The tectonic plates of the global financial system are shifting.
The century-old dominance of the U.S. dollar can no longer be taken for granted. That’s the view not only of European Central Bank President Christine Lagarde, but also of such titans of finance as BlackRock Chairman Larry Fink and JPMorgan CEO Jamie Dimon.
What’s emerging as a result is a fragmenting monetary order: on the one side, a more top-down, state-driven system, exemplified by central bank digital currencies (CBDCs) from Frankfurt and Beijing; on the other, a more free-wheeling system built and driven by the private sector.
It is a confrontation between rival visions of the power of money and how it should be deployed: each responding to the same structural pressures and slowly moving toward a model where banks can no longer create money as freely as they have since the Renaissance.
Lagarde’s vision is of an enhanced monetary sovereignty for Europe, one in which the dollar is no longer, in the words of Richard Nixon’s Treasury Secretary John Connally, “our currency, but your problem”.
But the eurozone’s ambitions now face a formidable challenge from a newly emerging alternative: a world of private digital currencies blessed and underpinned by U.S. regulation.
One world, two systems
Most of what we call money is actually created by private-sector banks, which issue credit backed by a much smaller layer of public money created by the central bank, like cash and reserves.
This two-tier system relies on commercial banks being able to guarantee what is known as the “singleness of money” — that is, to convert their private promises into central bank money whenever required.
The GENIUS Act, which passed the Senate on June 17, promises to change all that. It is the most sweeping piece of U.S. legislation on digital currencies to date, establishing the legal framework for a new system that allows the private sector to create money based on lines of blockchain code, while still — crucially — being backed by public money, i.e., dollars.
This system promises to increase the free availability of dollar equivalents abroad while maintaining tighter controls at home, thereby preventing the creation of “private” money that can cause runaway inflation and financial instability.
At the same time, the GENIUS Act aims to establish a global network of regulated “stablecoins” — digital currencies pegged to the dollar — that would absorb offshore demand for the greenback and redirect it back into the U.S. via platforms that Washington can regulate, weaponize, and — perhaps most importantly — tax. First and foremost, that would bolster demand for the U.S. government’s bonds at a time when the U.S. is struggling to convince the world’s big institutional investors — including the governments and central banks of other countries — that it can keep its debt under control.
As Treasury Secretary Scott Bessent observed on X in June: “Stablecoins can reinforce dollar supremacy … because stablecoins could end up being one of the largest buyers of U.S. Treasuries.”
If it succeeds, the approach could enable the U.S. to bypass traditional monetary chokepoints, such as fixed exchange regimes or capital controls, where central banks typically manage and regulate retail and corporate capital flows. The ECB’s Lagarde has already signalled her concern that stablecoins effectively offer a way to side-step foreign monetary authorities like hers entirely, channeling liquidity directly to the U.S. capital market and away from local capital markets elsewhere.
“They are creating, effectively, a new system of liabilities which could provide the U.S. dollar a new lease of life,” Brunello Rosa from consultancy Rosa & Roubini said of the new regime.
Meanwhile in Europe
A competing push is underway in Europe, although the official approach could hardly be more different. The European Union has already laid out in law what a stablecoin should look like. The European Central Bank, meanwhile, is working hard to eliminate the need for them in the first place with its plans for a central bank digital currency (CBDC), now popularly known as the digital euro. By contrast, Donald Trump has banned the Federal Reserve from minting a “digital dollar.”
The EU strategy is meant to address the striking lack of a cross-eurozone retail payment system, thus freeing the currency union from its dependency on U.S. payments providers such as Visa and Mastercard. It says that it should provide the private sector with an architecture that can be adapted to meet the demands of businesses and households.
But Europe, like the U.S., also has an ulterior motive. The arguments for a digital euro are “far more geopolitical … than improving payment services,” Rod Garratt, an economics professor at the University of California, Santa Barbara, told POLITICO. “If there’s some type of war or political disruption, [the view is] we have to have control over our infrastructures.”
Other central banks from Canada to Switzerland and the U.K. have all cooled on the idea of a CBDC after doing their own homework, but the eurozone is, as ever, a special case due to the unique nature of Europe’s currency union. A digital euro would provide European depositors with a trusted anchor in a potential panic if the credit of eurozone banks — or governments — ever came into question again.
