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• Stablecoins and the Demand for Dollars
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Transcript

Tim Sablik: My guest today is Marina Azzimonti, a senior economist and research advisor at the Richmond Fed. Marina, welcome back to the show.

Marina Azzimonti: Thanks for having me. It's great to be here again.

Sablik: Today we're going to be talking about a recent paper that you wrote with Vincenzo Quadrini, an economist at the University of Southern California. In the paper, you both examine what the rise of stablecoins could mean for the future of the dollar.

Stablecoins are digital currencies that seek to maintain a fixed value in relation to some other asset, often the U.S. dollar. So, a dollar-pegged stablecoin aims to ensure that each digital coin is consistently worth $1. How do stablecoin issuers try to ensure that peg is maintained?

Azzimonti: To understand how that peg is maintained, it helps to first understand exactly what a stablecoin is and what it's used for.

Think of it as a bridge between the traditional money and the digital world. Standard cryptocurrencies like Bitcoin or Ether experience wild swings and they can skyrocket or crash completely overnight. That makes them a bit tough to use for practical business operations, like running cross-border payroll for a remote team or pricing an international supply contract. A stablecoin solves this by locking its digital value directly to a real-world asset, which in 90 percent of the cases is the U.S. dollar. So, you basically get the round-the-clock speed of blockchain technology with the stability of the cash in your wallet.

Of course, issuers must ensure that a digital token is always worth exactly $1. In order to do that, issuers generally rely on two very different reserve backing set-ups.

The first is exactly like the classic currency board. A currency board is a strict monetary arrangement where a country pegs its local currency directly to a foreign anchor, like the U.S. dollar. You can think of Hong Kong or Argentina, where I'm from, back in the '90s. The currency board is legally required to hold 100 percent of the monetary base in foreign reserve assets. It cannot issue a single unit of local currency unless it has a physical dollar sitting in its vault to back it up.

When you look at fiat-based stablecoins like Tether or USD Coin [USDC], they are essentially operating as a private digital currency board. When a company wants to acquire these stablecoins, they deposit real U.S. dollars with the issuer. The issuer takes that cash and locks those funds away in an incredibly safe, liquid financial instrument. These are typically bank deposits, short-term U.S. T-bills. If users suddenly decide to cash out and redeem all their tokens at once, the liquid reserves are right there to honor the peg, so you avoid the traditional bank runs.

The second reserve backing set-up is to back stablecoins with crypto assets like Ether or Bitcoin. Because crypto is volatile, an issuer has to over collateralize. So, for every dollar of stablecoin that they issue, they might have to hold, say, $3 of Ether locked up as collateral. If the price of the collateral falls, holders have to either post more collateral or get liquidated, so there is some risk and they need to be hedging that risk.

The digital currency board model is what dominates the market today. Total stablecoin supply is now over $323 billion and the absolute giants in the industry are all fiat backed.

Sablik: Assuming that a dollar-pegged stablecoin is able to maintain that target value, that could be seen as a digital dollar, a substitute for the real thing. What effect would that have on demand for actual dollars or traditional dollar assets?

Azzimonti: Let's think of a business owner or an investor that makes a profit in the digital asset market. Eventually, they want to lock these gains and escape the price volatility of crypto like Bitcoin. Historically, the only way to do that was to cash out entirely — you had to sell your crypto, you had to exit the blockchain, [and] you had to transfer your wealth into a traditional commercial bank or use it to buy T-bills. All these different transactions involved fees, so it was a long and expensive process.

That standard route injects liquidity directly into the U.S. financial system. Stablecoins create a shortcut. Instead of moving that wealth back and forth between the digital and the real world, investors can simply trade their volatile crypto for a dollar-pegged token and they can leave their wealth sitting entirely on the blockchain.

If global savers can comfortably hold a digital token that perfectly mimics a greenback, they no longer have any reason to off ramp into traditional bank deposits or government bonds or physical dollar bills. This is what we call the substitution effect and it's precisely why people are worried that digital networks could erode the dollar's global dominance.

That worry makes a lot of sense because stablecoins live on decentralized public networks that are globally accessible to practically anyone that has an internet connection. I cannot emphasize how important this has been, especially outside of the U.S.

If you're a business owner or an independent contractor in an emerging market like Nigeria or Argentina — and I lived there, so I know how difficult this is — trying to push your digital world through a local commercial bank to get U.S. dollars can be a nightmare. Sometimes there are laws that forbid citizens of these countries to buy dollars. You have heavy wire and other transaction fees. Sometimes there are taxes to hold international currency. And, you have a very slow infrastructure that is difficult to access for most of the population.

Stablecoins streamline that process. They allow people abroad to lock in a steady value of $1 with just a few clicks. So, taken on its own, the substitution effect would chip away at the dollar's demand.

That's only one side of what is really a macroeconomic tug of work. There is a second equally powerful force that is pulling in the opposite direction and one that could actually strengthen demand for dollars rather than erode it.

Sablik: This, from your paper, gets back to the choice of the system for stablecoin backing. How does the choice of stablecoin backing affect the demand for traditional dollar assets?

