Stablecoins as USD Allies: Reinforcing Dollar Dominance in the Crypto Era

Stablecoins are reshaping the cryptocurrency narrative, potentially bolstering the U.S. dollar's global dominance rather than undermining it, according to a new analysis by Citi Wealth strategists.

Initially, cryptocurrencies like Bitcoin emerged as a challenge to traditional central bank-issued currencies, with some enthusiasts predicting Bitcoin could dethrone the dollar's hegemony. However, stablecoins—digital assets pegged to fiat currencies like the U.S. dollar—are now rewriting that script.

"Stablecoins, which facilitate over 80% of cryptocurrency trading, are not undermining the dollar. Instead, they are strengthening its position," Citi's report explains. These digital currencies are overwhelmingly tied to the U.S. dollar, with issuers holding USD and U.S. Treasury reserves. Citi argues that U.S. regulatory clarity could amplify this trend, increasing global access to dollars while reinforcing their dominance.

If policymakers legitimize stablecoins further, demand for U.S. Treasury bills from stablecoin issuers could surge, with issuers already accounting for 1% of purchases. "This variety of cryptocurrency could make dollars more accessible globally and sustain the dollar’s role as the preeminent global currency," the strategists note.

The data underscores stablecoins' growing prominence. In Q1 2024 alone, stablecoins facilitated a staggering $5.5 trillion in transactions—outpacing Visa's $3.9 trillion for the same period. Market leaders like Tether's USDT and Circle's USDC dominate the sector, with Ripple's RLUSD recently gaining regulatory approval in New York, signaling further expansion.

Traditional financial giants, including Visa and PayPal, are adapting, introducing stablecoin offerings or leveraging others' solutions to stay competitive. This evolution signals a transformative period where stablecoins not only challenge but also enhance the dollar's supremacy in the global financial landscape.

This dynamic shift highlights the dual role of stablecoins: advancing cryptocurrency adoption while reinforcing the enduring strength of the U.S. dollar.