legal and regulatory guardrails. But if Washington does not act quickly enough, America may miss this opportunity to lead. While some are proposing sweeping regulatory overhauls — "new tools for new rules," as they say — the best path forward can work within our current system.
First, the asset class needs to be unambiguously labeled, with defined parameters of what is and is not a true stablecoin. As things currently stand, in the U.S. there is no clear or regulated definition for what a stablecoin is — and perhaps more important, what it isn't. Comparing the 1:1 fiat-backed "USD Coin," or USDC, with USTerra — what's called an "algorithmic stablecoin" — is like comparing cash in hand to an IOU from your debt-laden college roommate. Meanwhile, both can currently (and legally) self-identify as stablecoins.
Fiat-to-crypto transfer-tokens that are unregulated — and thus potentially both uninsured and uncollateralized — are inherently unstable, and no algorithm can make up for those three combined shortcomings. Crypto developers should continue to experiment, but not under the guise of being stable.
Any digital asset that wants to bear the stablecoin label needs to meet simple requirements that ensure the unwavering stability they advertise. They must be backed by full 1:1 reserves held in approved and regulated banks, subject to inspection and periodic audits or other means of transparency. Regulators would then be tasked with ensuring those reserves are both high quality and highly liquid — bolstering customer confidence and mitigating volatility risks. As such, stablecoins must be backed by U.S. dollar cash and U.S. dollar cash equivalents.
It's of equal importance to then qualify what a stablecoin is not. Quite simply, stablecoins can't be viewed as an investment that generates yields or returns. If the asset class adopts higher risk practices like fractional reserves and lending money exchanged by customers, the crypto ecosystem would be mirroring the risky parts of the very system it originally sought to disrupt.
As Washington looks to strengthen the dollar's status through stablecoins, it's important to keep a few important, banking-specific realities in mind. Stablecoin issuers must be regulated, and stablecoin reserve banks must be regulated.
But this is not to say that stablecoin issuers should be regulated as banks. Technology is best led by those who know it best — skilled technologists who specialize in security and crypto. Likewise, banking is best led by banks — banks staffed with the requisite legal, compliance and risk-monitoring teams. Fully fiat-backed stablecoins are, in and of themselves, a feat of modern engineering. No bank or government body can or should be charged with their maintenance and upkeep. This is nothing new to crypto; traditional banking apps are often developed by external technology programmers who provide services that most banks cannot do themselves, just as the government hires external firms to upgrade its aging digital infrastructure.
The best parts of this stablecoin solution? In Washington, these are already points of common consensus across the aisle, prioritizing both consumer protections and American innovation. Further, many stablecoin issuers may already — albeit unwittingly — fall under the regulatory purview of federal banking agencies under the Section 7(c) of the Bank Service Company Act as technology service providers or other companies that provide services to banks. Federal banking agencies could use their authority under this act to issue necessary regulations described above.
Following this road map would avert the need for the usual stalemate of partisan policymaking. While the requisite regulatory build may be a hard pill for some in the crypto industry to swallow, taking our medicine now is exactly what America needs to maintain its competitive advantage and cement the dollar's central role in the digital asset ecosystem. We're at a critical crossroads with respect to the U.S. dollar dominance, and decisions made by policymakers of today will have wide-reaching domestic and global economic implications for decades.
Policymakers need to set clear and workable rules of the road for the U.S. dollar-backed stablecoins now, rather than waiting for our position of strength to be compromised further. In doing so, the U.S. dollar will reinforce its standing as the world's preferred currency in the digital era — backed by the technological merit that only private innovation can afford.
