On election night in November 2024, a wave of optimism swept through the U.S. cryptocurrency industry. Investors celebrated what they perceived as the dawn of a new era: the arrival of the first administration demonstrably supportive of digital assets. Bitcoin surged to an unprecedented high exceeding $75,000, and crypto-related equities experienced a significant rally. Donald Trump, a figure who had openly embraced digital money on the campaign trail, was hailed as a champion. His declaration, "If crypto is going to define the future, I want it to be mined, minted and made in the USA," resonated deeply with the sector.
Just a few months into his second term, President Trump moved to fulfill that promise, enacting legislation that many in the crypto community viewed as a passage to a digital promised land. In July, he signed into law the "Guiding and Establishing National Innovation for US Stablecoins Act," colloquially known as the GENIUS Act. This landmark piece of legislation established the first comprehensive federal regulatory framework specifically for stablecoins – digital tokens pegged to the U.S. dollar that form the bedrock of the cryptocurrency economy. The Act represented a pivotal moment for digital money, simultaneously opening doors to immense opportunity and significant new risks.
Private Issuance, Public Scrutiny
The GENIUS Act mandates stringent requirements for entities issuing dollar-backed digital tokens. Key provisions include the necessity of fully verifiable reserves held in cash or short-term government bonds (Treasuries), a commitment to monthly attestations of these holdings, clear redemption obligations for token holders, and adherence to anti-money laundering (AML) and consumer protection regulations. Crucially, the legislation classifies stablecoins as payment instruments rather than securities, thereby aiming to quell regulatory uncertainty and mitigate litigation risks for issuers. "We are witnessing a shift of stablecoins from simply being ‘crypto’ or ‘digital currency’ to being core payments infrastructure," notes Mike Hudack, co-founder of Sling Money, a cryptocurrency-enabled money transfer application that utilizes stablecoins.
Beneath the prevailing enthusiasm lies a more profound strategic calculus. While the Act signals an embrace of innovation, it also represents a deliberate counterpoint to the development of a central bank digital currency (CBDC). One of President Trump’s initial executive actions in his second term was to prohibit U.S. authorities from issuing a digital dollar. By rejecting a government-operated digital dollar – a project often associated with the previous administration – Washington effectively delegated the future of digital currency to the private sector. This decision is a complex amalgamation of ideology, market pragmatism, and political maneuvering. White House officials have argued that a digital dollar would have placed the government in an uncomfortably close relationship with citizens’ financial lives, potentially inviting accusations of financial surveillance. In contrast, stablecoins offer a market-driven model for digital payments, designed to uphold the dollar’s global dominance and preserve U.S. financial hegemony in an increasingly digitized global landscape. Currently, an estimated 99% of all stablecoins are denominated in U.S. dollars, meaning that every transaction conducted with these tokens reinforces the greenback’s international reach.
This policy choice also reflects the administration’s ideological aversion to expanding federal control over monetary systems, a stance that resonated with both libertarian principles and the business community during the election cycle. "A CBDC would concentrate financial power within the government, something this administration was never likely to endorse," explains Maghnus Mareneck, co-CEO of Cosmos Labs, a U.S. blockchain firm instrumental in developing interoperability protocols for financial institutions. "The administration recognizes that stablecoins can modernize the dollar without replacing it." The legislation was met with widespread enthusiasm from cryptocurrency firms, which had long grappled with years of regulatory ambiguity. Many industry participants contended that the Securities and Exchange Commission (SEC) had unduly stifled the sector’s growth through what they termed regulatory overreach. During his campaign, Trump had pledged to remove Gary Gensler, the SEC chairman appointed by the previous administration, who had been a key figure in shaping crypto regulation. Gensler departed his role in January, prior to the scheduled end of his term in 2026, facilitating a potential shift in the agency’s regulatory approach. In the months following the GENIUS Act’s enactment, the stablecoin market experienced a dramatic surge. Once a niche segment, total stablecoin capitalization surpassed $300 billion by last October, growing at more than twice the pace of the broader crypto sector. Analysts at Citi project that this figure could reach $4 trillion by 2030. Tether, the leading issuer of dollar-based stablecoins, is reportedly seeking up to $20 billion in new capital through its latest funding round, a move that would propel its valuation towards the $500 billion mark.
However, critics have voiced concerns regarding the Act’s perceived leniency towards the inherent risks associated with stablecoins. "What the Act does is vastly expand the network effects that make it easier to launder money and operate in the underground economy. It is important for the government to be able to monitor and audit transactions, and the bill is very light on that," warns Professor Kenneth Rogoff, an expert in international economics at Harvard University and former Chief Economist of the International Monetary Fund (IMF). David Hoppe, founder of Gamma Law, a U.S. law firm specializing in digital asset litigation, adds, "It does not guarantee timely redemption or provide federal insurance, and it lacks clear rules for dispute resolution, unauthorized transfers, or fraud recovery. Oversight is fragmented across state and federal channels, creating space for inconsistent enforcement and charter shopping."
