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Global finance is entering a new era. Digital currencies and emerging financial technologies are bypassing traditional financial systems and reshaping how money moves across borders. This disruption raises fundamental questions about how these technologies will affect financial stability, the effectiveness of anti-money laundering and national security controls, and the continued dominance of the U.S. dollar.
Within this changing technological landscape, the U.S. dollar faces pressures from multiple angles. Externally, U.S. competitors are pushing alternative payment systems that are designed to weaken the dollar’s influence and U.S. centrality within the international financial system. At present, the dollar remains the backbone of global financial flows. China, however, is attempting to undermine the dollar’s role by integrating the digital yuan into domestic and cross-border transactions, while projects like mBridge aim to create financial rails that operate beyond Western banking infrastructure. Likewise, Russia, the BRICS bloc, and sanctioned states like Iran and Venezuela are also exploring digital assets to skirt U.S. financial controls. Internally, recent U.S. policy adds complexity; sweeping tariffs imposed in early April produced the surprising result of weakening the dollar upon announcement, defying standard economic predictions and fueling uncertainty about its trajectory. These combined pressures underscore a challenging environment and signal that the United States must adroitly navigate to shape the future of digital finance and maintain the dollar’s status as the global reserve currency.
Stablecoins, which are digital assets pegged to stable currencies like the dollar, are central to this evolving landscape. They have quickly become vital tools in parts of the digital economy, offering new pathways for cross-border payments and remittances, fueling decentralized finance (DeFi) ecosystems, and holding the promise of faster, cheaper transactions. As these and other uses for stablecoins emerge, they have the potential to either reinforce or undermine U.S. financial leadership, depending on what approach the U.S. government takes. Today, the stablecoin market has grown to over $230 billion in value, with annual transaction volumes exceeding $20 trillion—outpacing some of the world’s largest payment networks. With 98 percent of stablecoins pegged to the U.S. dollar, this growth is embedding the dollar deeper into the digital economy even as competitors push for alternatives. This growing integration places the United States at a crossroads, where the lack of a clear regulatory approach risks undermining both financial stability and national security.
Since taking office, the Trump administration has prioritized stablecoin legislation, with key figures like Secretary of the Treasury Scott Bessent and White House “Crypto Czar” David Sacks calling for U.S. regulation to maintain dollar dominance and oversee the industry domestically. Responding to this push, Congress has advanced two primary bills: the Senate’s GENIUS Act, sponsored by Senators Bill Hagerty, Cynthia Lummis, Tim Scott, Kirsten Gillibrand, and others; and the House’s STABLE Act, introduced by Representatives French Hill and Bryan Steil. Both aim to regulate payment stablecoins through federal or state licensing pathways and are substantially similar, with key differences involving state oversight rules and requirements for international issuers. The GENIUS Act cleared the Senate Committee on Banking, Housing, and Urban Affairs, and the STABLE Act passed the House Committee on Financial Services.
As these bills advance to full chamber votes, proponents argue they establish a much-needed, “clear regulatory framework for payment stablecoins.” Yet the bills, even after recent amendments, offer inadequate safeguards against financial instability, leave gaps in national security protections, and weaken efforts to combat illicit finance. These risks are amplified by flaws in regulatory oversight, particularly the GENIUS Act’s dual state-federal structure. By allowing conditional paths for state supervision, this model incentivizes a “race to the bottom,” encouraging firms to seek out the least demanding regulatory environments and potentially undermining standards nationwide.
This dynamic has played out in financial markets before. In the 1980s and 1990s, states competed to attract credit card issuers by loosening usury laws, leading to industry concentration in states like South Dakota and Delaware, where regulations were most favorable. A similar trend emerged in payday lending, where companies moved to states with the least restrictive policies. This pattern appears to be repeating in the digital asset space: Wyoming, for instance, uses special crypto-focused bank charters to attract crypto firms, offering a state-level regulatory path with seemingly less stringent oversight than federal alternatives. If stablecoin issuers remain under state regulation indefinitely without a uniform federal standard, the United States could create a fragmented system with inconsistent oversight.
This patchwork approach contrasts with other major economies, which have adopted centralized, unified frameworks for stablecoin oversight. Since its creation in 2014, China’s digital yuan has been directly managed by the People’s Bank of China, ensuring national regulatory consistency. Similarly, the European Union’s Markets in Crypto-Assets regulation establishes a single licensing regime across all member states. In contrast, the fragmented oversight model contemplated in the U.S. bills could weaken U.S. credibility in setting global financial standards. Without a cohesive national framework, the United States risks ceding its influence over the future of digital finance, giving competitors the power to set global standards and shape the next era of financial infrastructure.
