How Stablecoins Are Cementing US Dollar Hegemony for Decades to Come

Or why America will never reindustrialise

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Jun 24, 2025

Treasury Secretary Scott Bessent's recent projection of a $3.7 trillion stablecoin market captures the transformative potential of stablecoins from an American perspective. His vision would drive massive demand for US Treasuries, lower government borrowing costs, and onboard millions globally to the dollar-based digital economy.

Nobody can dispute that this represents one of the most significant developments in global monetary policy since the collapse of the Bretton Woods system in 1971. Far from challenging American financial dominance, stablecoins are becoming powerful instruments that extend and strengthen US dollar hegemony into the digital economy.

The Digital Dollar Network Effect

Stablecoins create a reinforcing cycle for dollar dominance through interconnected mechanisms. Every USDC or Tether token minted requires dollar-denominated backing, creating immediate demand for US currency and Treasury securities. With over $205 billion in current stablecoin market capitalisation, the backing requirements already represent substantial dollar demand.

The global reach amplifies this exponentially. A trader in Nigeria, an entrepreneur in Vietnam, or a family in Argentina can access dollar-denominated digital assets instantly without navigating traditional banking systems. This digital dollarisation extends American monetary influence to populations that might never have directly interacted with the US financial system. Providing access to the dollar across emerging markets is Tether's core value proposition.

More fundamentally, stablecoins are cementing the dollar's role as the dominant unit of account in digital markets. As decentralised finance protocols, NFT marketplaces, and crypto trading platforms standardise around USD-pegged stablecoins, they create powerful network effects that make alternative currencies increasingly irrelevant in the digital economy. To paraphrase a16z’s Chris Dixon, “come for the crypto, stay for the stablecoins” as they make their way deeper into the non-crypto economy.

America's Structural Advantages

The dominance of dollar-backed stablecoins reflects structural advantages that other currencies cannot easily replicate. When stablecoin issuers need to back billions in digital tokens, they can seamlessly purchase Treasury bills backed by the full faith and credit of the United States government. US Treasuries provide a unified, liquid, and virtually risk-free asset for stablecoin reserves, creating an unmatched foundation.

This infrastructure advantage creates a self-reinforcing cycle: stablecoin growth drives Treasury demand, which supports the dollar's reserve currency status, which in turn makes dollar-backed stablecoins more attractive. The increased Treasury demand from stablecoin reserves helps lower government borrowing costs by expanding the buyer base for US debt. Recent legislative progress compounds this edge. The GENIUS Act passing the US Senate has established clear frameworks for stablecoin operations, whilst US officials have definitively stated there are no plans for a central bank digital currency, eliminating concerns about government competition.

This regulatory certainty gives stablecoin issuers and users confidence that rules won't change overnight, encouraging further adoption and investment in dollar-based digital infrastructure.

Global Currency Displacement

These structural advantages translate into real-world displacement of local currencies. The offshore demand for dollar stablecoins extends beyond simple preference. In Africa, where local currencies face persistent devaluation pressures, citizens in countries like Nigeria, Kenya, and Ghana discover that foreign exchange rates for local currencies against Tether are often more favourable than against traditional fiat dollars.

This creates powerful incentive structures where USDT becomes not just a store of value, but a better medium of exchange than official local currencies. And when digital dollar substitutes offer better exchange rates and more stability than sovereign currencies, they raise fundamental questions about the future viability of smaller local currencies.

Europe's Strategic Confusion

The euro, as the world's second-largest reserve currency, might be expected to resist the hollowing out that the dollar hegemony threatens on other currencies. Yet the opposite is true. The dollar's advantage is particularly stark compared to the eurozone's fragmented sovereign debt markets.

Indeed, the euro's minimal presence in the stablecoin ecosystem reflects deeper architectural limitations. Since eurozone member states retain sovereignty over fiscal and budgetary matters, there is no ‘European Treasury.’ Stablecoin issuers seeking euro backing must navigate German bunds, French OATs, Italian BTPs, and other sovereign bonds with varying risk profiles and liquidity levels. Unlike the dollar, which benefits from unified fiscal and monetary authority, the euro carries constant risks of sovereign debt crises and political fragmentation that make euro-denominated alternatives inherently less attractive.

