Investor confidence in stablecoins relies on the issuer’s capacity to redeem them for fiat currency at any moment. To maintain this, stablecoin companies hold reserve funds to secure their value. They keep actual U.S. dollars in a 1:1 ratio, along with safe assets such as U.S. government debt that generates interest.
Under the U.S. Genius Act, stablecoin issuers must hold reserves comprising dollars and short-term Treasuries. Treasury Secretary Scott Bessent recently characterized dollar-backed stablecoins as a mechanism supporting the dollar’s dominance, highlighting that the dollar represents nearly 90% of foreign exchange transactions.
With aggregate holdings nearing $200 billion, stablecoin issuers already rank among the top 20 holders of U.S. sovereign debt, surpassing the reserves of several major nations.
Risks to EMs
While such a strategy may bolster the dollar, it could also pose severe risks to emerging economies with current-account deficits that are susceptible to capital outflows.
Because stablecoins facilitate the movement of money over blockchains, they circumvent traditional banking channels, complicating efforts by central banks and governments to monitor and influence those flows. If dollar-backed stablecoins achieve widespread adoption in everyday transactions, domestic fiat currencies could face intense pressure.
Both the International Monetary Fund and Bank for International Settlements have repeatedly raised alarms regarding how USD-pegged stablecoins might threaten emerging economies, warning that they could accelerate capital flight from these nations during periods of stress.
