Stablecoins Could Extend Dollar Use but Cannot Secure Dollar Dominance

The GENIUS Act strengthens stablecoin redemption and reserve rules, but it does not establish a systemic liquidity backstop or arrangements for managing crises across borders. That gap frames the question Michael Bordo and Carolyn Wilkins examine through the history of private money: can stablecoins remain accepted at face value when many holders want their money back at once?

Bordo’s historical test is whether people can accept a private claim without investigating each issuer. He calls this “no questions asked” money. It requires more than a digital ledger or a promise to hold reserves. The system must make redemption credible, keep claims exchangeable at par, and manage liquidity and losses under stress.

Stablecoins are digital assets designed to maintain a fixed value against reserve assets. Their proponents point to faster settlement, programmability and cross-border use. Bordo treats them as a new version of an older problem: how to make privately issued money circulate reliably alongside public money. The technology changes; the institutional requirements do not.

The paper draws on the histories of the United Kingdom, the United States and Canada, among other countries. Bordo described it as history and policy analysis, not an econometric model. The historical record, he argued, points to five conditions for private money at scale: credible redemption at par; high-quality, transparent backing; common rules and a consistent regulatory perimeter; clearing and settlement that preserve exchange at par; and credible crisis management and loss allocation.

The question of who provides that last support surfaced in an exchange with John Cochrane. Cochrane asked who would be the guarantor of last resort for stablecoins: the taxing power of government, or someone in the role of J.P. Morgan, stepping in when private arrangements fail. Bordo pointed to historical systems that operated without government money, especially Canada. Cochrane pressed on the other side of that record: showing that a system worked for a long time does not explain why it eventually gave way.

A participant reframed the disagreement: much successful private money is a claim to public money. Banknotes once promised gold coins; deposits and money-market fund shares promise payment in public money. Bordo agreed that convertibility is central: a private claim needs something to convert into.

The exchange left a live question rather than a settled answer. Is stablecoin money private in ordinary times, with public support expected when failure becomes systemic? Bordo said he was describing history, not advocating private money, and expected a bailout if stablecoins became large enough to threaten the system. Others were less certain that authorities would intervene. The Act’s lack of a formal backstop does not resolve what officials might do in a crisis.

In England, private money evolved from scriveners, who certified contracts, to goldsmiths and then to banks issuing notes. Small country banks issued notes convertible into gold, but many were fragile. Their notes could circulate at discounts, and failures could leave holders with broken promises. Bordo said these banks nevertheless helped finance the Industrial Revolution.

The Bank of England, founded in 1694, issued gold-convertible notes and had a privileged position as the government’s bank. Joint-stock banking was restricted in London and its environs, leaving country banks to serve much of the rest of the country. After crises, including the 1825 panic, Parliament allowed larger joint-stock banks outside London, and the Bank of England established branches beyond the capital.

Bordo emphasized two institutional developments. Britain maintained a credible commitment to gold convertibility, suspending it during wartime but signaling a return and restoring it. The Bank of England also learned to act as a lender of last resort. Scotland offered a different arrangement: it had broad branch banking, unlimited shareholder liability and regular clearing, without a Bank of England or a central bank of its own. Bordo’s conclusion was that scalable private issuance required credible convertibility, enforceable liability, capital depth and a means of providing crisis liquidity.

Cochrane asked why Bank of England notes did not simply displace Scottish notes if the former were fully backed. Bordo pointed to a denomination restriction: the minimum Bank of England note size was five pounds, a substantial amount. Scottish notes remained useful so long as they were convertible and local banks supplied lending and other services.

The United States’ free-banking era exposed a different weakness. Under state rules, banks could enter relatively easily by meeting minimum capital requirements and posting bonds as backing. Those bonds varied in quality; notes were redeemable on demand for gold and supervised by state examiners. In practice, notes circulated at discounts that reflected the distance to redemption and the perceived quality of the backing. Bordo said the system worked better in some places, including New England, while fraud and failures were more common in parts of the Midwest. Counterfeiting, bank failures and panics showed the limits of fragmented state oversight.

