The Risks of Donald Trump’s Crypto Strategy
The administration’s emphasis on stablecoins risks eroding the Federal Reserve’s independence and could weaken the dollar’s global standing. A commentary by Ignazio Angeloni
Donald Trump’s executive order on “Strengthening American Leadership in Digital Financial Technology” does more than what the title declares: it launches a process to materially change the way dollar-denominated monetary assets are created, controlled, and used globally. At stake is the position of the Federal Reserve, more precisely, the role that a US president, Woodrow Wilson, who was in many ways polar opposite to Trump, gave to it 111 years ago.
The ban on issuing a CBDC (Central Bank Digital Currency) is the least surprising part. The new administration’s opposition to it was known.
The Fed itself, the target of the prohibition, had reservations at least on the “retail” version used for everyday transactions by ordinary people. And for good reasons: a retail CBDC crowds out private payment service providers without clear efficiency gains; it may even jeopardize financial stability.
Unfortunately, Trump’s prohibition appears to also ban the wholesale version of it, a more interesting proposition.
The bulk of global cross-border payments stands on weak legs, relying on correspondent accounts among a few global banks.
Correspondent banking is risky and inefficient because it grants banks a monopoly which they exploit by charging hefty fees on cross-border payment. An internationally connected network of wholesale CBDCs would solve the problem, but it is meaningless without the world’s most important currency, the US dollar.
Trump’s order therefore kills the solution not just in the US, but globally.
Conflicting Objectives in Trump’s Economic Strategy.
More consequential is the part of the order that intends to “promote United States leadership in digital assets”.
Digital assets are defined here not, as one would think, as those held and exchanged in digital form, but only as those recorded in distributed ledgers.
In other words, those exchanged without a central authority clearing and settling on its books. This is the function the Federal Reserve has performed ever since it was founded in 1913.
Still today, virtually all dollar payments eventually settle on the Fed’s balance sheet. The Fed guards the finality and soundness of those payments. This would no longer be the case were large masses of money-like instruments to start circulating on distributed ledgers.
The administration’s crypto-strategy gives a special emphasis to stablecoins, a relatively obscure instrument pegged to the US dollar, hence money-like. This is surprising.
Stablecoins are used today mainly to facilitate transactions in and out of more popular crypto instruments such as Bitcoin. Why should an ancillary instrument, with a market capitalization of less than 10% of the overall crypto market, be of such importance?
One begins to understand this by considering the multiple conflicting objectives of Trump’s economic strategy.
The first is rebalancing the US external accounts while supporting domestic manufacturing, both of which require a weak dollar and low interest rates. Another one is delivering on the campaign promises regarding trade (read: tariffs) and immigration (border controls and repatriations), both ideologically indispensable but likely to raise inflation.
Standing in the way is the Federal Reserve, an independent agency mandated to combat inflation by means of high interest rates and a strong dollar. An inconvenience for this administration’s “unitary executive theory” interpretation of its powers.
The Global Role of the Dollar
A third oft-stated objective is upholding the global role of the dollar, a valuable geostrategic weapon (it provides the basis for financial sanctions) that also helps finance the budget deficit.
So far the dollar dominance has been unchallenged, but if it begins to depreciate and it returns to decline, that position is no longer assured.
Trump mentioned punishments – from the imposition of tariffs to the withdrawal of military support – for countries trying to replace the dollar, but threats may not work if the economic calculation doesn’t square.
Stablecoins are hoped to make this complicated web of incompatible ambitions more consistent. They are a form of dollar-denominated quasi-monetary instruments, added on top of the money supply hence alleviating any undesired monetary policy constraint.
Their creation is independent of the Federal Reserve and potentially controllable by the executive by means of suitable regulation. They also increase the demand for US Treasuries, because the latter provide the collateral needed to back the stablecoins issuance.
Regulation will play a crucial role in determining how stablecoins are created and managed. The executive order entrusts the task of writing the rules to a working group controlled by the executive, including all relevant departments and agencies but excluding the Federal Reserve. An exclusion without precedent in comparable cases.
The US Federal Reserve’s function as guardian of all dollar payments and its independence in performing its monetary role have served America and the globe well for a very long time. This executive order puts that role and that independence at least partly in jeopardy. It is essential that such risk is fully understood and averted.
IEP@BU does not express opinions of its own. The opinions expressed in this publication are those of the authors. Any errors or omissions are the responsibility of the authors.
