Widely Used, Increasingly Distrusted: The Dollar’s Stablecoin Paradox

By Lamar Johnson-Harris, Neema Baddam, Tiffany Li, and Amy Zhang

Stablecoins are embedding the dollar deeper into global digital finance than at any point in history, yet the same central banks transacting in dollar-denominated rails are accelerating their accumulation of gold and their exit from dollar reserves. The world depends on the dollar as a transaction medium. It is losing faith in it as a store of value, and, when sanctions are invoked, as a reliably accessible tool.

A Tale of Two Signals

In early 2026, stablecoins hit a milestone: aggregate transaction volume crossed nearly $2 trillion in a single month. Indeed, adjusted stablecoin volume is projected to reach $719 trillion by 2035 through organic growth alone. Simultaneously, early this year, Chinese gold imports hit 162 tons (~$24.4 billion USD), their highest level since March 2024. Both milestones relate to the dollar. Only one suggests confidence in it.

The conventional debate over dollar dominance treats the question as binary: either the dollar is winning, or it is being displaced. The data says both are true at once. Dollar-denominated stablecoins have crossed from speculative instruments to critical payments infrastructure, with more than 98% of the total market supply of stablecoins pegged to the dollar. At the same time, the sovereign institutions most actively using that infrastructure are simultaneously moving their balance sheets away from dollar reserves.

The Dollar’s Digital Expansion

Nearly all stablecoins are dollar-denominated, so every stablecoin transaction is a dollar transaction. The dollar’s structural grip on international finance remains formidable: present in 89% of foreign exchange trades, 61% of foreign currency debt issuance, 57% of currency reserves, 54% of export invoicing, and a record 51.1% of interbank FX transactions via SWIFT as of March 2026.

The GENIUS Act, signed July 2025, accelerated this dynamic by establishing the first federal framework for dollar-pegged stablecoin issuance. By mandating 1:1 reserve backing in short term US Treasuries or cash equivalents, the GENIUS Act structurally ties stablecoin expansion to increased demand for US government debt. While stablecoin issuers are not direct ‘buyers’ in the traditional sense, growth in dollar denominated stablecoins could contribute to greater Treasury demand through reserve accumulation requirements.

After the GENIUS Act was passed, U.S. Secretary of the Treasury Scott Bessent issued the following statement.

USDC and USDT combined — the two largest stablecoins in the market — now hold $149 billion in US Treasuries, ranking stablecoin issuers 18th among all external Treasury holders globally, ahead of Norway, South Korea, and the UAE. These holdings are up 64% since Q1 2023. As the stablecoin market expands beyond $304 billion in market cap, that Treasury demand grows automatically.

Stablecoin adoption is accelerating in markets where dollar access has historically been constrained: emerging economies, cross-border remittance corridors, and settlement systems that never had efficient access to the dollar system. The GENIUS Act is opening the dollar to the world through private digital rails at a moment when many sovereign channels are narrowing.

The Trust Deficit: Gold as a Silent Vote

The gold data tells the opposite story. For the first time in more than 20 years, gold held in central bank FX reserves at market price, now $5.0 trillion, has surpassed foreign official Treasury holdings of $3.9 trillion. The dollar’s share of global FX and gold reserves combined has fallen to approximately 46%, the lowest in at least 26 years and down 15 percentage points since 2017.

While this is partially due to the surge in gold prices, the volume of gold in central bank reserves is also growing. Central banks added 244 tons (~$36.7 billion USD) of gold in Q1 2026 alone, their strongest quarterly pace in recent years, bringing total holdings to 38,666 tons, approximately 18% of all gold ever mined. Emerging markets account for the majority of global gold demand over the past decade, with India representing 21% of total demand. China has also continued accelerating its gold accumulation, with imports rising for the third consecutive month in early 2026. The geography of gold accumulation increasingly overlaps with regions seeking to reduce exposure to dollar-dependent reserve systems.

