Digital dollars are on the rise. Stablecoins pegged to the US dollar have seen rapid growth recently, with the stablecoin market holding over $120 billion in U.S Treasuries. But while some crypto enthusiasts celebrate this milestone, alarm bells are sounding in Washington.
In a recent FT article , authors Jay Newman, the author of Undermoney, and Richard Carty, a former managing director of Morgan Stanley Principal Strategies, argue that these dollar-based cryptocurrencies could undermine US economic power and law enforcement capabilities if left unregulated.
Newman and Carty aren’t the only ones sounding the alarm. This year, the International Monetary Fund (IMF) has issued multiple warnings about the so-called “cryptoization”, particularly the flight to dollar-pegged stablecoins.
The main appeal of stablecoins like Tether is that they aim to maintain a steady value, unlike volatile cryptocurrencies such as Bitcoin. However, Newman and Carty explain that stablecoins also currently operate outside traditional financial oversight. Whereas regular banks must comply with strict anti-money laundering and sanctions rules, crypto exchanges have little regulation or transparency requirements.
This regulatory void opens the door for criminals and hostile regimes to move money undetected on an immense scale.
As the authors starkly write, “large-scale acceptance of crypto tokens can provide a robust settlement mechanism for legitimate economic activities. But they really shine as tools for illegitimate activities.”
Yet the growing stablecoin activity centered in Hong Kong poses an even greater concern. With backing from Beijing, dollar-pegged cryptocurrencies and exchanges there could grow to displace the global dominance of the US dollar system.
Already, Tether (a coin with noteworthy links to China ) accounts for a staggering $83 billion stablecoin market share despite opaque ownership and accounting. Now Hong Kong hosts newer entrants like TrueUSD and First Digital USD which have unknown beneficial owners but suspected links to Chinese business tycoons. That, in an authoritarian state like China, could mean close ties to the Communist Party itself.
The authors warn that the ability to leverage economic sanctions and the soft power advantages of the dollar may be under threat from this digital realm growing under Chinese influence.
As they explain, “the ability to export American values and achieve economic objectives has long been eased by demand for the dollar.” If Beijing asserts control over dollar-based crypto trading, it could slowly erode this pillar of US financial power.
So what is the solution to these regulatory threats? Newman and Carty argue the US must either assert control over this new digital domain or risk ceding influence to adversarial powers like China.
Yet the Fed and Congress currently seem paralyzed on the issue, dragging their feet despite the risks. Newman and Carty acknowledge that there are no perfect solutions, but that it’s up to the U.S to offer an alternative. That could mean the U.S. offering its own crypto token or establishing its own crypto exchange. An idea that sounds good on paper, but could have limited buy-in.
The authors argue more urgency is needed from Washington before the mass adoption of cryptocurrencies diminishes US capabilities. As they dramatically conclude – these digital dollars aren’t a problem… until they are. When it is, “the ‘old’ dollar and incumbent global settlement system will have escaped US control for good.”