Kansas City Fed: Dollar Stablecoins Could Reinforce U.S. Currency Dominance

A new report from the Federal Reserve Bank of Kansas City argues that dollar-pegged stablecoins are more likely to strengthen the U.S. dollar’s global position than to undermine it. The analysis, authored by Circle executive Gordon Liao, Cornell University economist Eswar Prasad, and economist Tony Zhang, points to the dominant role of dollar-based stablecoins in cross-border payments as a key factor.

Stablecoin Supply and Global Demand

According to the report, approximately 98% of stablecoins are denominated in U.S. dollars. The authors note that global users overwhelmingly prefer dollar-pegged assets over euro- or yuan-based alternatives for international transactions. This preference, they argue, reflects the dollar’s existing status as the world’s primary reserve currency and its deep liquidity in financial markets.

The report also highlights that stablecoin issuers typically hold most of their reserves in short-term U.S. Treasurys and cash-equivalent assets. This creates a direct link between stablecoin adoption and demand for U.S. government debt, potentially reinforcing the dollar’s role in global finance.

Limited Competition from Other Currencies

Despite efforts by other jurisdictions to promote alternative stablecoins, the report finds no credible rival has yet emerged to challenge the dollar’s dominance. Euro-based stablecoins account for only a very small share of total supply, and yuan-pegged stablecoins remain negligible in global usage. The authors suggest that network effects and established trust in dollar-denominated assets create significant barriers for competitors.

Implications for U.S. Policy

The findings carry implications for policymakers. If dollar stablecoins reinforce demand for U.S. Treasurys and facilitate dollar-based payments, they could complement—rather than erode—U.S. monetary influence. However, the report also cautions that regulatory clarity is needed to ensure stability and protect consumers as the market evolves.

Why This Matters

Stablecoins have grown rapidly in recent years, with total market capitalization exceeding $150 billion. Their use in remittances, trade finance, and decentralized finance has drawn attention from central banks and regulators worldwide. This report adds an important perspective to the debate over whether digital currencies threaten the dollar’s hegemony or reinforce it.

Conclusion

The Kansas City Fed’s analysis suggests that dollar stablecoins are not a threat to U.S. currency dominance but rather a potential amplifier of it. By increasing demand for Treasurys and maintaining the dollar’s central role in digital payments, stablecoins may help sustain the dollar’s global standing in the digital age.

FAQs

Q1: What percentage of stablecoins are dollar-denominated?
According to the Kansas City Fed report, about 98% of stablecoins are denominated in U.S. dollars.

Q2: How do stablecoin issuers back their tokens?
Most issuers hold reserves in short-term U.S. Treasurys and cash-equivalent assets, which helps maintain the 1:1 peg to the dollar.

Q3: Could euro-based stablecoins challenge the dollar?
The report says euro-based stablecoins account for only a very small share of total supply, and no credible rival has yet emerged to displace the dollar in the stablecoin market.