Banks on Guard: Opportunity and Existential Threat
For the traditional banking sector, the ascent of state-sanctioned stablecoins presents a dual challenge: significant opportunity coupled with profound existential risk, primarily through the potential for disintermediation. While few stablecoins currently offer interest, a future scenario where issuers begin to provide yield and businesses adopt them for payroll, trade settlements, and other financial operations could lead to substantial deposit outflows from banks. This could undermine their foundational model of deposit-funded lending and jeopardize credit creation. The balance sheets of traditional lenders, already strained by the proliferation of digital payment platforms, could face further contraction. A recent U.S. Treasury report estimates that up to $6.6 trillion in deposits could be withdrawn from bank coffers if crypto exchanges are permitted to offer interest payments or similar financial incentives, a prospect that U.S. banks are actively lobbying policymakers to prevent.
Legacy financial institutions are adopting a cautious strategy, recognizing their enduring advantages. "If banks issue their own stablecoins directly, they would be safer, because they have direct access to central bank reserves," posits Lucrezia Reichlin, an economist at the London Business School. Major financial players like JPMorgan Chase and Citi are actively exploring the issuance of their own dollar-pegged payment tokens. Concurrently, nine European financial institutions, including UniCredit and ING, are developing euro-denominated stablecoins. "Banks may look to position themselves as the infrastructure and control layer for stablecoin custody, settlement, and on-chain treasury, providing KYC, segregation, and policy controls, so they can capture fee revenue as liquidity and payments migrate on-chain," suggests Susana Esteban, Managing Director of the Blockchain and Digital Assets practice at FTI Consulting, a prominent U.S. business consultancy firm. Their ultimate objective, she adds, could be the tokenization of deposits, while simultaneously offering the same "24/7, programmable experience" that stablecoins provide.
The stakes extend beyond mere transactional efficiency; they touch upon financial sovereignty. The increasing prominence of privately issued dollar-denominated digital currencies could diminish the influence of most central banks, fundamentally altering the architecture of international finance. "Stablecoins do not create base currency, so they don’t directly erode the Federal Reserve’s ability to set short-term rates or influence market liquidity," observes Jonathan Church of TransferMate, a fintech payments infrastructure firm. Nevertheless, central bankers express concern that a widespread shift to stablecoins could reduce their control over money creation and the transmission of interest rate policy, compelling monetary policy to operate through less predictable channels. As a greater volume of money circulates outside the regulated banking system, the impact of interest rate adjustments might take longer to permeate the broader economy. Andrew Bailey, Governor of the Bank of England, has recently cautioned that stablecoins could "separate money from credit provision," as non-bank entities assume a more significant role in financial intermediation.
The international payments group Swift is also adapting to this evolving landscape, collaborating with Bank of America, Citi, and NatWest to develop a shared blockchain ledger aimed at facilitating transactions, particularly the settlement of tokenized assets, including stablecoins. The emergence of stablecoins poses a direct threat to Swift’s traditional role by enabling instantaneous transfers that bypass traditional intermediaries. Transactions that once required several days and multiple compliance checks can now be executed within seconds, disrupting decades of established financial infrastructure. Swift’s efforts to remain relevant serve as a microcosm of the broader financial system’s challenge: in an era of programmable, borderless money, legacy institutions must evolve or risk becoming obsolete.
The Trump Effect and Geopolitical Undercurrents
As is often the case with the Trump presidency, the delineation between public policy and private interest appears blurred. Members of the President’s family have launched ventures in the cryptocurrency space, including World Liberty Financial, the issuer of the USD1 stablecoin, and American Bitcoin, a mining company co-founded by Donald Trump Jr. and Eric Trump. A meme-token, $TRUMP, has even been named in honor of the President himself. While the intertwining of political and commercial interests is not unprecedented for the Trump administration, the stakes are considerably higher in this instance. Stablecoins, unlike traditional businesses such as hotels or golf courses, directly impact the foundational elements of the financial system.
For proponents, the symbolism is compelling: the self-proclaimed dealmaker who once built skyscrapers now aims to solidify American influence in the realm of digital money. Critics, however, argue that this alignment of public policy with private profit risks eroding confidence in the impartiality of U.S. financial regulation. Lawmakers and ethics experts have called for enhanced safeguards, including restrictions on digital asset ownership by politicians and senior officials, as well as more robust blind-trust requirements. "The president directs agencies responsible for implementing the Act, while his family benefits from a company whose success depends on those same regulations," states David Hoppe of Gamma Law. "Even if lawful, such circumstances create the perception that private gain could influence public policy, which risks undermining confidence in fair enforcement and market integrity."
