(Continuation from Part 1 here)
Building on my previous post (here), I will begin by highlighting another issue with the EU Regulation (MICA) that hinders the issuance of stablecoins in euros, a flaw that does not exist in the US GENIUS Act. Then, I will explore the potential impact of stablecoins on 1) monetary policy; 2) the international system (Eurodollar, financial instability, currency substitution, dollarisation, and issues with capital controls and sanctions). Unfortunately, due to space limitations, I must postpone the discussion of the CBDCs ongoing demise. It will be a shorter post. Let me state in advance that CBDC will cause no harm but will face insufficient demand. The term "demise" reflects the list of countries that have recently abandoned issuing CBDCs for retail users. Most likely, the significant issuers remaining in technologically sophisticated countries will be China and the ECB.
STABLECOINS IN EUROS
As I previously mentioned, there are difficulties created by the EBA Technical Standard regarding minimum capital for significant stablecoins, including the already approved 2% to 3% of the total issuance and the proposed minimum cash component of reserves at 60%. The US GENIUS does not include such provisions. I support the requirement for a minimum capital ratio, but I believe the suggested 60% cash reserve is excessive and could hinder the growth of stablecoins in euros. Remember that in my earlier post on stablecoins, I argued that issuers should be regulated similarly to banks, aligning with the views expressed in the Report to the President, endorsed by all US Regulators, the Financial Stability Board, and other international organisations.
Another issue for euro stablecoins arises from MICA not setting a maturity limit for the securities held in reserves, as long as they are safe and liquid. It is understandable, yet problematic, that MICA requires regular, independent valuation and liquidity stress tests on reserve instruments. The draft EBA Technical Standard and its consultation responses take a further step towards mark-to-market by allowing longer-maturity, highly liquid bonds subject to regular valuations, specifying “market value where available," and clearly requiring reserve assets to match the value of issued stablecoins at all times for redemption. Any shortfalls must be covered, which involves using capital for that purpose. This means that, as the 3% minimum capital ratio relates to issued stock, if the issuer begins at the minimum ratio, it would need to issue capital to maintain a 3% ratio.
Pragmatically, the US GENIUS Act establishes a maturity limit of 93 days for any instrument in the reserves from the date of purchase. With such a short duration, any capital losses would be minimal, and stablecoin issuers can choose amortised cost rather than mark-to-market. It is expected that stablecoin issuers will mainly buy 90-day Treasury Bills for their reserves, including some bonds close to maturity.
Another limitation to the expansion of stablecoins in euros is the insufficient size of triple-A sovereign debt, especially Treasury Bills, needed to act as safe and liquid securities for the issuers' reserves. The US is much larger, and despite no longer enjoying full triple-A status, it benefits from being the dominant international reserve currency and is considered safer than European debt below triple-A. A final point is my view that the majority of demand for stablecoins will be for international purposes, and in this area, the role of the euro is a distant second to the dollar.
STABLECOINS POTENTIAL IMPACTS
Impact on Central Banks and Monetary Policy
I explained in my previous post why the creation of stablecoins will not significantly affect the total amount of retail domestic bank deposits. First, because stablecoin issuers must use the payments they receive for issuing to maintain reserves, which will be partly in bank deposits and partly in securities, primarily purchased from residents, thereby increasing their deposits. Additionally, after the initial issuance, stablecoin issuers have no capacity to amplify their “money-like” creation, as they do not operate, unlike banks, in a fractional reserve environment but rather a 100% reserve one, and are therefore prohibited from granting credit. The second reason stablecoins will not meaningfully impact the total amount of domestic deposits stems from my view that stablecoins will not become popular for domestic retail payments for the reasons I indicated in my previous post.