Azzimonti: So, the backing is everything. If stablecoins are backed mostly by crypto reserves, then the substitution story I just described goes through cleanly. The saver gets a dollar-pegged claim, but no dollar asset is being held on the other side of the balance sheet. The traditional reserve system is completely bypassed.

Now, here is a twist. If stablecoins are backed one-to-one by dollar reserves, every new stablecoin issued requires the issuer to go out and buy more dollar assets. The issuer is essentially an intermediary that is holding Treasurys and bank deposits and issues digital claims against them. So, as the stablecoin market grows, demand for traditional dollar instruments actually rises. This is what we call the demand effect. The rise of stablecoins reinforces rather than undermines the dollar's privileged position.

Which one of those two forces wins — the substitution channel or the demand channel — is going to depend on how the industry develops. There are three important dimensions of this.

The first one is how widely people end up adopting stablecoins and who ends up adopting stablecoins. Today, they are mostly held by crypto-native users — people that operate in the digital economy — and savers in emerging markets that are trying to get dollar protection. If that's where the adoption stays, then the substitution channel doesn't matter as much because those users were already finding ways to access dollars one way or another. If stablecoins move into mainstream cross-border payments [or] corporate, treasury, or even central bank reserves, then we are talking about a much larger pool of capital and a much different user of stablecoins, and a much larger demand for the underlying reserves.

The second dimension is, as we just said, what stablecoins are actually backed by. Right now, the market is dominated by Tether and USDC, which are these currency boards with one-to-one mapping. But that's a choice, and that choice is partly decentralized. But it's partly a result of what happens with regulation. I mean, it's not a law of nature.

The final dimension is the competitive environment and the broader regulations outside of the U.S. You have, aggressively, other countries develop non-dollar stablecoins — so let's say euro-pegged stablecoins — how central bank digital currencies evolve, and what are the rules of the game in other big economies. All these choices are going to shape whether stablecoins end up reinforcing the role of the dollar or chipping away from it.

Sablik: You and your co-author in this paper, you create a model for studying these interactions, this tug of war that we've been talking about. What does your model suggest about which type of stablecoins will prove to be dominant or most popular?

Azzimonti: A key piece of the model, and really the engine that drives everything in the paper, is what we call adoption.

Most people are still not comfortable enough to trust the blockchain, but the number of people that are doing so is growing over time. In the paper, we describe these households that are operating daily in the blockchain as accustomed to the digital economy — they have a wallet, they have the know-how, and they have the trust to plug into it. Everybody else is still saving and transacting in the traditional way that we've always modeled them in economics since the '50s.

Adoption is something that we model as gradual and contagious, borrowing from epidemiology thinking of how knowledge moves or how a disease moves through the network. As more people around you become comfortable with the digital infrastructure, the probability that you become comfortable rises. It spreads the same way as any other new technology spreads.

In our current model, just half a percent of households in the traditional economy are accustomed to the digital economy. The technology is still very early, but it's growing super quickly and, in our long-run scenario that, share rises to about 10 percent.

Who is actually doing the adopting matters. In the U.S. where dollar assets are already cheap and easy to access, becoming accustomed to stablecoins is mostly about gaining access to new services, the decentralized lending, [and] payment rails that settle instantly. But it's not that likely that all households are suddenly going to move all their savings into the digital world. We don't need to. We already have a bank account.

The rest of the world is very different. For an emerging market, being accustomed means that now you have access — for maybe the first time — to a stable, dollar-linked savings instrument that you can use from your cell phone [and] doesn't require going through your domestic bank or fighting against your capital controls. So, in the model, adopters in the rest of the world are going to tilt heavily towards using stablecoins as a store of value. They are likely to move their savings from their currency, which might be unstable, into the digital world, which is going to be seen as more safe. This is exactly the population whose behavior matters the most for the demand of dollar reserves.

Sablik: So, how does your model line up with the way adoption is playing out in the real world?

Azzimonti: We use our model to simulate what happens as adoption spreads. We start from this tiny proportion in the world of [stablecoin] users and then we increase the proportion.

When we look at the long-run transition dynamics, the result is very clear: stablecoins backed one-to-one by safe, traditional U.S. assets end up dominating the market. We wrote this in 2023 when it wasn't clear at all that that was going to happen. The reason is essentially that if you're the issuer, you want to manage your risk. As the digital economy grows and more savers around the world are willing to adopt stablecoins, the issuers face stronger and stronger incentives to back them with safer assets, and this mostly means Treasurys. Crypto backing requires absorbing a lot of risk on the issuer's balance sheet and that becomes unattractive as the system scales up. So, in the long run, the model predicts that the dollar-backed segment is going to dominate and the share of stablecoins that are matched by U.S. Treasurys is about 80 percent in the long run.

In fact, we are already starting to see this movement in the market. When we wrote the first version of this paper, we were talking about MakerDAO as a purely-backed cryptocurrency. We are now revising the paper and they are no longer doing that. They became a hybrid system and they are moving more and more towards holding a mix of crypto and U.S. Treasurys. They are even building partnerships with traditional banks.

We were talking about the long run, but the long run is rushing towards us. It's maybe already here.

