Will Stablecoins Save King Dollar's Reign? — Barrons.com

By Emily RussellThe Senate this week passed bipartisan legislation to establish regulations for stablecoins — a decade-old digital currency that proponents say make payments faster, easier, and more efficient. For crypto advocates, the bill's passage would help cement the next stage of the dollar's dominance as global currency.Unlike other cryptocurrencies, stablecoins are backed by real-world assets, such as U.S. Treasuries. Under the Senate's so-called Genius Act, stablecoins would be legally required to be pegged at a 1:1 ratio to U.S. dollars. Some argue that makes them safer and less volatile. The legislation would need to also pass the House, which could make changes."A hypothetically well-regulated stablecoin would be similar to other financial products Americans use all the time," writes Paul Blustein, a longtime economics reporter and senior associate at the Center for Strategic and International Studies, in his recent book, King Dollar: The Past and Future of the World's Dominant Currency. But it could create "new problems."Blustein and some other crypto observers believe stablecoins could fragment the money issuance system in ways similar to the chaotic Free Banking Era of mid-19th-century America. Hundreds of private banks issued their own currencies, which ended up worthless. Many collapsed.For those concerned about the trajectory of the dollar, however, stablecoins are a bulwark against China's rapid advancements in digital payment technology. The Chinese central bank's digital currency, e-CNY, has roughly 300 million users and has surpassed seven trillion yuan, or $1 billion, in transactions. And China's pilot settlement technology, mBridge, facilitates cross-border payments of e-CNY and other digital currencies worth tens of millions of dollars."The House and Senate tend to be anxious about the dollar's vulnerability to potential rivals, and stablecoin boosters are clever at exploiting that sentiment," Blustein writes. The dollar has fallen nearly 10% this year in response to uncertainty around global tariffs and U.S. leadership. But it isn't likely to be unmoored as the world's global reserve currency, he argues in King Dollar.In a phone interview, Blustein explained to Barron's why he believes the dollar won't be dethroned, and why he thinks stablecoins aren't all they are cracked up to be. Here is an edited transcript of the conversation.Barron's : Stablecoin proponents envision them as a way to ensure U.S. financial dominance. Trump and many in Congress seem to buy into that idea. Is it merited?Paul Blustein: The Trump administration is arguing that stablecoins — which they are trying to regulate to ensure they really do have the reserves of Treasuries, securities, CDs and other high-value, short-term liabilities — is what will save the dollar. "We are so worried about the dollar. Everyone is expressing concern about the dollar. Don't worry. Stablecoins will be spread all around the world so people will be using dollars."First of all, I don't think that is necessary. Either the dollar will be dominant for good reasons, or it won't be. Stablecoins aren't going to make any difference. At the margins they might. And I think it is not in the U.S.'s interest to have stablecoins spread all over the world because they facilitate a lot of illicit activities, including evasions of U.S. sanctions. Possibly, the regulations will be written so carefully and the technology of stablecoins may be improved. I have talked to people in the stablecoin business who say they are working on this. There is going to be a point where if stablecoins get too close to "bad guys," they will be frozen.There is a lot of bad stuff that happens within the traditional financial system, too. But it is very clear from the way stablecoins are used now that it makes it much easier for bad guys to operate and to transmit value very quickly while avoiding the long arm of law enforcement. I don't see how that is in America's interest.If not a stablecoin, then what other advancements should the U.S. make in order to stay competitive with China?I come out in the book in favor of tokenized deposits, and I still believe that is the most promising way forward for the U.S. to keep pace. Banks are starting to really wake up to this more.Recently, news broke that a group of banks are talking about issuing stablecoin jointly. I think if blockchain or other types of distributed ledger technology looks promising to the big banks, they will see the light and move toward a system where they are using stablecoin-like vehicles for transmitting payments, but using central bank money. Taking your deposit and turning it into a token, something that can be programmed so that payment is conditioned on certain criteria being met. It is not the kind of thing you would use to pay for your coffee, but could be useful for real estate transactions. JP Morgan has been a pioneer in this — but only for their really big customers, not for ordinary people.Banks are feeling the heat. They are seeing that regulation is moving in favor of digital assets and they need to compete. This is one good things about stablecoin: It will get banks to move in the direction of tokenized deposits or some better-regulated system that will preserve central bank money as the heart of the monetary system, preserve U.S. power, and preserve the dollar.You finished writing the book after the 2024 election, but before Trump's inauguration. Has your view on the dollar changed since then?I wrote that dollar dominance survived Trump 1.0, and I believe it will survive Trump 2.0 as well. I still believe that, for two major reasons. One is the shortcomings of the alternatives — the euro and the Chinese renminbi, in particular. And the other is the degree to which the dollar is so entrenched in the plumbing, in the inner-workings of the financial system. The biggest players in the global financial system are using the dollar in so many ways — borrowing, lending, investing. Unwinding that would be tremendously costly, difficult, and time-consuming.Is there some sort of threshold that might be crossed in Trump's term that would change this whole equation, something that could topple the dollar?That point would be when foreign investors are no longer confident that if they have a dispute involving their U.S. assets it will be heard in U.S. courts in an impartial way. A big problem with the renminbi is that the Communist Party controls all judges. I am appalled by Trump's assault on the rule of law everyday. But does that mean that the rule of law is so shredded that foreign investors can't see much difference in impartiality between U.S. courts and Chinese courts? I think that would accelerate the selloff of U.S. assets, including Treasuries. It could snowball into a real serious crisis. But I still think it would take a very long time for the dollar to lose its place as the currency most used in transactions involving international commerce. The more serious concern for the dollar is probably the U.S. fiscal outlook.How do you envision the federal deficit, which is expected to grow by nearly $3 trillion under the House's tax bill, affecting the dollar's dominance?One silly theory is because we borrow in the world's dominant currency, we can just go along on our merry way borrowing. That is extremely foolish. Foreigners would demand higher yields on Treasuries to continue buying them. It would be extremely painful for the U.S. economy. But that doesn't mean that the dollar wouldn't remain the predominant currency in international commerce.I am not suggesting we ought to be complacent. On the contrary, just because we have the dominant currency, doesn't mean we can be complacent about our fiscal situation. The dollar gives us some advantages that other countries don't have. But I don't think it is that great. To quote former Fed Chair Ben Bernanke: "Exorbitant privilege isn't so exorbitant anymore." We have a privilege, but the world isn't going to underwrite our profligacy.Thanks, Paul.Write to [email protected] content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.