After the Civil War, the National Currency Acts created a national banking system. National-bank notes were backed by more than 100 percent of their value in Treasury bonds, redeemable in lawful currency, subject to double shareholder liability and regulated by the Office of the Comptroller of the Currency. Even then, it took roughly a decade for the notes to achieve no-questions-asked circulation.

The additional arrangements mattered. Redemption centers allowed notes issued in one state to be redeemed elsewhere at par. Banks contributed to the system, and Bordo said the Treasury established protection for noteholders against issuer insolvency. A redemption agency, established in 1874, provided clearing; banks deposited lawful money equal to 5 percent of their notes. These measures helped make hand-to-hand currency safer and more uniform.

They did not eliminate banking panics. A participant observed that a bank could hold Treasury bonds against its notes and still fail if its deposits and lending were exposed to runs. Bordo agreed: note issue became less important as banks increasingly created deposits, and the national banking system did not solve the problem of depositors’ inability to convert deposits into currency during a panic. It produced a safe currency, not a complete solution to liquidity crises. The panic of 1907 helped spur the Federal Reserve and national crisis management, after regional clearinghouses had provided only local responses.

Bordo said Canada maintained private banking without a central bank longer than the United States. Its banks had specie, bond and capital backing, and nationwide branches that diversified exposure across regions. Canada avoided the American pattern of banking panics, he said, though banks did fail and uniform, no-questions-asked currency took time to develop.

The Canadian Bankers Association and federal government supplied note insurance, clearing and arrangements to absorb troubled banks rather than allow their failure to spread. Bordo compared the latter to the role of the FDIC today. In his account, private coordination and government cooperation reduced the immediate case for a central-bank lender of last resort.

That did not mean crisis liquidity was unnecessary. During the First World War, a global scramble for liquidity led the Canadian government to provide a lender-of-last-resort-like function. Bordo’s summary was that public-private cooperation supported par convertibility, redemption and loss protection.

The discussion resisted turning Canada into a simple prescription for the United States. A participant asked whether nationwide branching in the United States should mean it no longer needs deposit insurance. Bordo said the Canadian experience was path-dependent and difficult to transfer. Nationwide branches can insulate a bank from local shocks, another participant noted, but not necessarily from a national shock. Bordo also distinguished Canada’s banking experience from the United States’ role as a global currency system, arguing that the pressures in a crisis such as 2008 were different. He said Canadian banks did not fail during the Great Depression, while other reasons still led to the creation of the Bank of Canada in 1935.

The GENIUS Act provides for one-to-one reserves, explicit redemption rights and holder priority in insolvency, and restricts eligible reserve assets. The presentation also describes a more consistent supervisory framework: smaller issuers may be supervised under substantially similar state regimes below a $10 billion threshold, with federal oversight above it. Bordo and Wilkins distinguish those provisions from unresolved questions about uniform enforcement, redemption timing and treatment under stress.

Eligible reserves include not only cash and short-term Treasuries but also commercial-bank deposits, repos, reverse repos and qualifying money-market funds. Bordo and Wilkins note that such assets may introduce liquidity, counterparty, custody or market-functioning risks. Full backing does not necessarily mean an issuer can produce ready cash if many holders redeem simultaneously.

The Act does not establish a dedicated clearing system or mutual liquidity pool. The paper’s comparison also notes that it provides no formal lender of last resort or systemic backstop. Bordo said the law rules out a federal backstop, while leaving open what authorities might do if a failure became systemic. He described an implicit too-big-to-fail expectation as a concern, not a formal feature of the legislation.

A participant made the dollar peg problem concrete: two holders can transact with each other at any price; an issuer’s promise to redeem at a dollar does not by itself guarantee every secondary-market trade happens at par. Wilkins said the largest stablecoins generally trade close to a dollar, with some variation. The price can deviate sharply when confidence in redemption falters. She cited the period when Silicon Valley Bank was failing and Circle had about 80 percent of its cash reserves there. The stablecoin depegged and recovered only after SVB deposits were insured. Wilkins characterized that as an indirect bailout and noted that an issuer with insufficient liquidity has limited ability to manage a run.

A secondary market may let a holder sell at a discount rather than wait for redemption, one participant suggested, unlike a money-market fund share without a comparable market. Wilkins agreed that such a market exists but cautioned that it may not hold up in a run. The distinction is between ordinary trading and mass redemption.

