For India & the Global South, the pressure to trade more in dollar-backed stablecoins is inevitable.
The preoccupation with US tariffs has deviated attention from global developments around digital currencies. It is highly likely that tariffs will soon make way for digital currencies as the next geo-economic tool for global power projection. The US-China rivalry is acquiring a new dimension around digital currencies with significant implications for India and the Global South.
The US dollar has been the most important instrument in preserving the global economic hegemony of the US. As the leading reserve currency, the US dollar is the most popular currency for global trade invoicing and settling international payments. While nearly half of all global trade is invoiced in US dollar, around 90% of global foreign exchange transactions are carried out through the greenback.
Shifting away from the dollar
Some recent developments might see lesser use of the dollar in global trade and foreign exchange transactions. These include the rising cost of procuring dollar for invoicing exports and imports. This has been a major problem for many countries from the Global South, including India. As a result, India and some other countries have been exploring options for settling bilateral trade in local currencies. While there is appetite for doing so, the inability to use local currencies for a wide variety of transactions constrains their use. Over time, as more and more countries, such as the BRICS group, focus on ways for doing trade in local currencies, there might be a reduction in the use of the US dollar.
The other factor that might see lesser use of the American dollar is the perception of the US becoming an economically volatile country due to its unpredictable economic policies. These include the latest sweeping tariffs imposed on partners. If these tariffs result in significant diversification of global trade and lack of faith in American financial assets, the dollar might face usage pressures. However, the extent to which it loses its sheen as a “safe haven” depends on the availability of stable non-dollar alternatives.
China, India, and several other emerging market economies are developing sovereign central bank digital currencies (CBDCs) for increasing the use of such currencies in their external payments. These CBDCs — backed by national monetary and currency authorities — are not direct efforts to promote de-dollarisation. However, the current geopolitical scenario, especially the enlarging rifts between the US on one hand, and China, India, Russia, Brazil, and other emerging market economies on the other, might create the impression that emerging market digital currencies are attempts to displace the US dollar. President Trump clearly subscribes to the view as is clear from his describing the BRICS as distinctly “anti-American” and pursuing the de-dollarisation agenda.
GENIUS and the digital dollar strategy
The US has not piloted a CBDC yet. However, it plans to retain the prominence of the US dollar, and increase its use, through a different strategy. This involves encouraging the use of US dollar-backed private crypto currencies referred to as stablecoins. Central banks or national monetary authorities do not manage the latter. However, unlike the average cryptos, they are not considered volatile or high-risk, as they are linked to a stable global currency such as the US dollar or similar safe and low-risk financial assets.
On 18 July, the US announced the Guiding and Establishing National Innovation for U.S. Stablecoins (GENIUS) Act for creating a regulatory framework for stablecoins in the US. The Act aims to make the US the global leader in digital assets by ensuring the USD retains its global reserve currency status.
The GENIUS rules emphasise that stablecoins issued by the US will be fully backed by US legal tender, which will be either the dollar or US short-term treasuries. The ostensible strategic goal of the legislation is to make US dollar-denominated debt widely appealing to global investors by making such debt easily transactable through a variety of stablecoins of different issuers.
The geoeconomic motive of the GENIUS Act is in making the US dollar the leading option for financial transactions in a rapidly digitising world. Stablecoins are not regulated by central banks, unlike CBDCs, making them far more appealing to several sections of the global “digital” community preferring loosely regulated cryptos. The more risk-averse among the latter will also find the US dollar-backed stablecoins appealing given their stability accruing from the greenback. Major dollar-pegged stablecoins, such as the USDC and USDT, promoted by Circle and Tether, should be able to thwart potential de-dollarisation by increasing the dollar’s digital use.
Geoeconomic motivations have encouraged China also to consider yuan-backed stablecoins in addition to its CBDC. This contrasts with China’s earlier strategy of resisting more trade in cryptocurrencies. With the SWIFT inter-bank payment system likely to become more tightly controlled by the US, leading to lesser global use of the yuan, it is important for China to diversify options for greater use of its digital currency. Stablecoins are the way forward.
Tariffs have delivered for the US what they could have by getting amenable deals with various trade partners. The next round of demands from the US are likely to be for buying US debt through stablecoins. In addition to buying debt, it is likely that more US business-to-business global transactions will be “persuaded” to be settled digitally through dollar-backed stablecoins. Indeed, trade invoicing might also be encouraged to be settled digitally through stablecoins, citing the inflated cost of using traditional greenback!
For India, and several other economies from the Global South, the geoeconomic pressure to trade more in dollar-backed stablecoins is inevitable. Negotiating the pressure will not be easy; more so since China too, over time, will offer its stablecoins as further tradable and “stable” options.
The writer is senior research fellow and research lead (trade and economics), Institute of South Asian Studies, National University of Singapore.
