Will Stablecoins Save The Dollar?

Stablecoins are newcomers to the world of finance. They emerged with the rise of cryptocurrencies, following in the footsteps of bitcoin. The concept is simple: one unit of a stablecoin equals one dollar. The oldest is USDT, launched by the company Tether: 1 USDT equals 1 dollar.

USDT was initially designed for cryptocurrency traders who want to be able to close out their positions or secure a portion of their gains by converting all or part of their portfolio into dollars after selling their highly volatile and uncertain bitcoins, ethers, etc. Converting back from cryptocurrencies to dollars takes time, incurs fees, and requires re-entering the banking system, with the reporting obligations that entails. Switching to USDT, on the other hand, happens instantly on an exchange platform: you simply swap one cryptocurrency for another. Its success has been meteoric.

And how does Tether guarantee the parity between USDT and the dollar? Quite simply by purchasing U.S. debt. The amount of USDT in circulation is exactly matched by Tether’s holdings of debt — primarily short-term debt — which is easy to resell on the markets. And that is how stablecoins have become major buyers of U.S. Treasury securities!

This is becoming increasingly significant: USDT’s total market capitalization has reached $183 billion, a figure that has risen sharply ($163 billion a year ago, $114 billion two years ago, and $84 billion three years ago). Add to that the USDC, the second-largest stablecoin by volume ($72 billion), and the others — totaling approximately $300 billion, according to CoinGecko.

These figures are on the rise, as the number of users is skyrocketing and now extends far beyond the trading community. According to Tether, 650 million customers worldwide use USDT, primarily in emerging markets — notably Venezuela, Bolivia, and certain regions of Africa — which are grappling with high inflation, exchange controls, or geopolitical instability. Individuals are thus seeking to secure a portion of their savings and conduct transactions in dollars: 77.4% of USDT wallets hold less than $1,000.

In practical terms, the dollar is siphoning off some of the liquidity from weakening currencies through stablecoins and strengthening at the expense of emerging-market currencies. Well done.

At the same time, the U.S. Treasury is finding a new source of demand for its debt. It remains marginal — about $300 billion, or less than 1% of a federal debt nearing $40 trillion — but it is growing rapidly and could offset, at least in part, potential sales by Japan, which is currently struggling, or by China in the event of a standoff with the United States. And if we look at flows rather than stocks, their role becomes even more significant: Tether now ranks among the top 20 buyers of U.S. debt, ahead of Germany. That matters.

In short, stablecoins are a new tool of American power that helps strengthen the dollar. However, they are not significant enough to offset the risk posed by unchecked federal debt expansion. On their own, they certainly won’t save the dollar.

In fact, to diversify and secure its own reserves, Tether is buying… physical gold, as we explained last October. It has even become the world’s largest private holder of gold, with 146 metric tons as of the last count. Clearly, Tether would rather cover its own back than save the dollar!