The driver is increasingly geopolitical. The 2022 freeze of Russian central bank assets demonstrated to sovereign reserve managers that foreign held reserve assets, particularly those within Western financial jurisdictions, may be vulnerable to sanctions or seizure during periods of geopolitical conflict. While Russia held substantial reserves in both dollars and euros, the episode reinforced broader concerns about dependence on reserve systems tied to Western institutions. In contrast, domestically held gold reserves are viewed by many central banks as less exposed to external political risk. Deutsche Bank Research, in an April 2026 report titled “The Return of History,” concluded that gold’s growing role in central bank reserves is increasingly driven by geopolitical considerations rather than purely monetary factors, projecting gold’s share of global reserves could rise from 30% to 40%. That shift already appears to be underway.

The Paradox Explained: Utility Without Trust

The dollar functions as a network. Networks derive their value from participation, not from participant confidence in long-run governance. A country that distrusts the dollar system still needs dollars to settle cross-border transactions, pay external debts, and participate in global commodity markets. The switching cost is enormous. So it transacts in dollars while simultaneously building a hedge against dollar dominance.

Stablecoins lower the marginal cost of dollar-denominated transactions, reinforcing the network effect without requiring any change in policy confidence. Intermediaries and financial actors in dollar-constrained economies increasingly rely on stablecoins for cross-border payments, trade settlements, and liquidity management. In this sense, a country may simultaneously diversify official reserves into assets such as gold while private sector actors continue transacting in digital dollars.

The GENIUS Act may further reinforce this dynamic by requiring regulated stablecoin issuers to maintain reserves in short term US Treasuries or similar dollar denominated safe assets. As stablecoin issuance expands, issuers could contribute additional demand for Treasury linked reserve assets, partially offsetting softer demand from some foreign sovereign reserve managers. However, this mechanism operates primarily through regulated issuers and private financial intermediation rather than through foreign central bank reserve accumulation itself.

That vulnerability surfaced in April 2026, when Tether froze $344 million in USDT at OFAC’s direction, the largest single stablecoin enforcement action on record. Dollar stablecoin utility operates at the discretion of US enforcement authorities. Every sovereign treasurer who observed that action understood it.

This does not mean the arrangement is stable. A network sustained by switching costs rather than genuine institutional confidence is more fragile than headline metrics suggest. The conditions that have historically underwritten dollar dominance, specifically deep liquid markets, rule of law, and predictable monetary policy, are precisely the dimensions where the data has been deteriorating. Stablecoin infrastructure preserves the dollar’s transactional role. It cannot substitute for the fiscal credibility and geopolitical trust that make the dollar worth holding.

Implications

For Policymakers

Stablecoin growth can be misread as renewed dollar confidence, but this structural growth is driven by switching costs and network effects rather than renewed faith in US fiscal management. The reserve data argues for urgency on dollar credibility beyond digital asset regulation. A reserve currency that functions as a settlement rail but is no longer trusted as a store of value will eventually face a moment when those two properties cannot coexist.

For Investors

The data supports holding both sides of the paradox simultaneously: long dollar utility through stablecoin infrastructure and GENIUS Act-driven Treasury demand, and long dollar distrust through gold and non-dollar sovereign assets. The fact that a stablecoin issuer is now the 18th-largest holder of US Treasuries changes how fixed income demand should be modeled, a structural development most portfolios have not yet priced.

Conclusion

The dollar remains the world’s reserve currency, and countries are unlikely to structurally offload it entirely. However, on the margin, it is increasingly questioned, with an increasing share of reserves going toward gold instead. Stablecoins are another manifestation of this dollar paradox. With both stablecoin volume and central bank gold accumulation reaching new records, this shows that the world has decided to use the dollar while growing skeptical at the same time.

The GENIUS Act secures dollar dominance on the utility dimension for a generation, but no legislation yet addresses the trust dimension. That gap is where the next decade of dollar policy will be decided.

Lamar Johnson-Harris, Neema Baddam, Tiffany Li, and Amy Zhang are Wharton Initiative on Financial Policy and Regulation student fellows. The views and ideas expressed in this post are those of the authors and do not necessarily represent those of the Wharton School or the Wharton Initiative on Financial Policy and Regulation.

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