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The rapid ascent of stablecoins is unsettling policymakers across the world. Backed by dollars and other reserve currencies, they are increasingly viewed as instruments that could entrench the greenback’s dominance in international payments or even marginalise weaker domestic systems.
European officials warn of eroded monetary sovereignty, while regulators in Asia have rushed to devise frameworks for local, currency-linked alternatives.
A Symptom of Deeper Inefficiencies
Stablecoins are forcing finance to modernise
Yet this defensive posture risks missing the bigger picture. Stablecoins are not merely a threat to existing monetary systems; they are a symptom of deeper inefficiencies.
They expose high costs, outdated infrastructure, and—crucially—a lack of confidence in many countries’ central banks and currencies.
Rather than restricting their use, governments would be better served by addressing those underlying weaknesses.
Consider Europe. The euro is a common currency, but its payment landscape remains fragmented, shaped by a patchwork of banking systems and political divisions.
The European Central Bank is working on a digital euro to unify retail payments, but the absence of robust private-sector alternatives has underscored the bloc’s limitations as a reserve-currency power.
Elsewhere, the challenge is different but no less acute.
China and India have developed highly sophisticated domestic payment networks—arguably the most advanced in the world. Yet both nations retain capital controls and continue to battle periodic doubts over the credibility of their currencies.
The concern is clear: if given the choice, businesses and consumers might increasingly prefer to transact in dollar-backed stablecoins rather than renminbi or rupees, even for trade within their own economies.
Commercial Bank Disintermediation
Commercial banks, meanwhile, face disintermediation.
Stablecoins could lure deposits away from traditional accounts and reduce the role of banks in payments.
Unsurprisingly, many lenders are responding by “tokenising” deposits, enabling customers to transfer value via blockchain rails, while simultaneously slashing the hefty fees attached to cross-border transactions.
Competition is working precisely as economic theory predicts—forcing incumbents to cut costs and innovate.
What, then, is the correct response?
Not simply the proliferation of domestic-currency stablecoins, nor the hurried launch of retail central bank digital currencies.
These may patch over weaknesses but do little to resolve structural flaws. Instead, policymakers should focus on building more inclusive, efficient domestic systems, coupled with credible, independent monetary institutions.
Wholesale CBDCs and blockchain-based settlement tools could accelerate cross-border flows, but without stronger currencies and sound governance, no amount of digitalisation will restore trust.
Stablecoins’ greatest contribution may ultimately be catalytic.
By threatening to bypass inefficient structures, they are compelling central banks and commercial lenders alike to raise their game.
If that results in lower costs, faster transfers and renewed confidence in domestic money, the disruptive impact of stablecoins may prove to be one of their most valuable legacies.
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