The deep impact stablecoins can have on the mainstream U.S. financial system.

Written by: Dan Davies, Henry J. Farrell

Translated by: BitpushNews Yanan

For the U.S. cryptocurrency interest group, this week has been quite fruitful. The "Genius Act" has passed in the Senate, officially legalizing cryptocurrencies such as "stablecoins." More notably, President Trump hosted a private dinner for the top 220 investors holding the "Trump" memecoin ($Trump) on Thursday. However, for the U.S. as a whole, this is hardly a week to celebrate.

Stablecoins are a type of cryptocurrency backed by traditional assets like the U.S. dollar. A typical example is the USD1 stablecoin issued by the Trump family's cryptocurrency company, World Liberty Financial. If these digital currencies are used for political benefit transfers, their dangers cannot be underestimated. But what is even more concerning is the deep impact they may have on the mainstream U.S. financial system—this risk is more insidious and destructive.

Stablecoin supporters claim that these currencies will solidify America's financial hegemony—Trump has even stated that stablecoins will "further expand the global dominance of the dollar."

However, the reality may be quite the opposite. These digital currencies could not only weaken the international status of the dollar but also foster financial fraud, evade sanctions, and even trigger systemic risks. More alarmingly, they may open the door for another currency to replace the dollar as the global trade settlement tool.

World Liberty Financial states that its issued stablecoin will be backed by short-term U.S. Treasury bonds, dollar deposits, and other cash equivalents. Similar to the role of the dollar as the cornerstone of the global financial system, stablecoins attempt to provide a value anchoring standard for the cryptocurrency market—avoiding the costs of exchanging real dollars in regulated bank accounts while circumventing many restrictions of the traditional financial system.

The cryptocurrency interest group is trying to break the boundaries between the cryptocurrency market and traditional finance by integrating stablecoins into the mainstream U.S. financial system. This strategy allows them to switch freely between two vastly different realms: one is the highly volatile cryptocurrency casino (where people can wildly speculate on various internet meme coins), and the other is the strictly regulated traditional financial market (where assets and bank accounts are protected by the SEC and the FDIC).

With Trump returning to the White House, the cryptocurrency industry has welcomed a new opportunity for development—but this is not solely Trump's achievement. The bipartisan support for cryptocurrency has been bolstered by significant funding from political action committees (PACs) and the continuous defeats of politicians who are skeptical of cryptocurrencies. (In 2024, the cryptocurrency industry spent $40 million to successfully thwart the re-election campaign of Ohio Senator and well-known cryptocurrency critic Sherrod Brown.)

Supporters of stablecoins believe that the prosperity of cryptocurrencies will reinforce the international status of the dollar. As one of the co-sponsors of the "Genius Act," New York Democratic Senator Kirsten Gillibrand warned that the U.S. is at risk of "falling behind in the digital currency race." She specifically pointed out, "We are watching Europe and China make moves in the digital currency space, while the Trump administration is obstructing the Federal Reserve's plans to launch a digital dollar, which will undoubtedly cause us to fall further behind."

Gillibrand argues that since most stablecoins are pegged to the dollar, strengthening regulation and promoting these digital currencies could actually enhance the global dominance of the dollar. This viewpoint is not without merit—the dollar's global supremacy is indeed supported by the stability of the U.S. economy and politics, as well as the international payment networks it has established. This advantageous position allows the U.S. to turn the core position of the global financial system into a strategic weapon: through economic sanctions, the U.S. can force international financial institutions to choose between "serving clients not welcomed by the U.S." and "entering the dollar-dominated global financial system."

The cryptocurrency industry firmly believes that the legalization of stablecoins will formally integrate the current mixed cryptocurrency ecosystem—it's important to note that many of the major projects and exchanges in this system were originally created to evade or even replace dollar hegemony and government fiat currencies—into the mainstream financial system.

All of this is undoubtedly a significant boon for the cryptocurrency industry, but it poses a huge hidden danger to global financial stability. Just look at the bold claims made by cryptocurrency enthusiasts: David Sacks, the "AI and cryptocurrency czar" appointed by Trump, has openly expressed hopes that cryptocurrencies like Bitcoin could become the "new world currency," replacing America's financial hegemony with chaotic competition from the private sector.

