Angus Armstrong & Dennis Snower see major risks associated with the growth of privately issued US dollar-backed digital tokens

By Angus Armstrong and Dennis Snower*

Stablecoins are on the rise in global finance, promising to facilitate faster and cheaper payments and lead a wave of financial innovation. But what if that wave erodes governments’ control over money and debt, fundamentally reshaping how modern economies manage inflation, stabilise markets, and finance public spending?

This prospect has received surprisingly little public attention. As digital tokens backed by assets such as dollar deposits or US Treasury bills, stablecoins are redeemable on demand. When demand for them rises, issuers create new tokens and buy more Treasuries; when investors redeem tokens, those issuers must sell Treasuries. Stablecoin issuers thus are conducting their own miniature version of what the US Federal Reserve does: creating and withdrawing liquidity from the financial system. But unlike the Fed, they do so for profit, not public purpose.

The stock of dollar-denominated stablecoins outstanding has skyrocketed from US$138 billion at the start of 2024 to US$308 billion in October this year, and some financial institutions project that this figure could reach $2 trillion by the end of the decade. While the Bank for International Settlements (BIS) cautions that stablecoins fall short of serving the same functions as money, because they are not strictly interchangeable with central-bank currency, the passage of the US GENIUS Act may change these perceptions.

To the extent that stablecoins are seen as money, issuance backed by US Treasuries becomes a form of monetising debt. What this means for the money supply and the supply of loanable funds, however, depends on who is buying and selling. Domestic purchases will increase the money supply by the amount purchased, because the buyers get money-like stablecoins while the sellers of the backing assets get money from the buyers. But the total supply of loanable funds will remain unchanged. By contrast, if the stablecoin investor is in a country with limited holdings of US Treasuries, stablecoins may create capital inflows into the US to buy the Treasuries as backing assets, thereby increasing the supply of loanable funds.

Stablecoins also may change how policy signals reach the real economy. Traditional tools, like the federal funds rate or the interest the Fed pays on bank reserves, work through the banking system. But if households and firms hold stablecoins instead of bank deposits, these tools lose traction. An interest-rate hike may restrain bank credit but leave stablecoin liquidity untouched. Overall financial conditions would no longer move in sync with the Fed’s policy decisions. And as stablecoins grow, this private influence on liquidity could weaken the Fed’s grip on short-term interest rates, turning monetary policy into a reactive exercise rather than a steering mechanism.

Moreover, the government’s seigniorage (its profit from creating money) is slipping away. The interest earned on Treasury assets backing stablecoins now flows to private issuers – such as Circle and Tether – instead of to the public purse. Over time, this pattern could reduce fiscal revenues and weaken coordination between monetary and fiscal policy. The BIS has shown that the stablecoin industry is already affecting short-term interest rates and Treasury-market liquidity, which means that the Fed must now monitor the actions of private issuers that it cannot control.

Stablecoins don’t just disrupt monetary policy; they also reshape fiscal dynamics. Every dollar of stablecoin issuance translates into more demand for government debt. As automatic buyers of Treasury bills, stablecoin issuers are creating a captive market that suppresses yields.

Lower borrowing costs may sound appealing, but make no mistake: this is a form of financial repression, with private savings channeled into government debt at below-market rates. While the Treasury gets cheaper financing, the signals that normally reflect fiscal risks are suppressed. To the extent that real interest rates are below the rate required to maintain price stability, this will lead to higher inflation over time, or to higher short-term rates as an offset. The Treasury may look more fiscally sound than it is, because stablecoin demand has pushed down yields.

Yet if confidence in stablecoins falters and redemptions surge, the same mechanism works in reverse: issuers must sell Treasuries, yields will spike, and fiscal pressure will build. Worse, since stablecoin issuers would have no formal access to the Fed’s emergency lending facilities in the event of a crisis, they would have to dump Treasuries. If the size of the stablecoin market lives up to expectations, the Fed would have to intervene to restore stability. Once again, the Fed would be backstopping private money that it doesn’t control – a repeat of the post-2008 “shadow banking” crises. Having elbowed its way partly into the regulatory tent, the politically connected crypto industry will have become too big to fail.

The more that stablecoin issuance grows, the less control the Fed and the Treasury will have over the levers of liquidity, debt pricing, and money creation. A handful of private companies will become “shadow central banks,” determining how much digital money circulates and where it flows. They will profit from interest on Treasury assets while relying on the public sector for stability during crises. Once again, the gains will be privatised, and the losses socialised.

This dynamic could also undermine democracy itself, because it would mean that decisions about the creation and management of money – a core public good – are no longer the remit of accountable public institutions. Faced with such risks, the most dangerous thing that other central banks could do is to try to match US dollar stablecoins. That would simply expand the opportunities for regulatory arbitrage and even more implicit subsidisation.

Angus Armstrong is a research professor at the Institute for Global Prosperity at University College London, Director of Rebuilding Macroeconomics, and Chief Economic Adviser at Lloyds Banking Group. Dennis Snower, Founding President of the Global Solutions Initiative and President Emeritus of the Kiel Institute for the World Economy, is a visiting professor at University College London and a professorial research fellow at INET Oxford. He is a non-resident senior fellow at the Brookings Institution, an international research fellow at Oxford University’s Said Business School, and a research associate at the Harvard Human Flourishing Program. Copyright: Project Syndicate, 2025.