According to Rosa, many European banks, initially hostile to the project and afraid it would reduce their role in the financial system, have come to see ECB-led digital money as the lesser evil. The choice, he said, was between having their lunch eaten by U.S.-issued stablecoins or by the digital euro.
Yet others see an opportunity in competing with dollar stablecoins directly by issuing euro-denominated versions, not least because the digital euro is still years away and is limited to smaller payments, not suitable for corporates.
“If we as Europeans don’t come up with a viable solution, then ultimately we will have to accept a U.S. or Chinese solution,” said Alexander Hoptner, CEO of Frankfurt-based AllUnity, which recently received approval from German regulator Bafin to issue its first euro-denominated stablecoin. Allunity, which is backed by Deutsche Bank’s asset management subsidiary DWS, already has 12 banks in the onboarding process, including some large ones, he said.
Currency substitution risk
However, Europe appears increasingly concerned that its concept may not be able to compete with the U.S. one.
A chief concern is that U.S.-issued stablecoins could lure European savings away from investments closer to home, frustrating efforts to attract global capital into the euro and expand its use as a reserve currency. The ECB’s payments chief, Piero Cipollone, warned the European Parliament in April of a looming risk of “currency substitution”, a phenomenon that typically sees the central bank of the weaker currency lose control over its financial system and, ultimately, its economy.
A new study for the European Parliament has since warned that “stablecoins could be used as tools of statecraft and strengthen the global reserve-currency role of the U.S. dollar.” It also warned that, unless the digital euro has “high (or infinite) holding limits,” it will be hard-pressed to “meaningfully compete with bank deposits and stablecoins.”
Lagarde has also been vocal about the risk. “If I have the choice between receiving 2 percent or receiving 4.25 percent I’m probably going to look at the 4.25 percent, especially if that stablecoin issuer tells me that I am fully guaranteed and will have full access to the redemption safeguards and guarantees that would be available in my hometown,” she explained to the EU parliament in June.
The GENIUS Act, in its current form, prohibits the payment of interest on stablecoins, but the legislation is yet to be reconciled with the House of Representatives. Even if the clause remains in the final legislation, ECB officials worry it may be poorly policed or that there may be workarounds. It is already possible, for example, to lend stablecoins onto interest-bearing tokenized money-market funds.
But that’s not the ECB’s only concern. Currently, the Commission and Frankfurt are engaged in a dispute over the interpretation of the EU’s own existing stablecoin legislation. The big question: Should stablecoins pegged to specific currencies such as the euro or dollar — but issued in different countries with looser oversight — be treated as equal and interchangeable with those issued under stricter EU rules?
The ECB would rather they are not because, in a panic, treating all tokens as interchangeable could force European institutions to backstop the liabilities of lower-quality jurisdictions.
The Commission, which is currently pursuing a simplification and deregulatory agenda — while under pressure to conclude a trade deal with the U.S. — feels differently. It believes the risks arising from such global stablecoins are overstated and are manageable under the existing legal framework.
The GENIUS Act, by comparison, is ambiguous about the issue of interchangeability. It requires stablecoin issuers to back tokens 1:1 with cash or short-term U.S. government debt (T-bills) and explicitly prohibits the relending of such assets and the payment of interest, thereby eliminating the risk of issuers building up more liabilities than they can honor. Most importantly, in a bank bankruptcy, token holders must be paid out ahead of most other creditors — a privilege not extended to traditional bank depositors.
As such, dollar-denominated stablecoins, no matter where they are issued, could benefit from an implicit U.S. backstop — provided that at least one organizational leg is anchored to the U.S. banking system within a regulated entity. Euro-denominated stablecoins issued abroad under different regulations, on the other hand, would have no similar anchor if the ECB gets its way.
Exploiting the blockchain commons
Another difference between the two visions is cost. While those backing the digital euro are still quibbling over how to fund the development and running costs of the underpinning infrastructure, stablecoins draw significant cost advantages from being able to tap into existing public blockchains, such as those that power the Ethereum and Solana digital currencies. These have been built up over the last decade by a decentralized army of tech geeks around the world, all of them bringing their private agenda to the party.