If cryptocurrencies become mainstream financial tools, the potential chaos they could unleash is concerning. Democratic staffers on the Senate Banking Committee have pointed out that the "Genius Act" will allow U.S. exchanges to list stablecoins issued by offshore companies that are not subject to domestic regulation. Critics have specifically noted that the major stablecoin currently in circulation, Tether (whose operating entity is outside U.S. jurisdiction), has been confirmed as a funding channel for criminals and sanction evaders. Even more alarming, certain "mixing services" with transaction obfuscation features have been accused of helping North Korean hackers launder hundreds of millions of dollars.

Even with a comprehensive regulatory framework, the key lies in enforcement. The recent policies issued by the U.S. Department of Justice are perplexing—on one hand, they acknowledge that terrorist organizations like Hamas and ISIS use cryptocurrency platforms to hide the flow of funds and evade scrutiny, while on the other hand, they announce immunity from prosecution for certain platforms. The notorious memecoin scams (where issuers abscond with public funds) are even less likely to face legal consequences under the current president's view of them as personal profit tools.

The most fundamental concern regarding stablecoins may lie in the systemic financial risks they could trigger. This unique existence, straddling the edge of the traditional financial system, presents unprecedented regulatory challenges. Although the creators of the "Genius Act" propose to regularly assess the impact of stablecoins on financial stability, they deliberately avoid a core question: Will the U.S. government provide a credit endorsement for dollar stablecoins?

The crux of this question is: When a stablecoin faces collapse or is proven to be fraudulent, will the government step in to provide a bailout? If a bailout is chosen, it could burden taxpayers with heavy debt—this is precisely why "too big to fail" traditional financial institutions need to be subject to strict regulation.

But if a bailout is refused, it could introduce new systemic risks to the international dollar system. When the market cannot predict which institutions will collapse due to a chain reaction and how large the risk exposure is, a bank run crisis could erupt, ultimately leading the entire financial system into a liquidity crisis. This is also the fundamental reason why regulators require major participants in the global dollar market to maintain a high level of transparency.

Take Tether as an example; its CEO has candidly revealed a cautionary scenario: due to large banks refusing to cooperate, European stablecoin issuers have had to deposit funds in small and medium-sized banks. However, if the market loses confidence in these banks holding stablecoins and a 20% concentrated redemption occurs, these small and medium-sized banks will immediately face a crisis similar to a traditional bank run.

At that point, who can prevent this panic from spreading throughout the entire banking system? This role must be taken on by institutions with sufficient bailout capabilities—and they must use real dollars, not those seemingly legitimate cryptocurrencies.

This explains why the question of "Should the U.S. support dollar stablecoins?" is so difficult to answer. It is no wonder that reports indicate multiple countries are trying to reduce their banks' dependence on dollar financing.

The international community views the U.S. push for stablecoin legalization as a potential threat. Once stablecoins become a new financial tool controlled by the U.S., Washington may further infiltrate other countries' financial systems. Even more concerning is that the new binding relationship between the dollar and cryptocurrencies may allow illegal fund flows to reach unprecedented scales.

European Central Bank Chief Economist Philip Lane has warned that reliance on stablecoins will lead to a shift of financial activities from the euro system to privately issued cryptocurrencies backed by the dollar, making Europe more vulnerable when facing economic pressure from the U.S.

As a key part of the EU's "strategic autonomy" plan (aimed at reducing dependence on the U.S.), the European Central Bank is accelerating the development of the digital euro. This public sector-led digital currency will not only provide a complete alternative payment network but will also have built-in privacy protection and security mechanisms—contrasting sharply with private stablecoins.

The current situation indicates that stablecoins have not been able to solidify dollar hegemony by "helping the U.S. catch up with other countries" as expected; instead, they are prompting countries to accelerate their efforts to break free from the shackles of the dollar system. Europe is not only building its own financial safety net but is also planning to establish a brand new global alternative—this increasingly discredited U.S.-led system is facing unprecedented challenges.

The head of the European Central Bank's digital euro project has begun exploring its "international application prospects," aiming to create a new payment system that "respects the sovereignty of nations, reduces systemic risks, and creates new development opportunities."

Ironically, stablecoins were originally expected to use the credit of the dollar to regulate the chaotic cryptocurrency market, but now they may instead transmit the chaos of cryptocurrencies—combined with the special policy direction of the Trump administration—into the dollar-dominated traditional financial system. This reverse infiltration is triggering deeper systemic risks.

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