Europe, despite substantial progress on the regulatory front with MiCA (Markets in Crypto-Assets regulation) having come into force in 2024, appears stuck in strategic limbo with no unified vision. The ECB pushes a digital euro whilst appearing hostile to private stablecoin initiatives. Meanwhile, the European Commission appears more receptive to private solutions, but cannot deliver a platform on which euro stablecoin issuers can thrive. This internal discord creates policy paralysis where Europe has neither thriving private stablecoin ecosystems nor functioning CBDCs.

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Consequently, issuing USD-denominated stablecoins is easier, cheaper, and more rewarding than EUR-denominated ones. And if there was any doubt, euro stablecoins account for less than 1% of the global market, whilst the digital euro remains in prolonged development with no live product expected before 2026–2027.

The Treasury Arithmetic

All in all, Secretary Bessent's enthusiasm reflects compelling fiscal mathematics. The projected $3.7 trillion dollar stablecoin market would require massive Treasury purchases for backing, potentially $2-3 trillion in additional Treasury demand. For a Treasury Secretary facing trillion-dollar annual deficits, this represents genuine fiscal relief without raising taxes or cutting spending.

The immediate benefits are tangible. Lower borrowing costs, reduced debt service payments, and expanded global dollar adoption all strengthen America's financial position. The private sector benefits from clear regulatory frameworks and active government support, whilst consumers worldwide gain access to stable digital assets.

Yet there is an obvious downside.

The Hidden Constraint: Manufacturing's Structural Disadvantage

The same mechanisms that benefit the Treasury create structural constraints on American manufacturing competitiveness. Those “millions of new users onramped to the dollar-based digital asset economy” that Secretary Bessent celebrates in his tweet represent millions of new sources of demand for dollar liquidity that must be satisfied through trade deficits.

Indeed, every time a user in Nigeria, Vietnam, or Argentina requests newly minted USDT, it adds to the global demand for dollar liquidity. Unlike domestic demand, this pressure pulls dollars outward, either through wider US trade deficits or increased capital flows abroad. As this process scales, it places a growing strain on America’s ability to supply dollars to the world while maintaining internal economic stability.

The situation reflects the Triffin trilemma. When a national currency like the dollar also serves as the global reserve, the issuing country must choose between domestic economic goals and meeting foreign demand for liquidity. It cannot fully achieve both. If the stablecoin market surpasses $3.7 trillion and continues to grow, the dollar outflows required to sustain this form of digital dollarisation will also increase. Over time, this could force the US to prioritise global liquidity over domestic needs, for fear the whole system collapses under the weight of its own contradictions.

This reveals a fundamental constraint: the current US trade deficit of roughly $800-900 billion annually isn't merely a policy choice but a structural requirement imposed by the dollar's global role. The world needs that many dollars to function. Every dollar in foreign central bank reserves, every dollar used for international trade invoicing, every dollar backing stablecoins must leave America somehow. The trade deficit mirrors widespread dollar usage across the world, and it will multiply many times over with the rise of stablecoins.

Some might argue that Germany maintains strong manufacturing alongside currency strength, suggesting alternatives exist. Yet Germany operates within the eurozone, benefiting from a currency weakened by less competitive southern European economies. Moreover, German success relies on exceptional productivity gains, deep industrial specialisation, proximity to Eastern European supply chains, and a level of wage suppression that American workers would never accept.

The Hegemonic Trap

The dollar's unique global role creates constraints the euro doesn't face. For Americans, it creates “forced consumption.” The US must import more than it exports to satisfy global dollar demand, regardless of what might be optimal for domestic economic policy. American manufacturing becomes structurally disadvantaged when the country must run trade deficits to supply global liquidity needs.

The historical timeline reveals this pattern clearly. US manufacturing employment peaked around 1979-1980, just as the dollar's reserve currency role became entrenched after the collapse of the Bretton Woods system in 1971. Strong dollar periods of the early 1980s and 2000s coincided with accelerated manufacturing decline. Whilst automation and comparative advantage explain some shifts, the correlation between dollar strength and manufacturing weakness remains striking.

Every US administration, from Ronald Reagan in the 1980s to Donald Trump in 2025, has promised to “bring manufacturing back” or “reduce trade deficits,” yet none has succeeded sustainably. Trump's trade war temporarily reduced some bilateral deficits during his first term, but the overall deficit persisted because global dollar demand didn't disappear.