Traditional finance — the banks and investment companies that are household names — is now actively looking to adopt a process known as tokenization, which enables real-time trade and settlement of assets, deposits and central bank money. But the allure of stablecoins is equally great, if not greater.
Recognizing the broader shift toward stablecoins, many banks, both in the U.S. and Europe, are now realizing they have to adapt by embracing stablecoins directly.
“This infrastructure, it’s public, which means that traditional finance can use it as well, whether [the crypto industry] want them there or not,” UCal’s Garratt said.
Failure to adapt and compete may see today’s giants struggle to compete in cross-border payments or correspondent banking. Banks historically like to keep a healthy balance between their lending businesses and their deposit bases, and if customers transfer their deposits to stablecoins with all-singing, all-dancing functionality, then banks will have to be more selective with the money they still have at their disposal. That could mean less credit available for households and businesses.
Toward a ‘narrow banking’ model
Tether, the largest offshore issuer of stablecoins, is the archetype of such competition and a stakeholder in the new form of dollar mercantilism. It already holds a whopping $120 billion in U.S. Treasury bills to back its USDT token.
According to Tether’s CEO, Paolo Ardoino, demand for Tether today is highest in cash-based economies. It has especially flourished in jurisdictions with capital controls or currency instability — from Lebanon to Argentina to Iran — in many cases offering truer price signals for currency values than official exchange rates.
“These people don’t trust their national currencies — they want dollars,” Ardoino told POLITICO in an interview in April, explaining demand really began to shift from crypto enthusiasts to ordinary people from 2020 onwards. Today, he says, Tether reaches everyday users through a growing grassroots distribution network of local kiosk vendors and “boots on the ground.”
Ardoino is careful to frame USDT as a stop-gap for places where the ordinary plumbing of money has broken down, not as a rival to the credit-card networks or instant-payment rails of mature economies.
In the U.S., he admits, “stablecoins have to compete very hard with a very good alternative already,” which is why it plans a separate, federally supervised dollar token for that market. USDT, by contrast, is deliberately pitched at countries whose citizens “don’t trust their national currencies.” Its popularity, in other words, is a market signal that something in the underlying monetary system has failed.
As such, he said, Europe’s jitters over the perceived threat from stablecoins have some awkward implications.
“If Tether can be so scary for the European Union,” the native Italian quipped, “We are in trouble as a European Union.”
An unequal struggle?
However, some argue that a purely private sector-led system comes with its own dangers. Beyond the obvious risks of fraud, money laundering, and poor risk management, there is also the rise of closed-loop ecosystems that threaten the so-called singleness of money. Economic historian Barry Eichengreen has warned that the GENIUS Act will take the U.S. back to the chaos of the 19th century, when private banks would issue dollars of their own that regularly collapsed because of a lack of proper backing.
“If everybody has a walled garden, is that the sort of money we want, or do we actually want these digital monies to be effectively interchangeable?” incoming FSB Chair and current Bank of England governor Andrew Bailey told POLITICO at a conference in Amsterdam in May.
The desire for walled gardens may be lacking, but stopping them will be a tough proposition. Tether is far from alone in its international ambitions. U.S. fintech firms, such as Paxos, are building the infrastructure needed to support large-scale stablecoin issuance compliant with GENIUS. Its Global Dollar Network, based in Singapore, is preparing to offer “stablecoin-as-a-service” to major corporations. According to insiders, Meta — which is eying a return to stablecoin markets after its original Libra project collapsed — may even be among the potential clients.
Other household names are also circling the space. Walmart, Amazon, and Expedia have reportedly explored issuing their own stablecoins, possibly through a merchant-led consortium anchored by a major issuer.
“I don’t think people realize how radically disruptive a cash equivalent stablecoin is,” payments veteran Tony McLaughlin told POLITICO. Formerly with Barclays, HSBC and Citi, McLaughlin has made the personal journey from traditional finance to head Ubyx, a startup that aims to make it easier for rival stablecoins to operate with one another. He now argues stablecoins are the second coming of the traveler’s check.
Whatever system prevails, one thing is clear: the monetary order is being rebuilt in real time, and the outcome will determine not just the cost of money but the new geopolitical order.
“Sovereignty is about the flag, the anthem and the currency,” Rosa summed up. Money is as geopolitical as it gets.”