Stablecoins and the Demand for Dollars

Stablecoins are often described as a threat to the U.S. dollar. Pegged to the dollar but issued outside the traditional banking system, they appear to offer a digital alternative to holding dollar-denominated assets directly. As their market capitalization has grown rapidly in recent years — now exceeding $300 billion¹ — natural questions arise:

• Do stablecoins undermine or reinforce the global demand for dollars?
• How would this affect real rates?

However, the answers are not straightforward.

In our recent working paper "Digital Economy, Stablecoins and the Global Financial System," we study how the expansion of stablecoin use interacts with global saving decisions and the equilibrium level of interest rates. A central insight is that stablecoins affect the natural real rate of interest (or r*) through two competing forces that operate in opposite directions. Which force dominates depends critically on how stablecoins are backed and on the dynamics governing their adoption in the digital economy.

What Backing Implies for Asset Demand

Some of the largest dollar-pegged stablecoins — such as Tether's USDT and Circle's USDC — are backed primarily by safe dollar-denominated assets, including U.S. Treasury securities and short-term government repos. In these cases, issuing one dollar of stablecoins is associated with holding roughly an equivalent dollar of safe reserves. From a balance-sheet perspective, growth in stablecoin supply is directly tied to demand for U.S. government debt.

Other stablecoins rely on digital asset collateral. These stablecoins are backed by cryptocurrencies or other digital assets, subject to overcollateralization requirements. As long as the value of collateral exceeds the value of outstanding stablecoins, the peg can be maintained, as the collateral allows the stablecoins to absorb price drops.

Basically, a crypto such as ether (ETH) or bitcoin (BTC) is deposited in a smart contract which then issues a stablecoin for a fraction of the collateral. When the price of the collateral goes down, the system liquidates part of the collateral to keep the peg. Under this structure, stablecoins are not mechanically tied to demand for U.S. Treasuries and can instead function as substitutes for traditional dollar assets. More stablecoins would imply higher demand for crypto in such cases.

The difference in backing is key to understanding the macroeconomic implications of stablecoin expansion. If stablecoins are predominantly backed by dollar assets, their growth increases the global demand for safe dollar instruments. In this case, stablecoins act as an additional layer of intermediation, allowing a broader set of investors to access dollar-backed safe assets. By contrast, if stablecoins are primarily backed by digital assets, they can reduce the need to hold U.S. government debt directly, weakening demand for traditional reserve assets.

Two Forces, Pulling in Opposite Directions

Our model highlights two channels through which stablecoins affect global financial markets. The first is a substitution channel. As stablecoins become more widely used, investors — particularly those facing frictions in accessing U.S. financial markets — may reallocate part of their portfolios away from Treasuries and toward stablecoins. When stablecoins are backed by crypto assets, the resulting reallocation reduces global demand for U.S. government debt, placing upward pressure on the equilibrium real interest rate.

The second is a reserve demand effect. When stablecoins are credibly backed by safe dollar assets, increased adoption requires issuers to accumulate larger reserves. In this case, stablecoin expansion raises demand for Treasuries and other dollar-denominated safe assets, exerting downward pressure on equilibrium interest rates.

Because both forces operate simultaneously as stablecoin use expands, it is not immediately clear which one will dominate.

Why the Reserve Demand Effect Dominates

Our model resolves this ambiguity by emphasizing the interaction between risk, portfolio choice and adoption dynamics. As stablecoins become more widely adopted, investors place greater weight on safety and liquidity. Over time, these considerations limit the scale of crypto-backed issuance relative to reserve-backed issuance, particularly in the presence of uncertainty and collateral volatility in digital asset markets.

As a result, stablecoins backed by dollar assets become the dominant form as adoption broadens. In our quantitative analysis, the reserve demand effect outweighs the substitution effect in the long run for an economy calibrated to the U.S. Stablecoin expansion is therefore associated with higher global demand for U.S. safe assets, rather than lower.

Implications for the Natural Interest Rate

This shift in demand has direct implications for the natural rate of interest. The natural rate reflects the real interest rate consistent with balanced global saving and investment, abstracting from cyclical fluctuations. It is shaped by structural forces, including demographics, productivity growth, and the supply and demand for safe assets.

As demand for U.S. Treasuries rises, the equilibrium real interest rate consistent with global saving and investment falls. In the model, the expansion of stablecoins leads to a lower natural interest rate in the U.S., even in the absence of changes in monetary policy or fiscal conditions.

This mechanism also implies that the U.S. can sustain larger net foreign borrowing, reinforcing the privileged position of the dollar in the global financial system rather than eroding it. What initially appears to be a challenge to the dollar can — under plausible institutional arrangements — become a force that strengthens it.