The constraint binds: reduce dollar outflows too much, and you trigger global dollar scarcity, currency appreciation, and renewed import competitiveness that recreates the deficit. American voters consistently express frustration with trade deficits and manufacturing decline, as shown by their reelecting Trump in 2024, yet dollar hegemony—endorsed by the same Trump—makes these voter preferences impossible to satisfy.

The Spanish Precedent

Spain's New World gold created a similar paradox to America's dollar privilege. Massive precious metal inflows from South America allowed Spain to import goods rather than produce them domestically. Why develop manufacturing when you could simply buy everything with gold?

The result was economic hollowing-out disguised as prosperity. Spanish agriculture and industry atrophied whilst the empire appeared wealthy. The gold financed military adventures and consumption, but didn't build productive capacity, which resulted in long-term inflation and hyperinflation.

Both cases demonstrate similar patterns: unearned purchasing power, import bias, industrial decline, dependency creation, and political constraints. Policy becomes hostage to maintaining the privileged position. Spain suffered from chronic “Dutch disease” where large inflows of foreign income pushed up the exchange rate, making exports less competitive and leading to domestic industry decline.

America's situation parallels this: the strong dollar required to maintain reserve currency status makes American manufacturing chronically uncompetitive. Spanish workshops fell behind Dutch and English competitors who had to innovate to survive. American manufacturing faces similar pressures when financial engineering and services offer higher returns than physical production.

The Acceleration Effect

Stablecoins threaten to accelerate this dynamic. Spanish gold shipments peaked and declined as mines were exhausted and other powers intercepted shipments. But stablecoin demand could grow for decades through powerful network effects, making the trap more permanent.

Spain discovered that imperial financial systems are easier to enter than exit. Once the economy restructured around gold inflows, stopping them caused severe adjustment costs. Similarly, America might find that unwinding dollar dominance is more disruptive than maintaining it.

The difference is that Spain's gold was finite whilst America's dollar printing capacity isn't. This could make the American trap more permanent and therefore more dangerous if other powers develop competitive alternatives.

The Choice Becomes Clear

Spain's imperial decline followed a predictable pattern. Initial wealth from gold obscured structural problems. Manufacturing atrophied due to import competition. Fiscal crises emerged despite apparent wealth. Military commitments became unsustainable. Currency debasement and inflation accelerated decline. Other powers developed more productive economies that eventually overtook Spain.

America isn't yet at the crisis stages, but the structural parallels are concerning. The stablecoin revolution promises immediate fiscal benefits through lower borrowing costs (see Bessent’s tweet), yet it may simultaneously reduce long-term strategic flexibility by deepening America's dependence on maintaining global dollar liquidity.

What concrete choices does this create? America could pursue policies that deliberately constrain stablecoin growth to preserve manufacturing competitiveness, but this would sacrifice the Treasury benefits that Secretary Bessent celebrates and potentially cede digital financial infrastructure to other powers.

Alternatively, America could embrace stablecoin dominance whilst accepting that manufacturing revival becomes structurally impossible due to the larger trade deficits required to supply global dollar liquidity.

Theoretically, hybrid approaches might exist—targeted industrial policies, productivity investments, or strategic currency management—but the fundamental tension remains. The more successful dollar stablecoins become, the larger the required dollar outflows, and the greater the headwinds facing domestic manufacturing.

The emerging pattern suggests America faces an increasingly constrained choice between global monetary dominance and domestic economic optimisation. The stablecoin revolution makes this choice more binding over time, potentially forcing America to choose definitively between financial hegemony and industrial revival.

For those who support American reindustrialisation, the mathematics are clear. The policies that strengthen dollar hegemony through stablecoin growth, whilst they address fiscal challenges over the short term as argued by Secretary Bessent, may structurally prevent manufacturing revival by requiring ever larger trade deficits that disadvantage domestic production. The very success of digital dollar dominance may ensure that American factories never return.

This analysis suggests that excessive dollar proliferation may not serve America's long-term interests. Alternative reserve assets, including euro stablecoins, would therefore benefit not only European sovereignty but also provide a necessary counterbalance to a trend that risks undermining American industrial capacity over time. A multipolar digital currency system might paradoxically serve American manufacturing interests better than unchallenged dollar dominance. History suggests such trade-offs carry risks that compound, even when the immediate benefits appear compelling.