The approaches to financial stability in both the GENIUS and STABLE Acts also leave significant gaps that could expose stablecoins and the broader financial system to liquidity crises, redemption runs, and systemic contagion risks. While both bills mandate one-to-one reserve backing, their rules on those reserves and issuer resilience raise critical questions. The GENIUS Act, for example, permits reserves beyond ultra-safe cash or short-term Treasuries, allowing holdings like overnight repos, certain money market funds, and even tokenized assets, which introduce potential liquidity and contagion risks not present with simpler reserves. While the STABLE Act appears more restrictive regarding permitted reserve types, a broader weakness in both bills is the lack of requirements for the strict, comprehensive capital and liquidity standards imposed on traditional banks. The GENIUS Act’s capital requirements, for instance, focus narrowly on covering operational risks, overlooking the need for capital buffers to absorb other potential losses. This lack of robust capital and liquidity cushions limits regulators’ ability to ensure issuers can withstand stress, leaving the system vulnerable. Without adequate protections governing reserves and issuer capital, a major stablecoin collapse could ripple through markets, undermining confidence in dollar-backed assets and potentially impacting U.S. Treasury markets.
Additionally, the proposed frameworks for handling issuer failure remain a weak point. While the GENIUS Act offers “super priority” within bankruptcy and aims for faster payouts, relying on bankruptcy ignores the essential nature of stablecoins: They function as digital cash, requiring immediate, on-demand redemption at par ($1) to maintain user trust. Bankruptcy, however, is inherently a process of orderly liquidation over time. It’s automatic stay instantly freezes withdrawals, potentially for years, directly contradicting the “always available” promise implied by stablecoins. This fundamental mismatch makes bankruptcy dangerously slow and inadequate during a potential run, shattering user confidence. Furthermore, the “super priority” granted may prove ineffective against secured creditors or others holding superior claims under existing bankruptcy law. The STABLE Act offers even less protection, lacking explicit provisions for holder priority in insolvency. The 2022 collapse of TerraUSD provides a stark example: Triggered by a loss of confidence, the run cascaded rapidly, wiping over $400 billion from crypto markets in days. This event highlights the need for a resolution mechanism far more robust and rapid than traditional bankruptcy, especially for large, systemically important stablecoins.
These vulnerabilities pose risks to the wider financial system due to the market’s scale. Major issuers like Tether and Circle collectively back the vast majority of the $230 billion+ stablecoin market, holding tens of billions of dollars in U.S. Treasuries and similar instruments. A crisis forcing mass redemptions could trigger rapid-fire sales of these assets into potentially fragile markets. This selling pressure could disrupt the U.S. government’s debt market, raising federal borrowing costs, amplifying financial volatility, and eroding global confidence in dollar-denominated assets. By not mandating stronger safeguards across reserves, capital adequacy, and resolution processes, both the GENIUS and STABLE Acts risk embedding these vulnerabilities into the financial system, posing a threat to U.S. economic leadership and stability.
Beyond financial stability, both the GENIUS and STABLE Acts raise significant national security concerns. Unlike traditional financial institutions, issuers are not subject to an intelligence- or Department of the Treasury–led assessment of foreign influence or security risks, meaning state-licensed issuers could be backed by entities linked to adversarial governments or sanctioned actors. Without these safeguards, stablecoins could be exploited by adversaries, criminal networks, and sanctioned entities.
In addition to the risk of problematic actors issuing stablecoins, policing their actual use for illicit finance presents significant, inherent challenges. Stablecoins can bypass traditional financial monitoring points via peer-to-peer or decentralized finance transactions, making them attractive for illicit use. A recent Chainalysis report found that stablecoins facilitated over $40 billion in illicit transactions in 2022 and 2023, with the majority tied to sanctions evasion. Recognizing these risks, lawmakers added meaningful amendments to the GENIUS Act, including Bank Secrecy Act requirements and asset-blocking capabilities for issuers. But enforcement remains uncertain. Unfortunately, the Department of Justice (DOJ) recently dismantled its specialized crypto enforcement team and pivoted away from platform accountability, raising doubts about whether these rules will be meaningfully applied. Further, even assuming the DOJ robustly enforces new rules against illicit use, the bill does not grant the Department of the Treasury broader authority to address risks beyond individual issuers, leaving regulators without the tools to confront illicit finance threats across the full stablecoin ecosystem. Without stronger federal authority and enforcement clarity, even well-crafted safeguards risk falling short in practice.
The stakes in regulating stablecoins effectively are undeniably high, and the clock is ticking. Global competitors, particularly China with its advancing digital yuan, are rapidly pushing state-controlled currencies onto the world stage. Meanwhile, the United States has opted out of developing a government-issued digital dollar. This decision effectively makes privately issued, dollar-pegged stablecoins the United States’ primary vehicle for projecting financial influence in the digital age. Establishing a clear regulatory framework with urgency is thus vital to ensure the dollar competes effectively in this new landscape.
But speed alone is not enough. A framework rushed into place without robust safeguards could prove disastrous. If dollar-pegged stablecoins suffer from financial stability weaknesses or national security gaps, they will erode the very trust and perceived safety that underpins the dollar’s global appeal. For these digital dollars to genuinely reinforce U.S. leadership, they must be unquestionably credible and secure. That means proactively confronting the vulnerabilities within the proposed legislation before they escalate into systemic risks. Getting this balance right will determine whether stablecoins bolster U.S. financial leadership or instead leave the U.S. financial system dangerously exposed.
Matt Pearl is the director of the Strategic Technologies Program at the Center for Strategic and International Studies (CSIS) in Washington, D.C. Anoosh Kumar is an intern with the Strategic Technologies Program at CSIS.
