Since the Second World War, the U.S. dollar has been the dominant global currency for trade, settlement, and reserve purposes. As other countries seek to move away from the dollar system, key U.S. policymakers believe that the rise of dollar stablecoins—cryptocurrencies pegged to the value of the dollar—can help entrench the dollar’s hegemonic status. If they are correct, the United States is likely to continue to enjoy what former French president Giscard d’Estaing once termed an “exorbitant privilege”: Because demand for dollars goes hand-in-hand with the demand for dollar-denominated assets, U.S. businesses and the U.S. government enjoy lower borrowing costs than other countries with similar fiscal outlooks. At the same time, broad use of dollar stablecoins threatens to undermine U.S. policy interests in two areas: (i) financial stability and (ii) the use of the global payment system for law enforcement and foreign policy purposes.

The risks to financial stability arise because stablecoins are in important ways just like other forms of the dollar. Like bank deposits, they are debt claims that can maintain their $1 value only insofar as holders maintain confidence that the issuer can cash tokens out at par. (Tether, the largest stablecoin issuer, does not allow small-holder redemptions, but large holders can provide the same sort of arbitrage function that authorized participants do for exchange traded funds.) This makes stablecoins vulnerable to the same type of panic-driven withdrawals that traditionally plagued banks and that swept through the “shadow banking” system during the great financial crisis of 2007-08. Congress attempted to address this vulnerability in the stablecoin market with the passage of the Guiding and Establishing National Innovation for U.S. Stablecoins (GENIUS) Act in July 2025. The GENIUS Act relies entirely on risk constraints as a panic-prevention tool—above all, by mandating that stablecoins must be backed 1:1 by a very narrow universe of “safe” assets. Risk constraints without a government safety net, however, have a long history of failing to prevent runs and panics. It is foolhardy to rely on them alone for that purpose.

An even bigger issue is that the GENIUS Act does not cover dollar stablecoins that remain entirely offshore, where most such stablecoins currently circulate. An important lesson of the past two decades is that there is no firebreak between global dollar markets and the U.S. financial system. The Fed has extended trillions of dollars of emergency liquidity to help foreign central banks address runs on dollar-denominated deposits in their jurisdictions. This has been necessary to prevent fire sales of dollar-denominated assets that would have sparked contagion in the United States. If stablecoins become the trillion-dollar asset that key U.S. policymakers hope and predict, it will add significant tension to an already stressed system in offshore dollar markets.

In contrast to stability risks, the challenge stablecoins pose to law enforcement and foreign policy arises from a genuinely novel feature: They are bearer tokens in digital form, and once created can circulate among “unhosted,” anonymous wallets. Several factors have allowed the United States to leverage the global payments system over the past two decades to serve its policy goals. First, if a Mexican business (for example) needs to make a payment to an Indian business, it will generally do so in dollars, since converting pesos to dollars and dollars to rupees is far easier than converting pesos directly to rupees. Second, in the traditional banking system, payments are made via a series of bookkeeping entries among banks—but one needs to find a chain of banks that have correspondent relationships with each other in order to settle the transaction. Such chains for cross-border payments overwhelmingly run through a hub-and-spokes system, with a handful of giant “hub” banks all participating in the Clearinghouse Interbank Payment System (CHIPS).

CHIPS participants are subject to U.S. jurisdiction and must comply with extensive customer diligence, recordkeeping, and reporting requirements. These banks risk substantial fines for compliance failures. This has given the United States unprecedented visibility into the flow of dollar payments. The U.S. government has used its authority under various laws authorizing sanctions (above all the International Emergency Economic Powers Act), as well as anti-money laundering (AML) laws, to exclude targets—individuals, entities, or entire countries—from the global dollar system. This can impose significant costs on targets, and over the past two decades has become a foreign-policy tool of first resort for Democratic and Republican administrations alike.

To the degree that stablecoins circulate among unhosted wallets that are not subject to extensive “know your customer” (KYC) diligence by regulated intermediaries, it makes it significantly more difficult for the United States to “weaponize” the financial system against its targets. The GENIUS Act does require U.S. stablecoin issuers to comply with various AML and KYC requirements, but this only applies to their customers. One must be a customer to create or redeem stablecoins, but not to transact in stablecoins once they have been created. The GENIUS Act also requires U.S. stablecoin issuers to retain the ability to “freeze” their tokens anywhere, including in unhosted wallets. But the question is then how regulators will know what wallets to target.

The GENIUS Act basically punts on this question, ordering the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) to try to figure it out. While FinCEN may develop analytic tools to help identify illicit transactions, it stands to reason that, without KYC compliance carried out by regulated, well-resourced, risk-averse banks, the enforcement of AML laws and sanctions will be significantly more difficult and less effective. If this were not the case, it would suggest highly inefficient KYC compliance costs are being imposed on banks right now. Even if FinCEN were to develop ways to reliably identify illicit transactions and freeze stablecoins in unhosted wallets, the GENIUS Act’s reach (again) does not extend to stablecoins that circulate entirely offshore, where much money laundering and most sanctions evasion likely occur. And again, unlike the traditional payment system, where virtually all cross-border dollar payments must touch the U.S. banking system at some point, stablecoins can circulate on blockchains that remain entirely offshore.

The rise of stablecoins may thus result in the entrenchment of the dollar and the “exorbitant privilege” that its hegemonic status confers on the United States, while simultaneously exacerbating strains on the stability of the global financial system and neutering the U.S. government’s ability to weaponize the dollar against criminals and geopolitical adversaries. Fully addressing these problems would be technically feasible—for example, by providing the equivalent of deposit insurance for stablecoins, requiring that stablecoins be programmed so that they can only be held by wallets that have undergone some sort of KYC verification, and applying sanctions to cut off noncompliant stablecoins issuers from the dollar system. There appears, however, to be no political support for such an approach right now. Even if there were, eliminating anonymity and punishing foreign stablecoin issuers could undermine the goal of entrenching dollar dominance. It may no longer be possible for the United States to have its cake and eat it, too, when it comes to the dollar’s international role.

John Crawford is professor of law at UC Law San Francisco (formerly UC Hastings College of the Law). This post is based on his essay, “Stablecoins and the Global Dollar System,” forthcoming in UCLA Law Review Discourse and available here.