Stablecoins, the Eurodollar System, and U.S. Monetary Sovereignty

The Eurodollar system, a sprawling network of U.S. dollar-denominated loans issued by foreign banks, accounts for approximately one-third of all dollars in circulation—roughly $12 trillion. As Milton Friedman aptly described, Eurodollars are “a bookkeeper’s pen,” mere bookkeeping entries representing dollar-denominated IOUs held in non-U.S. bank accounts. These offshore liabilities, created by foreign banks and central banks, operate beyond the Federal Reserve’s direct control, free from U.S. interest rate policies, regulations, asset seizures, taxation, and capital controls. This shadow monetary system allows foreign institutions to lend dollars into existence, capturing seigniorage—the profit derived from the difference between the value of money and its creation cost—while relying on U.S. government and banking backstops for stability. This creates a free-rider problem, eroding the U.S.’s “exorbitant privilege” as the issuer of the world’s reserve currency. While the Eurodollar system reinforces the dollar’s global dominance, it shifts significant monetary influence to foreign entities, diluting U.S. control over its own currency.

Stablecoins, particularly those issued by foreign entities like Tether, are extending this dynamic into the digital realm. As Nic Carter has termed them, reserve-backed stablecoins are “tokenized Eurodollars”, dollar-denominated IOUs minted outside the U.S. banking system. Currently valued at $250 billion, the stablecoin market is projected to reach $3.7 trillion by 2030. By tokenizing both U.S. dollars and Eurodollars indiscriminately, stablecoins enable foreign entities to spread Eurodollar liquidity globally, leveraging U.S. backstops without contributing to U.S. seigniorage. This growing volume, where volume equates to power in monetary systems, threatens to further erode U.S. control over the dollar’s reserve status. Foreign-issued stablecoins, like Tether, operate beyond U.S. regulatory reach, raising concerns about oversight, stability, and the potential for illicit financial flows.

The U.S. government has compelling reasons to assert control over this digital evolution of the Eurodollar system. Beyond the loss of seigniorage, foreign-issued stablecoins pose challenges to enforcing Know Your Customer (KYC) and Anti-Money Laundering (AML) laws, critical for combating financial crime and ensuring transparency. The U.S. also seeks to ensure stablecoin issuers are subject to U.S. court orders, enabling authorities to address fraud, enforce sanctions, or seize assets when necessary. Offshore issuers like Tether, based in jurisdictions with lighter regulatory frameworks, complicate these efforts. For instance, Tether reported $13 billion in profits in 2024, largely from interest on its dollar reserves, yet these earnings escape U.S. taxation due to its non-U.S. incorporation. This underscores the broader issue: foreign stablecoin issuers benefit from the dollar’s stability and U.S. backstops while remaining insulated from American regulatory and fiscal oversight.

To address these concerns, the U.S. government may prohibit offshore stablecoin issuers from operating in its market. This could force companies like Tether to either cede the lucrative U.S. market or reincorporate in the United States, subjecting themselves to U.S. banking regulations, KYC/AML compliance, court orders, and taxation. Domestic stablecoin issuance, backed by U.S.-sourced assets like Treasuries, mortgages, or commercial debt, would ensure that seigniorage flows to U.S. institutions and that issuers operate under U.S. law. Such a policy would align with the broader goal of maintaining the dollar’s dominance, as articulated by Treasury Secretary Scott Bessent at the March 7, 2025, White House Crypto Summit: “We are going to keep the U.S. [dollar] the dominant reserve currency in the world, and we will use stablecoins to do that.”

Taking this to its logical extreme, the U.S. could mandate that only dollars tokenized by domestic institutions—backed by U.S.-sourced debt—are officially backstopped. This could disrupt the $12 trillion Eurodollar market, as foreign-held Eurodollars might lose their implicit U.S. guarantee, prompting a rush to convert them into U.S.-backed dollars. Such a move would redirect wealth and influence back to the U.S., reinforcing its monetary sovereignty. By restricting stablecoin issuance to U.S. firms, the government could curb the free-rider problem, ensure regulatory compliance, and maintain the dollar’s global primacy in an increasingly digital financial landscape.