Stablecoins and the GENIUS Act

These mechanisms provide a useful lens through which to interpret recent legislative proposals aimed at regulating stablecoins. The Growing and Evolving Innovative U.S. Stablecoin Act (GENIUS Act) establishes a federal framework for stablecoin issuance that places strong emphasis on reserve composition and liquidity requirements.

More specifically, the GENIUS Act requires that U.S.-domiciled stablecoin issuers maintain reserves backed on at least a one-to-one basis by safe and highly liquid U.S. dollar-denominated assets. Eligible reserve assets include bank deposits, short-term U.S. Treasuries, overnight repurchase agreements or reverse repos collateralized by Treasuries, and government money market funds. By restricting backing to instruments with minimal credit and liquidity risk, the GENIUS Act aims to ensure the credibility of the peg while limiting maturity and risk transformation by stablecoin issuers.

From a macroeconomic perspective, these backing requirements are consequential. When stablecoins are required to be backed by safe dollar assets, their expansion is mechanically linked to demand for U.S. government debt and closely related instruments. In the context of the model, such requirements strengthen the reserve demand channel, increasing global demand for U.S. safe assets as stablecoin adoption expands. At the same time, they limit the scope for stablecoins to act as substitutes for dollar assets through crypto-backed or riskier collateral structures.

While the GENIUS Act is motivated primarily by financial stability and consumer protection, the model highlights how its design can also shape long-run equilibrium outcomes. By tying stablecoin issuance to holdings of safe dollar-denominated assets, the regulatory framework links stablecoin growth to sustained demand for U.S. Treasuries and downward pressure on equilibrium real interest rates.

Stablecoin Policy Considerations

Stablecoins are not neutral innovations from a macroeconomic perspective. Their design and backing structure affect global portfolio allocations, the demand for safe assets and the natural rate of interest. From a policy standpoint, three considerations stand out.

Backing Standards Matter

Stablecoins backed by high-quality dollar assets are more likely to reinforce demand for U.S. Treasuries, while weaker or riskier backing structures could shift the balance toward substitution.

Credibility and Transparency Are Central

The macroeconomic effects described here depend on confidence in the stability of the peg and the quality of reserves. Regulatory frameworks that promote disclosure and enforce reserve requirements can help sustain this confidence, while the system could be subject to runs if credibility were eroded.

Scale Matters

The stablecoin market has grown rapidly and could expand further in the coming years, with some industry analysts projecting the market could reach roughly $500 billion to $600 billion by the late 2020s.² As digital financial markets evolve, distinguishing between alternative stablecoin designs will be essential for evaluating their implications for global finance and the structural determinants of interest rates.

Global Competition in Currency Markets

While the overwhelming majority of stablecoins are pegged to the U.S. dollar, stablecoins pegged to other fiat currencies could gain more traction in the future. Regulators outside the U.S. may have incentives to create a fertile environment for the diffusion of nondollar-pegged stablecoins.

For example, in August 2025, Hong Kong introduced a licensing system for the issuance of stablecoins pegged to the Hong Kong dollar. Currently, the Hong Kong dollar is pegged to the U.S. dollar, so stablecoins issued in Hong Kong are, thus, indirectly pegged to the U.S. dollar for the time being. Countries that do not peg their national currencies to the U.S. dollar, or that abandon such a peg, may choose to encourage the issuance of stablecoins pegged to their own national currencies.

Conclusion

The digital nature of stablecoins could make them more attractive to foreigners than the underlying fiat currencies that back them. In principle, these nondollar-pegged stablecoins could become substitutes for the dollar as an international currency. This suggests that there may be global competition in the issuance of stablecoins, which in turn would intensify competition for the international dominance of currencies. The establishment of regulatory frameworks by various countries may enhance the credibility of their own stablecoins, which, indirectly, would increase the international relevance of their native currencies. This provides another perspective on global competition among international currencies.

Marina Azzimonti is a senior economist and research advisor in the Research Department at the Federal Reserve Bank of Richmond. Vincenzo Quadrini is an economics professor at the Marshall School of Business at the University of Southern California.

To cite this Economic Brief, please use the following format: Azzimonti, Marina; and Quadrini, Vincenzo. (March 2026) "Stablecoins and the Demand for Dollars." Federal Reserve Bank of Richmond Economic Brief, No. 26-10.

This article may be photocopied or reprinted in its entirety. Please credit the authors, source, and the Federal Reserve Bank of Richmond and include the italicized statement below.

Views expressed in this article are those of the authors and not necessarily those of the Federal Reserve Bank of Richmond or the Federal Reserve System.