Stablecoins, pegged to real-world assets such as the US dollar, are blockchain-based digital crypto-assets designed to maintain stability amid the often volatile cryptocurrency market. Issued and controlled by private companies, stablecoins are primarily used for value storage and transfer, offering a more stable alternative to traditional cryptocurrencies like Bitcoin. On the other hand, central bank digital currencies (CBDCs), such as the proposed digital euro, are state-backed digital currencies regulated and issued by central banks. Unlike stablecoins, their value is directly tied to the country’s fiat currency, making them legally equivalent in value to paper money. The key distinction is that CBDCs are managed by national governments and central banks, while stablecoins operate within the private sector.

Why does Trump favour stablecoins over CBDCs?

In an exclusive interview with Paperjam, Patrick Vanhoudt, the newly appointed dean of the Luxembourg School of Business, discussed why US president Donald Trump favours stablecoins over CBDCs, highlighting the preference for private sector involvement rather than central bank control over digital currency.

Vanhoudt explained that the main reason for this stance is the control the Federal Reserve would have over a CBDC. If the Fed were to control the issuance of a digital dollar, it would be subject to monetary policy, directly linking it to the Federal Reserve’s interest rates and fiscal decisions. The Trump administration, however, has sought to limit this control and “decouple” the central bank’s influence over digital currency. By endorsing stablecoins, which are not tied to the Fed’s monetary policy, the administration has ensured that private entities can issue and manage digital assets without Federal interference.

Vanhoudt pointed out that, by preventing the Fed from regulating stablecoins, the Trump administration allows these digital currency proxies to operate outside the traditional monetary framework. This aligns with Trump’s desire to limit governmental control over financial instruments, leaving more room for private control in the crypto space. “If he [Trump] were able to, he would even cut the link [to the Fed] entirely,” Vanhoudt remarked. “The only way in which stablecoins are not fully responsive to monetary policy is through their base interest rate.”

Stablecoins and the US economic strategy

Stablecoins, with over 99% of the current $235bn market already denominated in USD, have become a critical tool for global liquidity. Vanhoudt elaborated that their rise has indirectly absorbed global liquidity, directing it into the US Treasury market. When private companies issue stablecoins, such as USD Coin (USDC) and Tether (USDT), they collect US dollars in exchange for their tokens, which are then invested in US Treasury bills or short-term debt. This process creates a direct flow of capital into the US public debt market.

While stablecoins initially emerged as a byproduct of the demand for a digital dollar, Vanhoudt argued that the Trump administration’s policies effectively institutionalised them as part of a broader economic strategy. “It has become a deliberate strategy, especially under the Trump administration. This is not just opportunistic; it’s intentional design. Private innovation serves public debt,” Vanhoudt remarked.

He continued, explaining how USD-backed stablecoins play a pivotal role: “And so, they [the USD-backed stablecoins] quietly, under the radar, reinforce the dollar as hegemonic money by embedding USD in a digital network worldwide, without needing any banking infrastructure.” This, Vanhoudt noted, is key to their effectiveness. He further analysed how the US government leveraged the rise of stablecoins to indirectly fund public debt while simultaneously strengthening the global appeal of the dollar.

This strategy, according to Vanhoudt, provides the US with a unique form of monetary power projection. The US dollar’s global dominance is further reinforced without the need for traditional banking infrastructure. Instead, the US government capitalises on the growing adoption of digital currencies to channel liquidity into US debt, all while bolstering the dollar’s standing on the global stage.

What’s even more interesting, Vanhoudt pointed out, is that while credit institutions holding US government debt are heavily regulated, stablecoins are controlled by private entities with far less oversight. As a result, “the side effect, neatly, is that if one of these private investors goes belly up, part of the US debt is wiped away.” This, he explained, is what he calls the “pressure valve”--crypto absorbs global liquidity and channels it to Washington. The dual effect of a weakened nominal exchange rate and the strong structural usage of the dollar makes the system both flexible and resilient. “It’s a unique form of digital monetary power projection that is being installed,” he concluded.

Risks of over-reliance on stablecoins

Despite the apparent benefits, Vanhoudt also cautioned that the US’s reliance on stablecoins could introduce significant risks. The collapse of a major stablecoin issuer, for instance, could trigger a digital “bank run,” destabilising both the crypto and traditional financial markets. Furthermore, the growing dependence on crypto liquidity to fund US deficits could create vulnerabilities within the US financial system.

“The US may become over-reliant on crypto liquidity to fund its deficits, and that’s a problem in its own right,” Vanhoudt warned. “If this infrastructure becomes systematically important, then regulatory failure or technological disruption could have contagion effects across the globe.”

These risks are compounded by the fact that stablecoin issuers, while backed by a 1:1 ratio of reserves in USD, may still face significant liquidity issues if the duration of their investments exceeds the demand for withdrawals. Vanhoudt likened the situation to traditional banks, where the mismanagement of reserves can lead to a collapse of trust in the financial system.

[USD stablecoins] become a new digital foundation for US economic power. They circulate the dollar without needing embassies, troops or banks. It's a strategic expansion of economic geography.

Patrick Vanhoudt, Dean, Luxembourg School of Business

A new era of economic power

Looking ahead, Vanhoudt outlined the long-term implications of this strategy. If successful, the integration of stablecoins into the global digital economy would entrench the dollar as the primary currency for international trade. It would also create a structural demand for US Treasury securities, ensuring that the US remains the default jurisdiction for financial innovation.

However, this could have significant consequences for emerging economies, particularly those within the Brics bloc, comprising Brazil, Russia, India, China, South Africa, Egypt, Ethiopia, Indonesia, Iran, and the United Arab Emirates. The increasing dollar dependence could undermine the ability of these nations to conduct independent monetary policy, as their financial systems become increasingly tied to the US dollar. Vanhoudt noted that the Brics nations, which have been exploring alternatives to the US dollar, face significant challenges in competing with the growing dominance of the US-backed stablecoin system.

For institutional investors, Vanhoudt suggested that stablecoins should be viewed as proxies for US debt exposure and dollar demand. He pointed out key indicators to monitor, including the composition of stablecoin reserves, market cap growth, and the regulatory frameworks being adopted globally. The Federal Reserve’s policies, particularly interest rate decisions, will continue to influence the yields on stablecoins, making them an important asset class to track.

In the context of global monetary systems, Vanhoudt argued that stablecoins are “not just payments, they are the ‘pipes,’ in fact, of tomorrow’s global monetary system.”

Vanhoudt believes that the US strategy of stablecoins is equivalent to “exporting monetary influence in this approach to stable commerce. They become a new digital foundation for US economic power. They circulate the dollar without needing embassies, troops, or banks. It's a strategic expansion of economic geography.” Ignoring them would be a grave mistake, and it’s reassuring that the European Central Bank has not lost sight of this issue, he concluded.