Strengthening the Dollar: How Stablecoins Empower Developing Nations

Opinion by: Christos A. Makridis, Associate Research Professor at Arizona State University and Visiting Fellow at the Heritage Foundation

Key Takeaways

Stablecoins are experiencing rapid growth, largely backed by the US dollar, which enhances the currency's global dominance.
Developing nations benefit from stablecoins by gaining access to stable currencies without the traditional barriers of banking systems.
The use of stablecoins can significantly reduce transaction costs for essential services like remittances.
With stablecoins, developing countries can avoid reliance on predatory loans from powerful nations.
Unlike state-controlled CBDCs, stablecoins address real consumer needs effectively, highlighting their grassroots acceptance and usage.

Stablecoins strengthen the dollar and empower the developing world

The emergence of stablecoins represents a significant shift in global finance, especially following the US GENIUS Act. This initiative strengthens the dominance of the US dollar while offering developing countries access to stable currencies, facilitating economic activity, and potentially reshaping global financial systems.

The Rise of Stablecoins

Stablecoins are gaining momentum, especially after the signing of the GENIUS Act by former President Donald Trump. European banks are now looking to create their own stablecoins, reflecting their admiration for the US dollar's prominent role in the global economy. The recent growth of dollar-backed stablecoins represents a strategic advantage for the United States, supporting the dollar’s stronghold worldwide.

By fostering an environment for stablecoins, the US can not only maintain its economic influence but also democratize financial access in developing countries. These digital dollars present several advantages — they minimize transaction fees, speed up service delivery, mitigate local inflation, and broaden the access of small businesses to international trade.

Market Impacts of Stablecoins

The market for stablecoins has soared, with transaction values surpassing $265 billion, nearly all supported by the US dollar. For every dollar issued in stablecoins, there are significant reserves in US dollars and Treasury bills, creating a shift from traditional banking holds to stablecoin issuance. Federal Reserve Governor Christopher Waller has emphasized that increased adoption of stablecoins will further bolster the dollar as the global reserve currency, pointing out that stablecoins generate higher demand for US dollars and federal debt.

Empowering Developing Nations Through Stablecoins

For countries facing unstable currencies and high inflation, access to dollar-based stablecoins can unlock crucial economic opportunities. Many citizens in developing regions struggle with underdeveloped banking services, leading to a reliance on cash or expensive remittance services. The innovative aspect of stablecoins is their accessibility; anyone with a smartphone can now access digital dollars, thereby bypassing cumbersome banking processes.

This evolution in finance promotes inclusion for the 1.4 billion adults globally who lack banking services, especially in Africa and Asia. Stablecoins allow individuals to save in a stable currency and transact internationally without traditional bank account limitations.

Financial Inclusion Driven by Stablecoins

In Sub-Saharan Africa, dollar-backed stablecoins are becoming instrumental for transactions and savings amid currency instability. Currently, more than 40% of cryptocurrency transactions in Africa involve stablecoins, with users often paying a premium to obtain them, indicating a strong demand for reliable value storage.

Stablecoins are also streamlining commerce by reducing remittance costs. For instance, a Kenyan pilot project demonstrated that using stablecoins for micropayments dropped transaction fees from 28.8% to just 2%, allowing workers to retain more of their income. Globally, it’s estimated that shifting remittance channels to stablecoins could save over $12 billion annually, providing local households with more disposable income.

Stablecoin financing can offer crucial support where traditional banks see little incentive to lend, fostering the growth of small and medium enterprises in Africa.

Battling Influence with Stablecoins

Adopting stablecoins can also mitigate the economic influence of countries like China, which has extended significant loans to developing nations under challenging terms, often leading to debilitating debts and asset relinquishment. By integrating dollar stablecoins into their economic framework, these nations can explore new funding methods and break away from exploitative lending practices.

Tokenizing sovereign debt is another innovative approach, allowing governments to issue bonds on blockchain platforms in smaller denominations. This method makes local investment more accessible, enabling citizens to participate in national financial plans without depending solely on foreign creditors.

The Role of Central Bank Digital Currencies (CBDCs)

Recognizing the potential of stablecoins, many central banks are looking into CBDCs as state-backed alternatives. While proponents argue that CBDCs could drive inclusion and modernize payment systems, their initial implementations, such as Nigeria's eNaira, have faced hurdles, with many Nigerians returning to dollar stablecoins for financial stability amidst local currency challenges.

Research indicates that central bank promotion of CBDCs can negatively impact private stablecoin usage. This competition risks limiting access to superior financial services for consumers. Studies show no significant macroeconomic benefits from CBDC adoption compared to the active engagement around stablecoins.

Encouraging the use of dollar-backed stablecoins in developing countries presents mutual advantages, enhancing dollar influence while offering these regions vital access to stable financial resources.

The US stands to gain from championing dollar stablecoins, unlocking potential growth in emerging markets while confirming its economic strength. As global finance evolves, stablecoins could play a pivotal role in creating a more equitable and resilient financial ecosystem.

In the global race for economic influence, a reliable stable currency can indeed offer considerable advantages.