Stablecoins: The Future of the Digital Dollar
In a decision that will redefine the future of the dollar, the United States has opted for an unusual approach in the global race to digitise currency. In July 2025, the Trump administration passed the GENIUS Act, creating a robust regulatory framework for privately issued stablecoins and deliberately closing the door on a digital currency issued by the Federal Reserve (CBDC).
This regulatory framework is not just a technical adjustment; it marks a turning point in the evolution of the digital dollar. The United States is placing its bets on a digital dollar ecosystem that is managed by private companies and subject to strict, banking-style supervision. This model is expected to be more innovative, competitive, and widely accepted than the state-controlled model implemented by China.
This dual decision to embrace private innovation while rejecting direct government control lays the foundation for a new phase of financial competition. The implications are profound and could affect everything from the stability of the banking system to the evolution of monetary policy and the role of the dollar in the 21st century digital economy. This reflection looks at the architecture of this novel approach, the potential economic impacts, and the geopolitical framework.
The cornerstone of the new legislation is the creation of a clear legal framework for the "payment stablecoin”, defined as a digital asset intended for use as a means of payment, for which the issuer must provide a fixed monetary conversion rate. In addition, the law states that these instruments are not classified as securities or commodities when issued by an authorised entity. This strategic reclassification means that stablecoins are now supervised by banking regulators rather than capital market regulators, treating stablecoins as an evolution of currency rather than speculative investment products.
Only licensed entities can issue, which may include subsidiaries of traditional banks or new financial technology companies (fintechs) that have obtained a federal licence. The aim of this mixed approach is to encourage competition between well-established companies and potentially more agile newcomers.
Another crucial point to note is that the law has extraterritorial reach. Foreign issuers wishing to operate in the US must comply with regulatory standards considered "comparable” to those in the US and must maintain sufficient reserves in US financial institutions. In practice, this measure effectively exports US regulatory standards to the rest of the world, thereby reinforcing the centrality of the US financial system in the digital age.
To obtain a licence, stablecoin issuers must adhere to a strict set of requirements modelled directly on banking regulations designed to make each digital dollar as secure as a physical dollar.
1. Full Coverage (1:1): The main pillar of the system is the requirement for each stablecoin to be backed by high-quality liquid assets at a minimum ratio of one to one. The permitted asset list is highly conservative, comprising only cash, insured bank deposits, and extremely short-term US Treasury bills. Higher-risk assets, such as corporate bonds and other cryptocurrencies, are prohibited. Algorithmic models, such as the one that led to the collapse of Terra/Luna, have also been banned.
2. Prohibition of Fractional Reserves: issuers may not use reserve assets for any purpose other than holding them in reserve. This means that they cannot grant loans or make their own investments. Unlike banks, which operate on a fractional reserve system, stablecoin issuers must act solely as custodians of customer funds. These funds must be kept in segregated accounts that are protected in the event of bankruptcy.
3. Prohibition on Interest Payments: In a crucial step to safeguard the traditional banking business model, the law prohibits issuers from paying interest to stablecoin holders. The banking sector strongly requested this provision, fearing that interest-bearing stablecoins would compete directly with current and savings accounts by draining the low-cost deposits that form the basis of credit financing.
4. Transparency and Supervision: issuers must publish audited monthly reports on the composition of their reserves. They are also subject to all anti-money laundering and counter-terrorist financing rules (AML/CFT), including customer identity verification (KYC – Know Your Customer).
Despite being a regulatory framework, the law has the potential to reshape the financial system entirely. The main economic tension stems from the risk of banking disintermediation, or the migration of funds from traditional bank deposits to stablecoins.
Analysts estimate that the stablecoin market could withdraw almost $1.9 trillion – about 10% of the total –in deposits from the US banking system. This would have two direct consequences:
• Increased cost of credit: banks rely on low-cost deposits to finance loans to households and businesses. If these funds were lost, banks would have to resort to more expensive sources of financing. This would inevitably reflect in the interest rates charged for mortgages, car loans, and business loans, resulting in tighter credit conditions in the real economy.
• Reduction in the money multiplier: in the fractional reserve system, one dollar deposited in a bank can be used to create multiple dollars’ worth of credit. However, when that dollar is converted into a stablecoin backed by public debt, it is effectively removed from the private credit creation system. On a large scale, this could have a contractionary effect, rendering the central bank's monetary policy tools less effective.
Paradoxically, this dynamic gives rise to a significant new buyer of US public debt. The stablecoin sector could become one of the largest creditors of US debt, helping to finance the government. However, this would come at the cost of more expensive credit for the private sector.
In a global context where more than 135 countries are actively exploring a public alternative, the US decision to pursue a private route is notable: Central Bank Digital Currencies (CBDCs). China is the undisputed leader in this field, with its digital yuan (e-CNY) being the world’s largest pilot project, strategically promoted as a potential alternative to the dollar-dominated payment system.
There are fundamental trade-offs involved in choosing between the two models:
• Risk: with a stablecoin, the credit risk lies with the private issuer. With a CBDC, however, the risk lies with the central bank and is effectively zero.
• Privacy: with a stablecoin, transaction data is held by a private company. In the case of a retail CBDC, the state could have direct access to a record of all transactions, raising concerns about surveillance and financial privacy — the main argument against a "Fedcoin” in the US.
Therefore, the US strategy is to compete with China’s e-CNY by unleashing a regulated private ecosystem, rather than by creating an equivalent framework. The main belief is that a range of digital dollar issuers operating in competition with each other will be more innovative and attractive, and will be adopted more widely around the world, than a single state-controlled digital currency.
The GENIUS Act marks the beginning of a new and uncertain chapter. Although the US Congress has set out a roadmap, the future remains uncertain, offering the promise of innovation but also posing the risk of instability.
In an optimistic scenario, regulatory clarity could lead to a renaissance of the digital dollar. Stablecoins would become the dominant means of conducting global digital commerce, enabling cross-border payments to be instant and at low cost, thereby reinforcing the dominant position of the dollar.
In a pessimistic scenario, compliance costs could stifle innovation, causing the market to concentrate on a few giants that are "too big to fail.” Banking disintermediation could also cause a credit crunch that would hurt the real economy.
US legislation is an innovative response to the challenges posed by digitalisation. However, the questions it raises are striking. Will the efficiency gains offered by this innovative technology outweigh the systemic risks involved in redesigning the basis of the monetary system? The answers to this question will not only shape the future of the US economy, but also the balance of power within the global financial landscape.
This reflection was prepared with the specialised contribution of Miguel Ricon Ferraz, Financial Analyst and Head of Investment Advisory Services at Banco Carregosa.
Bibliography:
• The White House. (18 July 2025). Fact Sheet: President Donald J. Trump Signs GENIUS Act into Law