Stablecoins are the new kid on the currency bloc, combining the ease of faster and cheaper digital transactions with the stability that comes from being tied to an underlying asset. The US and Europe are both awake to the possibilities but have taken very different approaches to stablecoin development: in the US, the market decides, while in Europe their future will be determined by regulators and the European Central Bank. Little wonder, then, that over 97% of the USD300 billion global stablecoins currently in existence are dollar-denominated. However, there are still many hurdles to world domination.
Rather than creating a public e-dollar backed by the Federal Reserve, the US has chosen to regulate and legitimise the private issuance of digital dollars.
Under the US regulatory framework, dollar stablecoins must be fully backed by liquid and secure assets, primarily US Treasury bills and central bank reserves. Issuers thus effectively become holders of US public debt, strengthening demand for secure dollar assets.
At the same time, stablecoin holdings in the US cannot be remunerated with yield or interest payments. This limits the risks of market participants moving funds away from traditional deposits and thus compromising banks’ ability to support the real economy with credit provision.
Europe is following the opposite path. At the end of 2025, the European Council assigned full responsibility for the development of the digital euro to the European Central Bank. The euro zone’s ambition is clear: to offer a public and sovereign version of the currency in the digital age. The timetable is equally clear: even in the most favourable scenario, large-scale deployment is not expected before 2028–2029, lagging the US by several years.
So, while the private digital dollar is already in use, the digital euro is still under construction. In this sense, the US holds the upper hand over Europe; by the same token, the private sector appears to be challenging public institutions for control of the digital currency arena.
This has several implications.
In the short term, the rise of the digital dollar could offset what has been a gentle decline in the use of the traditional dollar as both a reserve and investment currency (as discussed in our Secular Outlook). Since 2014, the dollar’s share in global foreign exchange reserves has dropped to 58% from 66%, as the weaponisation of US assets has dented their appeal, prompting some countries – particularly those in the developing world – to look for alternatives. While dollar stablecoins are tied to the value of the underlying currency, they are insulated from some of the risks that have dented the standing of the traditional dollar, such as US threats to suspend economies from the SWIFT payment system.
Another corollary of stablecoins’ rise is a corresponding increase in demand for US assets used as collateral, supporting US Treasuries.
Uncertain future
Longer-term, though, it is still not clear how big a role stablecoins might play in the global financial system. There are also concerns over the feasibility of shifting currency controls from the public to private sphere.
The wide range of projections for the growth of the stablecoin universe testifies to this uncertainty: in five years’ time their capitalisation is estimated to be anywhere between USD500 billion to USD3 trillion. (For comparison, the market value of outstanding US Treasuries stands at around USD30 trillion.[1]
Today, stablecoins have two main uses. The first is transactional: they enable faster and cheaper cross-border payments, particularly in areas underserved by traditional banking systems. A significant portion of the flows represents conversions between dollars and crypto-assets, rather than final payments. The second use is monetary: in high-inflation economies (like Turkey or Argentina) stablecoins offer direct access to a currency perceived as a more stable alternative to the domestic one, becoming an informal store of value.
However, these uses are not without limitations. Any systemic currency must satisfy three criteria: singleness, elasticity, and integrity. In all three cases, stablecoins fall short.
Singleness is a fundamental concept: a monetary unit must be accepted everywhere at the same value. In a public system, this parity is guaranteed by the central bank. But stablecoins are controlled by separate private issuers. Each token is a claim on a specific balance sheet, with its own reserves and governance. As long as confidence remains, parity is maintained; in times of tension, however, discrepancies may arise.
Elasticity refers to the ability of the monetary system to adjust to fluctuating demand for money (eg during shocks). Central banks have discretionary tools and unlimited access to their own balance sheets for this purpose. By contrast stablecoins, even those fully backed by liquid assets, remain constrained by private balance sheet mechanics: they are issued when cash inflows allow and their supply contracts mechanically in the event of redemptions. Without a lender of last resort, this elasticity is limited and potentially directly correlated to the economic cycle – so in times of economic weakness, when liquidity may be most needed, it may not materialise.
Finally, integrity concerns the soundness and consistency of the system as a whole: operational security, compliance with rules, and user protection. Stablecoins circulate across a global and fragmented infrastructure, crossing multiple jurisdictions, which complicates supervision, consistent enforcement of compliance rules, and risk management.
Other hurdles include political and financial considerations. Emerging markets may, for example, tolerate the use of stablecoins as a transactional or hedging instrument, but might be reluctant to accept any lasting digital dollarisation that would weaken their monetary sovereignty.
Meanwhile, the fact that stablecoins don’t offer a yield limits their appeal as a store of value. Traditional bank deposits and money market funds offer credible competition, both as savings vehicles and, potentially, as means of payment.
To assess the future evolution of digital currencies, history offers an illuminating precedent: in the 19th century, competing private currencies flourished in expanding economies, particularly in the US, but this came with fragmentation, variable discounts depending on the issuer, and recurring crises. As these currencies became systemic, their limitations (lack of uniformity, procyclical elasticity, loss of confidence) led to a re-centralisation of money.
These limitations of private money hold true today, suggesting stablecoins may not be able to permanently replace public currency, particularly as a pillar of the international monetary system. Technology, thus, won’t change the monetary hierarchy – at least not yet.
Put another way, dollar stablecoins are thriving because they are backed by the world’s largest economy and deepest financial market, and the dominant safe-haven asset, the US Treasury. They have not invented the dollar’s hegemony; they are exploiting it. And while they may offer some support to US assets, they are unlikely to halt the slow but steady decline in dollar supremacy.
Technology and innovation are changing the financial landscape, but – despite the early success of dollar stablecoins – we believe it is still not clear to whether the private sector can replace the public sector in the issuance and circulation of currency.
[1] https://www.sifma.org/research/statistics/us-treasury-securities-statistics)
Patrick Zweifel is chief economist at Pictet Asset Management