Participants also raised the reserve-asset problem: if holders want bank deposits but the issuer holds Treasury bills or repos, someone must sell those assets to meet withdrawals. Bordo compared the gold standard’s clarity—everyone knew what redemption meant—with the more complicated task of turning a reserve portfolio into cash under pressure. Faster settlement and round-the-clock transfers may compress the time available to respond without removing the need for credible redemption and common expectations.

Tokenized deposits came up as a possible U.S. alternative or complement. Under the banking proposal Bordo described, eligible tokenized deposits would remain within the Federal Reserve’s rails and could offer interest, deposit insurance and access to central-bank liquidity through the issuing bank. The appeal is programmable payment without moving deposits outside the regulated banking perimeter. But participants questioned whether this answers the demand for large, interest-bearing balances that are not formally insured. Bordo acknowledged that the scope of guarantees remains an issue. He suggested tokenized deposits might work better domestically than stablecoins, while the exchange made clear that the answer depends on which problem is being solved: programmable payments, or a safe place for large uninsured balances.

International use magnifies the problems of redemption, coordination and crisis management. Stablecoins already support crypto trading, lending, collateral management and decentralized-finance liquidity. They also enable some cross-border peer-to-peer transfers. Bordo acknowledged that these transfers may avoid some costs and delays of correspondent banking, but asked whether stablecoins can become general-purpose international money.

The history he invoked was not a story of technology alone. Medieval Maghribi traders financed Mediterranean commerce through relationships, reputation and trust. From the thirteenth century, bills of exchange allowed European trade to proceed without moving specie, supported by trust and commercial courts. In the nineteenth century, merchant banks such as Barings arbitraged bills across continents; the telegraph helped, but legal predictability and institutional credibility mattered. Bordo used Phileas Fogg’s sterling drafts in Around the World in Eighty Days as an illustration of how far credible payment claims could travel.

Under the classical gold standard, sterling bills financed global trade, with London as the central clearing hub. Other European countries shared the gold commitment, and central banks helped enforce stability. For peripheral countries, adherence to gold could serve as a “good housekeeping seal of approval” for access to international capital. Bordo’s historical lesson is that international money can operate across multiple issuers when backing assets and legal commitments align across jurisdictions.

The later record is less reassuring. World War I ended the classical gold standard; the interwar gold-exchange system lacked credibility and collapsed during the Great Depression. Bretton Woods restored an anchor through dollar-gold convertibility for official holders, exchange-rate pegs, IMF oversight, capital controls and lending. The system’s foundations weakened amid the Triffin problem and U.S. inflation, and dollar-gold convertibility ended in 1971. The Eurodollar market, which developed to evade capital controls and U.S. interest-rate ceilings, offered another precedent for dollar intermediation beyond U.S. borders.

After Bretton Woods, the dollar’s anchor shifted from gold convertibility to confidence in U.S. fiscal and monetary capacity. Cross-border payments relied on correspondent banks, central-bank accounts and messaging infrastructure such as SWIFT. The Federal Reserve supplied domestic lender-of-last-resort capacity and international dollar liquidity through swap arrangements. A participant emphasized that swap lines made the Fed an important source of emergency dollar liquidity for foreign institutions, without the same regulatory apparatus that applies domestically. The implication for stablecoins is not that they can reproduce these arrangements by moving tokens faster. They must confront questions of sovereign credibility, enforceable claims and crisis liquidity across borders.

Wilkins said stablecoins are currently held mainly by people active in crypto markets, where they serve as a bridge to the wider financial system or as collateral. She added that the picture is changing and that she was looking into more detailed data. Participants raised the possibility that stablecoins could serve people in countries with weak currencies who want to hold dollars outside domestic authorities’ reach. Wilkins called that a plausible use case, while distinguishing it from current activity. U.S.-regulated issuers would face know-your-customer rules; offshore issuers could present different issues. Transactions on a blockchain may be traceable by people with the right capabilities, she said, but tracing is not necessarily easy.

