Dollar Stablecoins Surge: IMF Warning, GENIUS Act, and Monetary Policy Shifts

Dollar-pegged stablecoins have exploded in scale, reaching a $260 billion market cap and generating $23 trillion in annual trading volume. This growth is driven by their efficiency in cross-border payments and crypto trading, especially in regions with weak financial infrastructure where they offer faster, cheaper alternatives to traditional banking. Issuance has doubled in just two years, accelerating adoption globally.

The GENIUS Act, which establishes U.S. regulatory oversight for dollar-backed stablecoins, has clarified they are not insured assets and limited issuer activities to stablecoin issuance according to Brookings analysis. By Q3 2025, U.S. dollar stablecoins exceeded $260 billion in value, with monthly transactions surpassing $1 trillion.

However, regulators warn of risks including unstable reserves, financial contagion, and money laundering. The IMF and FSB stress that without coordinated global rules, stablecoins could undermine monetary stability through currency substitution and capital flow volatility, particularly in high-inflation economies. While the GENIUS Act aims to mitigate these risks, its success hinges on rigorous capital/liquidity standards and international cooperation to prevent market concentration and illicit use.

Dollar Dominance Reinforcement Mechanisms

The rapid expansion of dollar-pegged stablecoins is actively reinforcing global dollar dominance through a powerful feedback loop. Their massive Treasury holdings create direct demand for U.S. debt. These platforms now hold over $150 billion in U.S. Treasuries, a position that effectively increases the pool of loanable funds available for government borrowing. This heightened demand for safe, liquid assets pressures the neutral interest rate (r*), the theoretical rate that neither stimulates nor restrains the economy, downward. As a result, borrowing costs for the U.S. government and potentially the broader economy may face downward pressure, altering traditional monetary policy transmission channels. This shift raises significant concerns about how central banks, particularly the Fed, manage monetary policy in an environment where stablecoin growth influences fundamental market dynamics according to Forbes analysis. The GENIUS Act's 1:1 reserve requirement provides stability but introduces new systemic vulnerabilities, as these platforms become de facto holders of Treasury risk without traditional bank safeguards, potentially amplifying runs during market stress.

Emerging markets are adopting these dollar-pegged stablecoins at a rapid pace, particularly in economies grappling with high inflation or weak local currencies. Their penetration rate has risen sharply in these regions, driven by the need for efficient remittances and wealth preservation outside fragile local banking systems. Stablecoins facilitated $27.6 trillion in transactions in 2024, offering a bypass for traditional banks and local currency controls. This surge in adoption directly accelerates dollar usage, reinforcing its role as the primary reserve and transaction currency globally. However, this growth comes with costs. The lack of FDIC-like protections means users face heightened liquidity risks, while the potential for runs on stablecoins during systemic stress could trigger sudden capital outflows. Central banks in adopting economies face eroded monetary control, as capital flight and currency substitution intensify volatility in local financial markets, complicating their ability to manage inflation and stabilize their own currencies.

The systemic risks associated with this dollar-stablecoin-Treasury nexus are becoming increasingly apparent. While they enhance cross-border payments and offer alternatives to underdeveloped local finance, the sheer scale of Treasury demand concentrated outside the traditional banking system introduces novel points of fragility. Regulatory gaps remain significant, especially in markets with weaker institutional frameworks, where oversight of stablecoin issuers is fragmented or absent. The International Monetary Fund (IMF) and Financial Stability Board (FSB) warn that without robust, internationally coordinated regulations, stablecoins could exacerbate financial instability through operational failures, fraud, or cascading runs that transmit shocks across borders. Policymakers must urgently address these gaps, balancing the efficiency gains against the risks to macro-financial stability and ensuring that the dollar dominance fuelled by stablecoins doesn't undermine the resilience of the global financial system according to IMF analysis.

Threats to Monetary Policy Transmission

Building on earlier concerns about stablecoin growth, regulators now warn that these digital assets could fundamentally disrupt how central banks steer the economy. The Banque de France analysis identifies three specific channels where stablecoins threaten policy effectiveness. First, as users move funds from traditional deposits into stablecoins, banks face higher funding costs, potentially leading to tighter lending standards. This competition directly pressures the interest rates banks charge consumers and businesses.

Second, reduced demand for central bank money itself alters key interbank rates like SOFR and EFFR. Empirical evidence suggests these disruptions are currently minimal but measurable in U.S. markets, indicating a developing vulnerability. Third, the surge in stablecoin demand increases competition for traditional risk-free assets like Treasuries, reshaping collateral markets and potentially creating new frictions in liquidity provision. The GENIUS Act's 1:1 backing requirements aim to stabilize the sector and mitigate some of these transmission risks.

However, significant challenges remain. The IMF report cautions that stablecoins' rapid expansion could erode national seigniorage-the profit governments make from issuing currency-and reduce tax bases as financial activity shifts outside the traditional banking system. This fiscal impact raises long-term sustainability questions. Furthermore, the analysis highlights systemic risks from stablecoins' largely uninsured status. In fragile economies, sudden loss of confidence could trigger runs comparable to traditional bank runs, but with less regulatory protection and potentially faster contagion through interconnected digital wallets.

While the GENIUS Act provides a stabilization anchor through its backing rules, the evolving nature of stablecoins means these transmission risks require ongoing scrutiny. The interplay between private digital alternatives and public monetary policy remains one of the most complex challenges for central banks navigating the digital asset era.

Scenarios, Catalysts & Investor Implications

The GENIUS Act's passage in mid-2025 marked a turning point for U.S. dollar stablecoins, creating regulatory clarity that accelerated adoption while introducing new risks. Two divergent paths now emerge: a conservative scenario where institutional demand for stablecoins locks up $1 trillion in Treasury reserves, reinforcing dollar dominance, and a speculative trajectory where market capitalization balloons to $500–750 billion-potentially triggering regulatory pushback. By Q3 2025, stablecoin holdings crossed $260 billion with monthly transaction volumes exceeding $1 trillion, driven by USDT and USDC dominance. This growth aligns with J.P. Morgan's projection of $1–3 trillion in stablecoins by 2024, though its reliance on U.S. Treasury demand introduces monetary policy complications according to JPMorgan research.

The runaway scenario faces significant headwinds. While 1:1 reserve backing mandated by the GENIUS Act reduces substitution risk from algorithmic failures like TerraUSD's 2022 collapse, opaque exposures to uninsured bank deposits and liquidity mismatches could still spark runs. Regulators warn that stablecoins' Treasury demand surge might displace traditional funding sources, pressuring the neutral interest rate (r*) and complicating Fed monetary transmission. Meanwhile, infrastructure strains could emerge if global dollar access expands unchecked, bypassing capital controls and intensifying competition with central bank digital currencies (CBDCs).

Investors face dual exposure: valuation upside if stablecoins cement dollar liquidity dominance, and downside risk if regulatory overreach curtails issuance. Treasury demand from stablecoin issuers could lower U.S. borrowing costs in the short term but may trigger Fed intervention if systemic risks escalate. The $1 trillion reserve threshold acts as a regulatory guardrail-if crossed, it might prompt stricter capital requirements or issuance caps. For now, the market balances innovation gains against fragility: stablecoins' $1 trillion monthly volume hinges on regulatory compliance, but their long-term trajectory depends on resolving liquidity transparency and counterparty risks.