Despite these concerns, the administration appears resolute. In Washington’s strategic calculus, the digital future of money must be denominated in dollars, even if those dollars are issued by private entities. In this context, the GENIUS Act functions as a geopolitical statement. Both administration officials and members of the Trump family frame the policy as a direct response to de-dollarization efforts spearheaded by China. "Crypto is actually going to be the thing that preserves dollar hegemony around the world," asserted Donald Trump Jr. at a crypto conference in Singapore. He added, "As stablecoins start becoming the markets and treasuries, that’s going to replace China and Japan and some of these places that say, ‘You know what? We don’t want America to have that power anymore.’"
China’s Digital Yuan Gamble and Europe’s Response
One of China’s strategic maneuvers to challenge the dollar’s dominance is the accelerated rollout of its own CBDC, the digital yuan. This initiative gained further impetus following sanctions imposed on Russian banks accused of facilitating the acquisition of weapons parts for Russia. Beijing has also actively promoted its Cross-Border Interbank Payment System (CIPS), while outbound lending in renminbi has seen a dramatic increase, with renminbi loans, deposits, and bond investments by Chinese banks quadrupling since 2020. China is also a key proponent of the m-CBDC Bridge, a multi-CBDC platform designed to facilitate cross-border payments, overseen by the central banks of China, Hong Kong, Thailand, Saudi Arabia, and the United Arab Emirates.
"China’s ambition is not to replace the dollar or make the yuan an alternative to it. They know that it would be unrealistic," remarks Lucrezia Reichlin, the economist from the London Business School. "But they want to defend the payment system in their financial ecosystem, and one way to do it is to control the rails for cross-border payments via digital solutions."
China’s approach to stablecoins is marked by significantly greater caution. Last summer, the Hong Kong Monetary Authority began accepting applications from stablecoin issuers, a move widely interpreted as China’s response to the U.S. GENIUS Act. Chinese officials suggested that the U.S. promotion of stablecoins necessitated a counter-strategy involving a renminbi-pegged stablecoin to boost the yuan’s international usage. However, since then, various Chinese regulators, including the People’s Bank of China, have expressed reservations about yuan-based stablecoins, citing concerns that private stablecoins could undermine the development and adoption of the digital yuan. This regulatory tightening has prompted major Chinese tech giants such as Ant Group and e-commerce group JD.com, which were expected to participate in Hong Kong’s pilot program, to postpone their stablecoin issuance plans. "Beijing wants every digital yuan transaction, whether it is domestic or international, to move through systems it can oversee. Stablecoins inherently create alternative payment networks that the state cannot easily legislate, and that introduces risk and potential fragmentation of issuance for this government," explains Mareneck of Cosmos Labs, an expert on Asian stablecoins.
The U.S. pursuit of stablecoin supremacy has also unsettled European policymakers and the European Central Bank (ECB), which is proceeding with its own digital euro initiative. Despite being the first major economic power to establish a comprehensive regulatory framework for crypto assets with its Markets in Crypto Assets (MiCA) regulation, the EU does not currently prioritize stablecoins. Experts warn that Europe risks repeating past mistakes by over-regulating a nascent market, potentially allowing American platforms to dominate it. "MiCA has a number of restrictions, and many in Europe appear to be focused on protecting banks rather than embracing technological innovation. Stablecoins enable easy access to U.S. short-term government bonds from all parts of the world, which also diverts capital flows from the EU and the UK to the U.S.," observes Gilles Chemla, a finance professor at Imperial Business School and co-director of the university’s Centre for Financial Technology. Concerns over financial sovereignty are a primary driver of the EU’s CBDC program, as it seeks to reduce reliance on dominant U.S. payment companies like Visa and Mastercard.
However, experts question the achievability of this goal if dollar-denominated stablecoins become widely adopted within Europe, and whether a digital euro is the most effective tool to address this challenge. "The digital euro, in its current design, is narrowly focused on the euro area as a means of payment only for private households and with holdings limited to €3,000, while stablecoins offer an international payment scheme that can be used by global companies," states Peter Bofinger, an economist at Würzburg University and a former member of the influential German Council of Economic Experts. A more effective approach for the EU, Bofinger suggests, would be the integration of its existing national payment systems.