If redemption rights vary, claims may trade at issuer- or jurisdiction-specific discounts rather than circulate uniformly at par. If many holders redeem at once, issuers may need cash from the same markets that supply their backing assets. Bordo and Wilkins identify Treasury and repo markets as potential transmission channels for correlated redemptions. A stablecoin may promise a dollar everywhere, but fulfilling that promise across different insolvency regimes, supervisory systems and enforcement practices requires arrangements that cross those jurisdictions too.

The discussion did not produce a ready-made international mechanism for pooling liquidity or allocating losses. That absence sharpens the question raised earlier: who supplies liquidity when a run crosses borders, and under whose rules? Domestic redemption rights may define what an individual holder can claim; they do not, by themselves, coordinate a response to simultaneous claims on shared markets.

Dollar-denominated stablecoins dominate the sector, connect crypto markets to the broader financial system and may reduce reliance on correspondent-bank chains. If access widens, they could reinforce network effects around dollar settlement and encourage “digital dollarization” in countries with weak monetary institutions. The postwar Eurodollar market offers a parallel: dollar intermediation expanded outside the United States because users trusted U.S. institutions.

The effect on Treasury demand is contested. Bordo presented a comparison indicating that major stablecoin issuers are meaningful participants in short-term Treasury markets, though small relative to the market as a whole. One participant cautioned that stablecoin holdings may replace other demand, such as money-market fund holdings, rather than create an equivalent amount of net new demand. Wilkins said studies she had seen found some net new demand, while emphasizing that it was not the same as the gross holdings shown in the comparison. The figures were attributed on screen to an adaptation of Ardoin and Guesmia (2024), using end-April 2024 data.

The reserve-share chart shown during the presentation placed the dollar’s share of official foreign-exchange reserves at roughly 57 percent at the end of its series, down from about 70 percent around 2000. Its displayed sources were the IMF’s COFER survey and Bordo and Levin (2024). The dollar remained dominant in the chart, but Bordo’s point was that network effects reinforce currency use without making dominance permanent. Reserve status rests on deep and liquid financial markets, credible legal institutions and geopolitical influence.

That dependence creates two possible feedback loops. If confidence holds, wider stablecoin adoption could increase demand for dollar tokens and their Treasury backing, support liquidity in public-debt markets and make dollar payment instruments more attractive. If confidence weakens, doubts about reserve quality or liquidity could prompt redemptions. Issuers might have to sell Treasuries for cash, potentially stressing short-term funding markets and adding to rollover pressure. Twenty-four-hour transfers and correlated redemptions could intensify the stress.

Participants questioned whether Treasury backing would provide what a redeemer actually wants. In a run, a holder may want bank reserves, not a Treasury bill; the issuer may have to sell into a stressed market. Wilkins added that the possibility of market stress, and the consequences for core markets, could affect how authorities respond. Neither she nor Bordo treated a bailout as certain. Bordo’s claim was narrower: when failure threatens a system, political decisions are made under pressure, and the boundary between liquidity and solvency is difficult to assess in real time.

Stablecoins also sit inside a larger contest over monetary power. Dollar dominance gives the United States reach through sanctions and its position in global financial networks. That reach has encouraged efforts to reduce dependence on U.S.-linked infrastructure, including China’s Cross-Border Interbank Payment System, regional payment platforms and cross-border wholesale central-bank digital-currency experiments. The result could be a more multipolar payments infrastructure even if the dollar remains the leading reserve asset. Competition may discipline issuers and encourage innovation, Bordo said, but it can also increase fragmentation—and still depends on sound institutional arrangements.

The historical warning is sterling. Britain’s slower relative growth, declining military power and the fiscal costs of two world wars weakened its position. Sterling networks kept the currency in use after Britain’s broader influence had eroded; Bordo said the dollar did not fully supersede sterling until the 1960s. A payment network can prolong use, but it cannot preserve monetary dominance if the institutions beneath it lose credibility.

Bordo’s conclusion returns to fiscal capacity, monetary credibility and the rule of law. Stablecoins could lower payment frictions and extend dollar use at the margin. They cannot substitute for credible redemption, common rules, reliable clearing or crisis management. Nor can they make dollar dominance permanent if confidence in U.S. institutions and policy weakens.