Sablik: Okay, so that describes this market-based process that you're modeling, and we find that these dollar asset-backed stablecoins are the ones that seem to dominate. Does policy also play a role in determining which type of stablecoins succeed?

Azzimonti: Absolutely. The policy choices that are being made right now will shape what the market looks like in the next 10 to 20 years.

Stablecoin issuers, unlike traditional commercial banks, aren't subject to the same kind of extensive regulation. For most of them, there are no strict capital requirements. There's no FDIC. There is no supervised disclosure regime. A lot of what we do at the Federal Reserve with our local banks doesn't happen with stablecoin issuers. A large stablecoin failure today wouldn't have the same backstops that a bank failure would. Our society spent a lot of time building a resilient banking system with a lot of guardrails that all these new issuers don't have.

The U.S. understands this and they started addressing this directly. The GENIUS Act that was signed into law in July 2025 is now requiring licensed payment stablecoins to be backed one-to-one with cash and short-term Treasurys. This is very good for the role of the dollar, but the spirit of the law is to ensure that the peg can be maintained as the system grows.

Another thing they are asking is to segregate those reserves from operating funds and to publish monthly exactly what they have in their balance sheet. [The GENIUS Act] creates federal licensing pathways through the OCC [Office of the Comptroller of the Currency] and the banking regulators. The proposed implementing rules came out this spring, so this is all very recent.

What do we think will happen in early 2027 when all this goes into effect? We are trying to achieve transparency and reserve quality, which is going to essentially squeeze out the algorithmic and crypto-heavy backing structures out of the regulated market. We are trying to get out of the partial backing collateralization because that's difficult to monitor and it brings a lot of unnecessary risk.

One provision [of the GENIUS Act] worth highlighting is the treatment of foreign issuers. The biggest stablecoin in the world today is Tether, which is technically based offshore, partly to operate outside this kind of regulation. Under the GENIUS Act, a foreign-issued stablecoin can only be offered to U.S. users through a Treasury-administered registration that demands equivalent reserve and disclosure standards. So, the law is not just shaping which kind of stablecoins can succeed inside of the U.S., but it's also pulling the offshore market toward the same standards or walling it off if they are not willing to comply with those standards. That regulatory choice is enormously consequential for macroeconomics and we are just starting to understand to what extent.

Sablik: Yeah, so that definitely covers how regulation in the U.S. might impact the picture. How might other countries' approach to stablecoins impact the dollar's global position as well?

Azzimonti: Since 2022, there has been a geopolitical shift. After the Russian central bank reserves were frozen, many monetary authorities around the world started looking for reserve instruments that aren't under U.S. legal jurisdiction. Dollar-backed stablecoins held on a decentralized public blockchain are a perfect alternative. The lending institutions have exposure to the dollar stability as a store of value, but they are out of the U.S. domestic legal reach.

Other governments are also pursuing their own digital currency strategies. The legal architecture in these other jurisdictions is starting to mirror what the U.S. is doing, but they have a different currency at the center. So, for example, the EU MiCA framework, which took effect at the end of 2024, is structurally very similar to the GENIUS Act. It requires a one-to-one backing with safe, high-liquid assets, monthly disclosure, segregated custody of reserves. They are trying to squeeze the same algorithmic, crypto-heavy models out of the market.

But here's the crucial difference. Under MiCA, the safe asset is mostly euro-denominated, short-term EU government debt. So, every euro-regulated stablecoin in Europe becomes additional demand for euro sovereign bonds, not for dollar assets. Same regulatory philosophy, opposite balance sheet effect, and opposite effect for the demand of the dollar.

The same pattern is playing out across Asia and the Gulf. Hong Kong's stablecoin ordinance came into force in 2025 and the monetary authority granted the first two licenses last month in April 2026. Singapore's framework for single-currency stablecoin comes into full effect this year. Japan licensed its first yen-pegged stablecoin in late 2025. Several other central banks, including the EU, are advancing with their own digital currencies as a public sector alternative running in parallel.

So now we have the U.S.-backed stablecoins [and] the other country-backed stablecoins with their own regulations. And, we have digital currencies, which are something completely different — it's non-physical dollars issued by central banks. And these are all coming into play as we speak. Every major jurisdiction has now built, or is trying to build, a licensed channel for its own currency to compete in this digital space.

So, if non-dollar stablecoins gain traction in regions where the dollar has been used as the default for cross-border payments and savings, that would substitute for the dollar. A key dimension of the competition is whether the U.S. uses its regulatory framework to support dollar stablecoin innovation or cedes that ground to other jurisdictions.

In some sense, the dollar's global dominance has always rested [on the lack of] any credible substitutes. But this digital infrastructure is changing all of that because it is creating credible substitutes.

Sablik: What's the acronym, TINA? "There is no alternative."

[Laughter]

Azzimonti: The next obvious step in our research is to introduce these other stablecoins that are pegged to other currencies [into our model] and to understand how that competition may change the forces that we have been studying so far.

Sablik: Marina, thank you so much for coming on the show to talk about this really rich topic that I'm sure we'll be following for some time to come.