Stablecoin issuance, whether to meet domestic or international demand, will increase demand for T-Bills even if it does not result in a significant overall rise in US debt demand, as stablecoin buyers might already hold US debt and may reduce their holdings after purchasing stablecoins. This substitution is possible, though difficult to quantify. In any case, what the expansion of stablecoins enables is what has been called the “Treasury QE,” that is, the issuance of more short-term debt to finance the budget deficit at lower costs, similar to the effect of Fed QE. This strategy, initiated by Yellen and continued by Bessent, who previously criticised Yellen harshly, is much less risky if the Treasury can expect higher demand for T-bills from stablecoin issuers in the future. Meanwhile, T-Bill yields may fall by perhaps 2 basis points due to the additional demand. These developments suggest that the Fed may face less pressure to engage in QE in the future.
Another pressure on central banks (CBs) stemming from stablecoins, if they become hugely successful, will relate to the possibility that CBs may need to offer some form of liquidity backstop in the future—whether permanent or during stressful situations—to significant issuers. Concerns over financial stability for systemic institutions and the role of stablecoins as a form of money, similar to deposits, will underpin these arguments. For this to occur, numerous laws would need amending, starting with MICA and GENIUS. Issuers would have to be authorised to pledge securities as collateral to access CB liquidity (currently prohibited by MICA and GENIUS), and CBs would need supervisory authority over stablecoin issuers. The oversight powers granted to the ECB under the framework for Electronic Payment Instruments, Schemes, and Arrangements (PISA), as provided by MICA, would not be sufficient. While PISA allows the ECB extensive access to information from stablecoin issuers, it does not grant true supervisory powers, unlike those assigned to the EBA (European Banking Authority) by MICA. Relying solely on the MICA regulatory framework and the issuer's voluntary compliance (which GENIUS depends on entirely) would be inadequate to address moral hazard and the erosion of market discipline for issuers with access to a CB liquidity backstop, especially when they are solvent and only require temporary liquidity support.
STABLECOINS AND THE INTERNATIONAL MONETARY AND FINANCIAL SYSTEM.
The Eurodollar system
I mentioned before that the impact of stablecoins will be mostly felt internationally. To better understand this impact, it is worthwhile to examine what the “Eurodollar system” is, as it constitutes the core of the global system of payments and finance, where the dollar dominates. Simply put, the “Eurodollar system” refers to the wholesale market for dollar deposits located outside the US, which amounts now to about $14 trillion, compared with $18 trillion, the total US banks´ domestic deposits. The expansion was facilitated by the development of dollar derivatives in the 1980s, which were created for hedging and speculative transactions. The largest is the Interest Rate Swaps (IRS), whose notional amounts involved were valued at $570 trillion in 2024, accounting for 79% of all over-the-counter derivatives. The notional amounts involved in swap and futures markets on currencies were then $130 trillion. On the other hand, the CLS (Continuous Linked Settlement) provides settlement services to mitigate currency transactions (spot, forwards, swaps) settlement risks. It now ensures an average daily settlement of $7 trillion.
The offshore system of dollar deposits began in the late 1950s with a dollar deposit in London by a Russian bank and then gained momentum through US banks in London due to Regulation Q, which limited interest rates on US domestic deposits. The term “Eurodollar” originates from this, although offshore dollar deposits are now found in many countries. These deposits are not subject to US regulations, such as mandatory minimum reserves or limits on interest payments. Banks holding these deposits can create new deposits by issuing loans in dollars, just as they do domestically, thereby amplifying the growth of Eurodollars. Banks that do not have a direct dollar account with the FED settle dollars and obtain liquidity through a correspondent account with a US bank. Unsecured interbank deposits and credit lines from Eurodollar banks have enabled many other banks to access international finance in dollars. Despite the shift to interbank secured borrowing and lending (Repos) since the 2007/08 crisis, “Correspondent banking” remains important and was made more secure by the introduction of SWIFT (Society for Worldwide Interbank Financial Telecommunication) in 1977, created by 239 banks from 15 countries to ensure secure messaging for transmitting orders and confirmations of interbank financial transactions. Today, it connects over 11000 institutions in 200 countries. It is based in Belgium, but as seen in the case of Iran sanctions, it is controlled by the US.