Should dollar-backed stablecoins gain public traction in the Eurozone, the ECB could face difficult choices. "There is a risk of dollarization. Dollar-backed stablecoins could become what the eurodollar market is now: a big offshore dollar-based market," warns Reichlin from the London Business School, a former ECB Director General of Research. She adds, "If Europe doesn’t develop euro-pegged stablecoins, the old payment system could be dollarized, especially large cross-border payments. Europe is complacent about this risk." Conversely, some economists argue that warnings about dollarization are overstated. "The ECB is raising the risk of dollarization to justify the need for a digital euro," contends Bofinger. "There’s no such risk, because currencies are like languages: to switch from a domestic currency to a foreign one, the domestic currency has to be in a terrible state, like in some Latin American countries."
Another concern for the ECB is that dollar-backed stablecoins could erode the euro’s global standing, while their widespread adoption in Europe might diminish the ECB’s control over monetary policy. "Every tokenized dollar transaction strengthens the dollar’s global position, even beyond U.S. borders. A euro CBDC cannot match that momentum and will likely be slower, more limited, and less compatible with global blockchain systems," notes Mareneck of Cosmos Labs. Reichlin adds, "It was a mistake of the ECB to think of CBDCs as an alternative to private stablecoins. These are two different things. CBDC is similar and complementary to cash, whereas stablecoin is complementary to deposits. There is no reason why CBDCs and stablecoins could not coexist."
A Risky Bet on Private Money
Nearly two decades after the 2008 credit crunch, policymakers remain acutely aware of its devastating effects. Stablecoins are expected to be backed by safe, liquid assets, and users should be able to redeem them at par. "Because stablecoins are not lent out the way bank deposits are, you can argue that in some respects they are likely to be at lower risk than bank deposits, though governments are more likely to bail out banks than stablecoin companies," says Paul Brody, a blockchain expert at professional services firm Ernst & Young. However, economists caution that stablecoin issuers effectively operate as shadow banks, but without the same capital requirements, access to central bank liquidity, or regulatory oversight. Should confidence in their reserves falter, the unwinding could spill into bond markets and trigger liquidity crises, echoing the panic witnessed in 2008 and 2020, and once again compelling governments into politically unpopular bailouts. "If a major stablecoin issuer is unable to meet redemptions or discloses reserve weaknesses, trust could unravel quickly, prompting mass withdrawals. The impact would extend beyond digital assets, affecting wider financial markets that rely on tokenized instruments for settlement and liquidity," warns Krishna Subramanyan, CEO of Bruc Bond, a cross-border banking and payments provider.
A significant concern is the potential for speculation to once again overshadow regulatory prudence. Although the GENIUS Act prohibits the issuance of interest-bearing stablecoins, it does not explicitly ban third parties from offering interest-bearing financial products that involve stablecoins. Experts caution that the creation of such reward-based products could foster a parallel deposit market that competes on yield with only a tenuous guarantee of one-to-one convertibility, thereby complicating monetary control. "Because stablecoins are vulnerable to runs, a fire sale of their reserve assets – such as bank deposits and government debt – could spill over into bank deposit markets, government bond markets, and repo markets," the IMF noted in a recent financial stability report. Susana Esteban from FTI Consulting suggests a practical safeguard: "integration rather than prohibition: preserve monetary control by including stablecoin flows in the liquidity toolkit using facilities such as the Standing Repo Facility and Reverse Repo Facility to absorb shocks while supervisors treat major issuers as systemically important payment institutions subject to stress testing and live disclosure."
Security remains a critical factor. Some experts warn that, like other forms of cryptocurrency, certain stablecoins could be exploited for illicit activities such as money laundering and are also susceptible to cyberattacks and technical glitches. Stablecoin issuers will likely need to secure insurance to reimburse holders in the event of cyberattacks and to cover operational risks, which would inevitably increase their costs. Political uncertainty may also contribute to volatility, as a future Democratic administration could impose more stringent regulations on stablecoins. "Expect a revisit of the CBDC ban, stricter consumer protections, and tighter perimeter rules for issuers regarding resolution, interoperability, and wallet safeguards," predicts Maja Vujinovic, CEO of Digital Assets at FG Nexus, a digital assets holding firm.
By the time of the next presidential election, however, America’s financial experiment with stablecoins may have become too significant to fail. The wager is bold: that the profit motive of dollar-denominated token issuers will align seamlessly with national interests. In this sense, the GENIUS Act embodies a paradox: it aims to enhance dollar supremacy while simultaneously diluting Washington’s direct control over money creation. Can this hybrid model of monetary sovereignty – one where Wall Street and Silicon Valley, rather than the Federal Reserve, wield significant influence over global finance – live up to the expectations of crypto enthusiasts, including the Trump administration, or will it sow the seeds of the next financial crisis?
The ultimate answer will likely hinge on the same enduring forces that have long shaped financial markets: confidence, liquidity, and the fundamental belief that the system, despite its inherent flaws, will ultimately hold.
