Will stablecoins herald a broader-based dollarization?

That is the topic of my latest Bloomberg column.  Here is one excerpt:

Stablecoins are programmable crypto assets that promise conversion into some currency, typically US dollars. Currently, they are the fastest-growing sector of crypto. Stablecoin usage is up 84% since August 2023 and is now at a peak of $224 billion. The sympathetic stance of President Donald Trump’s administration toward crypto is likely to help growth further.

It is noteworthy that, measured by market capitalization, perhaps as much as 99% of stablecoins are denominated in dollars. That is a much higher share than is found in standard international trade and finance. This shows that, if monetary institutions were started all over again from scratch — which is part of what crypto is doing — the market would opt largely for dollars.

Traders in many less well governed countries want to partake in dollar-based economies, but they do not always have ready access to dollar-based banking in the way that Americans do. Their domestic banking systems may be unreliable or be regulated to discourage dollar dominance. Traders may also be afraid of US regulations, which operate through sanctions and restrictions on dollar-denominated transactions. “Know your customer” regulations, for example, can make interacting with US financial institutions very costly.

So foreigners are increasingly turning to stablecoins, which they can access quickly and directly through apps. Stablecoins are not much regulated now, but eventually regulation will emerge in many countries. That said, there will likely be more and less regulated versions of stablecoins for a long time to come. For that reason, another advantage of stablecoins — at least for individual traders, if not always for broader society — is that traders will be able to choose the level of regulation they desire.

Several countries have dollarized in recent years — including Panama, Ecuador and El Salvador — and none seems to regret it. President Javier Milei in Argentina has pledged dollarization, and that proved to be a popular campaign promise, although it remains to be seen if he can summon the resources to pull it off.

The simplest scenario is that people outside developed nations use stablecoins more and more. Their economies will become partly “dollarized” — or if you wish to use an even less elegant term, “stablecoinized,” with the stablecoins backed by dollars. People in those economies will get more used to thinking and calculating in terms of dollars, even for their domestic transactions. Dual-currency economies may become more common, with both a domestic currency and dollar-backed stablecoins. Over time, fearing the redemption risks associated with stablecoins, many nations will opt for outright dollarization, either full or partial. In some cases, the dollar might end up predominating.

Worth a ponder, and this is yet another scenario where crypto proves useful.