US authorities initially observed the development of this parallel dollar system with some ambiguity, as it represented the creation of dollars outside any control by the FED. However, it also served as a way to expand the international relevance of the dollar and to generate private credit to address the growing challenge of providing official international liquidity solely through domestic dollar creation. So, in 1962, when some instability emerged in the Eurodollar system, the FED introduced dollar swap lines to European Central Banks, providing a backstop for the system. By the end of the 1960s, the Eurodollar system was fully established and thriving. The 1970s saw it expand further, driven by the so-called petrodollars. In an effort to control this growth, in 1981, the US eliminated Regulation Q's cap on deposit remuneration and established the International Banking Facilities (IBFS), allowing US banks to hold “Eurodollar deposits” outside US regulations but still within US territory. These never grew very large. The 1980s marked the emergence of all the derivatives mentioned earlier, which helped strengthen the Eurodollar system and sustain dollar dominance. The 1990s were the peak of global banks, ending with the 1997/98 Asian and Russian financial crises and the introduction of the euro in 1999. The system managed these crises well, and the euro saw some growth in offshore euro deposits, with the new currency becoming a distant second to the dollar's relevance. Many European banks, however, used the euro as an opportunity to expand dollar lending, often raising funds domestically in euros and swapping into dollars to lend abroad, particularly for trade financing.
The 2007/8 financial crisis marked a significant shift from unsecured to secured lending through repurchase agreements (Repos), especially those with 24-hour maturities. These proved to be more influential in creating instability than naked credit default swaps, often linked to major liquidity stress episodes that required substantial FED interventions. The crisis itself was described by Gary Gorton as “a run on Repo” (September 2019, March 2020)[i] (and see here about repos and basis trade) . The role of Repo was encouraged in the US by the 1984 change in bankruptcy law, which removed repos from any execution stay during bankruptcy. This was further improved in 1990 and again in 2005. The EU adopted similar measures in 2002. Repos gradually expanded, gaining significant momentum in the US during the 1990s and early 2000s, often involving highly risky securities. After a temporary decline following the financial crisis, new regulations and the collective settlement mechanisms provided by CCPs helped restore confidence, allowing the market to grow to its current estimated size of approximately $12 trillion in repos. This growth is facilitated by the practice of reusing and rehypothecating the same securities across multiple successive repos. In 2020, Infante et al (AER 2020) found that for US Treasuries alone, a multiplier of 7 was present[ii]. The overnight repo market became an essential component of the global monetary system, providing and expanding liquidity for short-term settlements and, regrettably, for longer-term funding. Bayoumi (2017) [iii] highlighted that repos played a significant role in funding the housing bubble. It is a complex network of institutions and monetary and financial instruments that enables the payments and financing that underpin the global economic system, serving as the linchpin of international dollar dominance and making it very difficult to substitute. What, then, can a successful stablecoin expansion bring about in this vast system?
Stablecoins and the international monetary system
Until the tokenisation of securities genuinely becomes significant, enabling all the DeFi smart contracts that stablecoins will support, their role will focus on payment activities, as they are a faster and cheaper way to perform these transactions. Their creation begins with the destruction of a cash deposit, either domestic or offshore (“Eurodollars”). In the latter case, it is much less certain that the amount of offshore deposits will be reconstituted by the stablecoin issuer purchasing dollar securities, specifically T-Bills, outside the US from offshore depositors. Therefore, the mechanism I previously explained, which tends to reconstitute domestically destroyed deposits to mint stablecoins, will not operate in the same way for “Eurodollar deposits.” However, these deposits may not necessarily shrink if there is a margin from increased credit demand, facilitating more activity by “Eurodollar banks” in creating deposits through granting additional credit. Beyond the initial deposit destruction and potential partial reconstitution, stablecoins cannot guarantee any new creation, as their issuers are restricted from issuing credit and must maintain a 100% reserve backstop.
We should remember that there are several different stablecoins, each with its own name and blockchain, and that transactions between two or more parties require all of them to be connected to the same blockchain. However, it is expected that either consortia of issuers or the development of interoperability among different stablecoins will eventually facilitate payment activities. There are also technologies that enable redemption at par outside the linked currency’s jurisdiction. It is therefore natural that cross-border payments will ultimately be dominated by the use of stablecoins. This is another reason, as I mentioned earlier, why global banks will play a significant role as issuers of stablecoins.
