The Paradox of Digital Dollar: Stablecoins Are Shaking the Foundations of the Global Financial System

(Source: Requoted from Financial Times)

As the line between crypto and traditional finance fades, stablecoins are no longer mere digital assets. They’ve grown into a force capable of influencing the U.S. Treasury market—and now threaten the transmission channels of central bank monetary policy.

In June 2025, we are witnessing an unprecedented phenomenon: stablecoin issuers now hold more short-term U.S. Treasuries than large foreign investors like China (see chart above). Stablecoins such as Tether and Circle’s USDC began as a convenient medium of exchange within the crypto ecosystem—easier to use than actual dollars when trading Bitcoin or other tokens. But their influence now extends far beyond crypto into the heart of traditional finance.

The Hidden Giants

The original promise of stablecoins was simple: one dollar equals one dollar, backed 1:1 by equivalent reserve assets. While holders earn no interest (though issuers make billions in annual profits), they gain the ability to move something dollar-like across the crypto universe with near-zero friction.

But as the Financial Times points out (in Why We Should Worry About the Rise of Stablecoins, Katie Martin, June 7, 2025), stablecoins have now evolved into a destabilizing force in the global financial system. A recent Bank for International Settlements (BIS) study provides quantitative proof that when stablecoins grow and convert inflows into reserves, they significantly affect the value of short-term U.S. Treasuries.

A New Dimension of Market Manipulation

According to BIS researchers Rashad Ahmed and Iñaki Aldasoro, an inflow of $3.5 billion into stablecoins over five days can exert enough upward pressure on short-term Treasury prices to push yields down by as much as 0.025 percentage points over ten days. That may sound small, but the researchers compare it to “a mini quantitative easing” on long-term yields—akin to what a central bank would do to stimulate a sluggish economy.

More alarming is the effect of outflows. The impact on bond prices when money leaves is two to three times greater. While issuers can pace their purchases when funds flow in, redemption demands force them to sell quickly. When customers sell stablecoins and demand dollar redemptions, issuers must liquidate their reserves—typically short-term Treasuries—immediately, injecting unexpected volatility into financial markets.

A New Variable in Monetary Policy Transmission

This dynamic has profound implications for central banks. One of the Federal Reserve’s main transmission mechanisms—long-term Treasury yields—is now subject to interference by an unpredictable new actor: stablecoins. “If the sector continues to grow rapidly, it could eventually affect the transmission of monetary policy via bond yields,” the BIS warns. The opacity of Tether’s reserve holdings, in particular, makes modeling its systemic risk especially difficult.

This adds another layer of complexity to already difficult policy environments. When the Fed adjusts interest rates, it may now also have to factor in what’s happening in the stablecoin market.

The Trump Effect and Regulatory Gaps

Some may welcome stablecoin growth—encouraged by pro-crypto policies from the Trump administration—as it partially reduces borrowing costs. But it’s a double-edged sword. In 2024, stablecoin issuers purchased over $40 billion in U.S. Treasuries, making them significant market participants. The concern is that their actions follow a completely different logic than traditional institutional investors.

While institutions base decisions on portfolio diversification, risk management, and yield optimization, stablecoin issuers react to crypto market movements. A crypto boom drives demand for stablecoins, which then results in Treasury purchases. A crash, however, causes mass redemptions—and rapid Treasury liquidations.

From 2021’s Warning to 2025’s Reality

Credit rating agency Fitch warned in 2021 that if stablecoins collapsed, issuers might have to liquidate all assets, disturbing underlying markets. Back then, this seemed like a theoretical risk. Now, it’s a tangible one. The sheer scale of the stablecoin market means collective behavior has significant impact on the U.S. Treasury market.

Of particular concern is market concentration. Tether dominates the market—so any operational issue or policy shift by Tether could trigger systemic risk.

Growth in a Regulatory Vacuum

At a time when risks are growing, the U.S. seems to be accelerating stablecoin expansion. Under the Trump administration, crypto regulations and enforcement have been rolled back, making tighter oversight seem nearly impossible.

This is a dangerous contradiction. As stablecoins become more embedded in the traditional financial system, transparency and supervision become more crucial. Yet, political realities are moving in the opposite direction. What’s needed is robust regulation requiring frequent, detailed reporting of what stablecoin issuers buy and sell. But that’s not happening.

Possible Future Scenarios

Looking ahead, there are a few plausible scenarios:

• Optimistic: Stablecoin markets grow steadily and become a reliable source of demand for U.S. Treasuries, helping lower borrowing costs for the government.

• Neutral: Current conditions persist; stablecoins increase volatility in Treasury markets but stop short of triggering systemic crises.

• Pessimistic: A major crash in crypto or the failure of a large stablecoin leads to mass Treasury sales, destabilizing U.S. financial markets.

Central Banks' Dilemma

Central banks now face a difficult choice: curb stablecoin growth and risk stifling innovation, or allow it to continue and watch financial stability risks grow. Predicting and modeling stablecoin behavior with traditional economic tools is difficult—they follow different incentives than legacy financial institutions. Other central banks, like the ECB and BOJ, are likely to face similar challenges. The impact of U.S. dollar-linked stablecoins is global, not just American.

The Importance of Transparency

Tether’s “secret sauce” model is no longer viable. Given their growing systemic impact, stablecoin issuers must fully disclose their reserve composition and trading activity. Current quarterly reserve reports are insufficient. Monthly—or even weekly—disclosures may be necessary, including detailed asset breakdowns and maturity structures.

A New Threat to Global Financial Stability

Stablecoins are now a core concern in discussions of global financial stability. Institutions like the IMF and FSB are starting to pay closer attention. Emerging markets are especially vulnerable. As dollar-linked stablecoins gain usage over local currencies, concerns over monetary sovereignty intensify.

Technology and Operational Risks

Beyond financial risks, stablecoins carry technological vulnerabilities: hacks, smart contract bugs, or blockchain failures could trigger mass redemptions. Operational risk is also high—most major stablecoins are controlled by a handful of entities, meaning their internal decisions can have outsized market consequences.

Conclusion: A Changing Rulebook

We stand at a turning point in financial history. Stablecoins are no longer fringe products—they are becoming core infrastructure of the global financial system. This transformation brings both opportunity and risk. If managed properly, they can enhance financial efficiency and innovation. If neglected, they may seed systemic instability.

The key is balance: neither excessive regulation that chokes innovation nor regulatory neglect that breeds risk. Unfortunately, today’s political climate makes striking that balance extremely difficult.

What’s certain is this: stablecoins will play an increasingly large role in global markets in the years ahead. Whether under the Trump administration or its successors, no one should be surprised by the shocks this sector may produce.

The paradox of the digital dollar continues: an asset designed to provide stability may, paradoxically, become a source of systemic instability. Resolving this paradox may be one of the most important challenges in 21st-century financial policy.