CRYPTO CAN STRENGTHEN THE DOLLAR

By Dave Lee, Founding Partner at Aqua Labs in Abu Dhabi

The debate around the negative consequences of digital assets for fiat currency has been around since the launch of Bitcoin in 2009 and the biggest question has always been whether digital assets could challenge the dominance of the world’s most important currency.

I believe that is the wrong question to ask. As blockchain technology is here to stay, we should instead be asking how it can make the US dollar more efficient and more accessible. If that can be achieved, the dollar will become even more deeply embedded into the global financial system.

Events in the foreign exchange market over the summer provide an interesting starting point. Japan had intervened heavily to support the yen as it came under significant pressure against the dollar, with the US also participating in the market operation. Whatever one’s view of the responses, the episode reinforced a fundamental reality of the international financial system: when markets become stressed, the dollar remains the primary reference point for global capital.

At the same time, another form of dollar infrastructure is developing. Stablecoins are bringing dollar-denominated value onto blockchain networks.

This evolution of the dollar should not be viewed in isolation. Consider USD1, which is redeemable one-to-one for US dollars and backed by dollar-denominated reserve assets. Unlike dollars sitting in a traditional bank account, USD1 exists directly on the blockchain.

This distinction is important because a conventional dollar transfer relies on a network of banks, payment processors and settlement systems. Cross-border transactions can involve several layers of reconciliation, multiple intermediaries, different jurisdictions and operating hours, as well as exposure to geopolitical and other external disruptions. Even relatively minor changes in circumstances can create friction and impede the movement of money.

A USD1 transaction is far less exposed to many of these constraints. The underlying economic value remains a dollar, but what changes is the mechanism through which that value is transferred. A digital dollar can move between wallets on a blockchain at any time, without requiring the same chain of intermediaries involved in many conventional cross-border payments.

This is where I believe the long-term opportunity lies. The next phase of financial innovation will not necessarily be about inventing new forms of money, but rather rebuilding the infrastructure through which our money moves, and that is what USD1 enables.

The dollar already possesses advantages that new forms of digital money would struggle to replace: liquidity, institutional trust, deep capital markets, global acceptance and a long legacy. These things will continue to matter. The opportunity presented by stablecoins is therefore not to disregard those advantages, but to make them available through more efficient technological architecture.

A digital representation of the dollar can be integrated directly into financial software. It can be used as collateral, embedded into digital capital markets and transferred automatically when predefined conditions are met. A fundamental advantage of blockchain technology is that a distributed network can reduce the dependence on multiple intermediaries.

This is particularly important as tokenization develops. Financial assets are increasingly moving onto blockchain infrastructure, from funds and securities to commodities and other real-world assets (RWAs). It follows that the money used to transact against digital assets will increasingly need to exist digitally too.

As digital assets grow, so too will demand for digital dollars, driving greater use of blockchain-based financial infrastructure. Greater utility also encourages more institutional participation, which can, in turn, reinforce the role of the dollar within the digital economy.

The US government’s growing regulatory framework for stablecoins is therefore significant. Rather than treating stablecoins solely as a threat to the existing monetary system, policymakers are increasingly recognizing their potential to further extend dollar liquidity, while creating additional demand for US Treasury assets.

One of the most interesting developments for blockchain is that it will become an additional layer of the financial system, with the dollar sitting at its center. This is why I would expect the finance industry to move on from conversations around de-dollarization, and to start speaking about digital dollarization.

The importance of the dollar within the traditional financial system is simply not up for debate, despite some voices to the contrary, and the rise of stablecoins points towards its increased importance. If the US leads innovation in stablecoins, tokenization and blockchain-based financial markets, one of the greatest beneficiaries of crypto will most likely be its own currency.