Blockchain finance has developed to the point where its strongest application is in the liquidity of the US dollar itself, which seems to contradict the goal of de-dollarization. This article, sourced from Pantera hedge fund product manager Jeff Lewis and content director Erik Lowe, explores the ironic role of cryptocurrencies in de-dollarization.
The trend of de-dollarization, where countries and institutions are increasingly diversifying their reliance on the US dollar in global trade and financial transactions, has raised concerns about the long-standing dominance of the dollar. The most common indicator of the dollar’s dominance, its share in global foreign exchange reserves, has been steadily declining since 2000, dropping by 13 percentage points.
We believe this trend is about to reverse, and ironically, the driving force behind this reversal is the same technology that many US policymakers and central bankers viewed as a potential threat to the dollar’s position five years ago: blockchain technology and asset tokenization. These technologies, once seen as potentially undermining the dollar, have now become the biggest drivers of its dominance.
“The most ironic outcomes are the most probable.”
– Elon Musk
Public blockchains have empowered fiat currencies, like the US dollar, by delivering them directly to the fingertips of 5 billion smartphone users worldwide and enabling frictionless cross-border fund transfers. The demand for fiat-backed tokens, such as stablecoins, has given rise to a massive $200 billion industry, with the US dollar maintaining a dominant position in the market. A report by Castle Island and Brevan Howard shows that the US dollar overwhelmingly dominates the stablecoin market as a collateral asset, far surpassing other economic categories.
In the top 20 fiat-backed stablecoins, 16 of them include “USD” in their names.
The perception of blockchain technology has remained largely unchanged since its inception 16 years ago. Early supporters of Bitcoin once believed that cryptocurrencies had the potential to challenge the dominance of the dollar. However, in recent years, Bitcoin has increasingly been seen as a store of wealth rather than a medium of exchange, reducing its threat to the dollar. The rise of stablecoins and the tokenization of real-world assets have allowed blockchain to fulfill Bitcoin’s original promise as a decentralized currency and provide a stable, potentially income-generating medium of exchange. This has not weakened the importance of the dollar but has rather amplified its influence.
Emerging markets have found US dollar-backed stablecoins to be a practical alternative to holding physical cash or relying on fragile banking systems. For countries with unstable currencies, businesses and individuals will increasingly prefer the stability of digital dollars when given the choice. A survey conducted by Castle Island and Brevan Howard found that among existing cryptocurrency users in emerging markets, the demand for savings denominated in dollars is a significant driver for the adoption of stablecoins.
47% of respondents stated that their main use of stablecoins is to store funds in US dollars, slightly lower than the 50% who primarily use stablecoins for trading cryptocurrencies or NFTs.
69% of respondents have exchanged their local currency for stablecoins, unrelated to trading.
72% of respondents expect to increase their use of stablecoins in the future.
Note: The survey covered Nigeria, Indonesia, Turkey, Brazil, and India.
Whether it’s consumers with small amounts of funds or multinational corporations, when economic participants favor the safest and most liquid option, the dollar may gradually squeeze out the use of other local currencies.
In the best interest of the United States – Stablecoin legislation in 2025?
Legislation regarding stablecoins is gaining momentum, and it is widely expected that such regulatory bills will be passed during the Trump administration. The Stablecoin Act, initially introduced by Patrick McHenry in 2023, has recently been submitted to the House of Representatives by Congresswoman Maxine Waters and has received bipartisan support. Stablecoin legislation has long been seen as the first step towards regulatory clarity in the United States. We believe that substantial progress will be made by 2025, especially as policymakers become increasingly aware of the strategic role stablecoins play in expanding the influence of the dollar.
Stablecoins serve the best interests of the United States by increasing the proportion of transactions denominated in dollars and driving demand for US government bonds as collateral. For a country with $37 trillion in outstanding debt, diversification and liquidity of funds are crucial, and the cryptocurrency market can provide such channels.
Stablecoins vs. Central Bank Digital Currencies (CBDCs)
To avoid confusion, it is necessary to distinguish between fiat-backed stablecoins and Central Bank Digital Currencies (CBDCs). While they may share some similarities in technology, they are fundamentally different concepts.
J.P. Morgan’s report on the de-dollarization trend, released in October last year, pointed out that emerging technologies seeking payment autonomy are a major potential driver of de-dollarization. The report mentioned projects like mBridge, a collaboration of multiple central bank digital currencies (CBDCs), as a potential alternative to dollar transactions.
However, despite the potential pressure from foreign CBDCs and other emerging payment systems, we believe that the rapid growth of US dollar-backed stablecoin markets helps counter this trend. In our view, stablecoins issued on decentralized, permissionless blockchains will become the preferred choice in the market because they offer better privacy, censorship resistance, and cross-platform interoperability.
Driving demand for US government bonds through tokenization
According to the US Department of the Treasury, approximately $120 billion of stablecoin-backed assets are directly invested in US government bonds, further driving demand for short-term government debt.
In addition to stablecoins, the direct tokenization of US government bonds is also a rapidly growing trend. Companies like BlackRock through Securitize, Franklin Templeton, Hashnote, and Ondo, a portfolio company of Pantera, are leading this emerging $4 billion market.
Ondo’s two core products are:
USDY (US Dollar Yield Token): A tokenized note collateralized by short-term US government bonds and bank deposits, providing stable and high-quality yield for non-US investors.
OUSG (Ondo Short-Term US Government Treasuries): Provides a highly liquid investment channel for short-term US government bonds, allowing qualified investors to mint (purchase) and redeem at any time.
Products like USDY allow foreign investors easier access to the US dollar and US government bonds compared to traditional methods.
The new era of dollar dominance
Blockchain technology has not weakened the dominant position of the US dollar but has instead created a digital infrastructure that strengthens its influence. Through asset tokenization and global liquidity, the dollar continues to be indispensable amid the geopolitical and technological forces driving de-dollarization. As J.P. Morgan pointed out in their report, the structural factors that support the dollar’s dominance – deep capital markets, rule of law, and institutional transparency – are unmatched. Stablecoins extend these advantages to the digital and borderless realm.
The dollar, once seen as vulnerable to blockchain innovation, has now become the biggest beneficiary of this technological revolution. The “killer app” of blockchain technology is likely the dollar itself, demonstrating how technology can both drive change and further consolidate existing power structures.
With clearer regulatory frameworks and growing demand for asset tokenization, the on-chain presence of the dollar is expected to consolidate its role as a global financial cornerstone. Whether US regulators and legislators come from the Democratic Party or the Republican Party, they will recognize that any force that promotes demand for US government bonds should be embraced rather than resisted. Substantial progress in the regulation of stablecoins has become almost certain.