The use of stablecoins will decrease the volume of SWIFT messaging and correspondent banking activities. Conversely, the repo market may be slightly impacted since stablecoin issuers cannot act as borrowers, as they cannot pledge their securities within reserves, but they can become lenders since repos are allowed by GENIUS to be included in reserves. The legal status is less certain under MICA, but in principle, there is no reason why they should be excluded. Lastly, the widespread adoption of stablecoins will make it more challenging, but not impossible, to enforce restrictions on capital flows and the implementation of international financial sanctions.
Stablecoins and monetary sovereignty
Another potential factor for strengthening the dollar's position internationally relates to the possible increase in dollarisation in other countries' internal payments, especially in those with high inflation and weak currencies, as the widespread presence of dollar-based stablecoins over the internet will facilitate its use. In this regard, it is important to emphasise that MICA introduces measures to prevent excessive penetration of stablecoins in foreign currencies within domestic retail payments, which could threaten “monetary sovereignty” (EP study “Cryptomercantilism vs. monetary Sovereignty: Dealing with the challenge of US Stablecoins for the EU”, June 2025). MICA (Articles 23 and 24) establishes two safeguards against dominant stablecoins pegged to foreign currencies: 1) the first, aimed at promoting competition, caps any stablecoin where the “estimated quarterly average number and average aggregate value of transactions per day associated to its uses as a means of exchange within a single currency area is higher than 1 million transactions and EUR 200 000 000, respectively” In case of breaching these thresholds, the issuer must “(a) stop issuing that asset-referenced token and (b) within 40 working days submit a plan to ensure future compliance. This cap does not apply, however, to cross-border payments, e.g, if the issuer is in a foreign jurisdiction. How does this apply, as an example, to Amazon that is very likely to issue a stablecoin? Right now, European Amazon sites are legally incorporated in each European country, and an Amazon stablecoin would be subject to the mentioned cap. If Amazon were to attempt to restructure and make payments to its US quarters, European authorities could require Amazon to establish a local entity by invoking consumer protection laws (necessary local entity responsibility), VAT obligations (necessary local entity), or competition law. Naturally, all the restrctions would apply to each indicidual stablecoin, altough the disturbing effect could result from many stablecoins dollar-pegged operating in Europe…
The second line of defence against currency substitution (Articles 24.3 and 58.3) is the power given to “the ECB or, where applicable, the central bank referred to in Article 20(4), issues an opinion that the asset-referenced token poses a threat to the smooth operation of payment systems, monetary policy transmission or monetary sovereignty, and specify the applicable limit or minimum denomination amount “ .
Despite its length, many points could not be addressed in this context. Generally, I believe that the use of stablecoins will strengthen the role of the dollar in the international system, mainly by attracting new users to dollar payments, as this is the most common form of stablecoin, which will encourage other aspects of that dominance. A significant example, assuming all other factors remain constant, could be an increase in dollar invoicing for international trade in goods and services. Nonetheless, the pushback against the dollar, facilitated by recent Trump policies, could have the opposite effect. Like many other issues, the prospects and consequences of the likely success of stablecoins involve too many variables and remain uncertain.
[i] Vitor Constâncio (2022) “Unfinished regulatory reforms and the repo market” in “Macroprudential Matters”, the Bulletin of The Centre for Global Banking and Finance at King´s Business School, Cambridge UK
https://macroprudentialmatters.com/unfinished-regulatory-reforms-and-the-repo-market/
[ii] Infante,S, Press,C, and Zack Saravay (2020) “Understanding Collateral Re-use in the US Financial System” American Economic Review, May, vol. 110: 482–486
[iii] See Bayoumi, T. (2017) “Unfinished Business: The unexplored causes of the Financial Crisis and the lessons yet to be learned”, Yale University Press., page 73.
Excellent!