In a world shaken by conflict, pandemic, and populism, the golden era of globalisation appears to be in retreat. The once-celebrated flows of capital, goods, and information now stutter under the weight of fragmented politics and deepening geopolitical divides.

As trust in the post-war liberal consensus is eroding, the financial infrastructure underpinning global trade is being reimagined. A quiet but significant transformation in this context is in the architecture of money. As nations race to redefine their monetary sovereignty in a digital age, two competing infrastructures have emerged: Central Bank Digital Currencies (CBDCs) and Stablecoins.

While much of the world, led by China and India, is making rapid strides in deploying CBDCs, the US is making a deliberate strategic bet on stablecoins. Far from being a neutral technological preference, this choice reflects a geopolitical calculus as stablecoins could be the digital-age scaffolding that sustains the hegemony of the US dollar.

Pegged to dollar

Stablecoins are digital tokens pegged to fiat currencies, most commonly the dollar, and backed by reserves typically held in short-term US government debt. The two dominant players — USDT (Tether) and USDC (Circle) — collectively account for over $150 billion in circulation and are growing in usage across crypto markets, cross-border payments, and decentralised finance ecosystems.

What makes these instruments geopolitically significant is not just their popularity or technical architecture, but their reserve mechanism. When a user in Nigeria, Brazil, or Turkey buys a stablecoin pegged to the dollar, they are not just gaining access to a digital token —they are effectively channelling funds into US Treasury bills.

In other words, stablecoin adoption abroad generates demand for US debt, reinforcing the global appetite for dollar-denominated assets.

To understand the full implications of this shift, one must look to the past. After the collapse of the Bretton Woods system in the 1970s, US had forged a new financial regime based on ‘petrodollar recycling’. Oil-exporting countries, flush with dollars from energy exports, reinvested their surpluses in US assets, especially Treasury securities. This created a self-reinforcing loop: as the world demanded oil, it demanded dollars; and as it accumulated dollars, it reinvested them in US debt, funding America’s deficits and lubricating the global financial system.

Simultaneously, the rise of ‘eurodollars’— US dollars held outside American banks, especially in European and offshore markets — fuelled an offshore dollar system that operated independently of US domestic monetary controls. These dollars formed the liquidity backbone of global finance, free from US regulatory constraints but dependent on the dollar’s credibility.

Stablecoins combine these two forces — and add a third. Like petrodollars, stablecoins channel foreign demand into US financial markets, particularly government debt. Like eurodollars, they exist largely outside the formal American banking system. But Stablecoins can go further by adding programmability — the ability to embed financial logic directly into money.

The advantages

A stablecoin can trigger an automated payment when goods arrive at a port, split proceeds among multiple parties, or interact seamlessly with smart contracts. In doing so, they don’t just mimic money; they redefine what money can do.

Why would the US, the issuer of the world’s reserve currency, forgo the opportunity to create its own digital dollar through a central bank digital currency? The answer lies in geopolitics.

China has launched its Digital Yuan (e-CNY) to advance its Belt and Road ambitions and circumvent dollar-dominated payment rails like SWIFT. India, too, has launched the e₹ (Digital Rupee), with wide pilot programmes across retail and wholesale segments. These countries see CBDCs as instruments of sovereignty, resilience, and soft power. If successful, they could erode dollar’s grip on international finance.

Rather than play catch-up, the US appears to be outsourcing innovation to the private sector. By encouraging dollar-backed stablecoins, the US is betting that a decentralised, programmable, market-driven financial layer can extend the reach of the dollar in a digital age — without ceding control to the state.

The risks

This is not a gamble without risk. Stablecoins, unlike CBDCs, are vulnerable to issuer default, regulatory arbitrage, and financial contagion. The collapse of algorithmic stablecoins like TerraUSD (UST) in 2022 reminded the world that not all pegs are stable. But the leading stablecoins today — those backed by high-quality liquid assets like US Treasuries — offer a model that blends dollar stability with digital agility.

For countries in the Global South, stablecoins offer both opportunity and challenge. On one hand, they provide access to a stable store of value, low-cost cross-border transfers, and financial services otherwise out of reach. In places with inflationary domestic currencies and capital controls, stablecoins act as lifelines to the global economy.

On the other hand, they risk reinforcing the dollar’s dominance at the expense of local monetary policy. If people prefer dollar-stable digital tokens over local currency, it can lead to a phenomenon known as crypto-dollarization, weakening central banks’ control over credit, inflation, and exchange rates.

The question, then, is not whether stablecoins will rise — they already have. The real question is who controls them, what rules govern them, and whose interests they serve.

The writer is Assistant Professor (Economics), Faculty of Management Studies, University of Delhi

Published on June 25, 2025