Growth in Bitcoin and stablecoin adoption could accelerate dedollarization

The US dollar’s longstanding status as the preeminent global reserve currency is increasingly under scrutiny. While it commands nearly 60% of global foreign exchange reserves, the recent geopolitical climate and the strategic use of economic sanctions have catalyzed a move among several nations to reduce their dependence on the greenback. With the US accounting for about 25% of global GDP, its currency still controls a staggering 88% of international trade transactions as of 2024. However, the balance is shifting, driven by an array of factors, including the recent banning of the dollar in Russian trade transactions due to sanctions connected to the Ukraine conflict.

In response to its exclusion from the SWIFT payment platform, Russian companies have turned to cryptocurrencies for cross-border business transactions. Recent regulations have allowed the use of digital currencies in foreign trade, effectively legitimizing Bitcoin and other cryptocurrencies. This shift illustrates a strategic pivot away from traditional banking platforms, reflecting a broader, global trend towards what many are now calling “dedollarization.”

This movement, underscored by Bitcoin’s rise, seeks to lessen the US dollar’s grip on international markets. Advocates of cryptocurrencies have long championed dedollarization, where nations transition away from using the dollar for significant financial activities—ranging from oil transactions to foreign exchange reserves. As outlined in a 2024 report from Morgan Stanley, the advent of digital currencies may both undermine and reinforce the dollar’s dominance in the long run.

Despite Bitcoin’s increasing recognition as a store of value, experts suggest it remains premature to label it a true competitor to the dollar. Countries like El Salvador have aggressively adopted Bitcoin, incorporating it into their reserve structures. However, widespread acceptance globally remains limited, raising concerns about whether such moves would ultimately erode or bolster dollar authority. Brandon Mintz, CEO of Bitcoin Depot, articulated the necessity for “broader mainstream adoption” and “clearer regulatory frameworks” for Bitcoin to function as a legitimate alternative.

Furthermore, Bitcoin’s notorious volatility continues to hamstring its potential as a reliable currency. The World Gold Council notes that Bitcoin’s price fluctuations are significantly greater than those of gold, further complicating its viability as a stable medium of exchange. Eswar Prasad, a Cornell University trade professor, emphasizes that the erratic nature of cryptocurrencies makes them unsuitable for roles typically occupied by reserve currencies.

Data from the International Monetary Fund indicates that while 58% of allocated foreign reserves are still held in US dollars, the proportion has dropped from over 70% in the early 2000s. The geopolitical ramifications of sanctions against Russia catalyze this trend, as many nations reassess their reserve portfolios away from potentially vulnerable currencies.

The value of the dollar remains strong, despite attempts by organizations such as BRICS+ to diminish its global influence. Interestingly, the stablecoin market, which has surged to a $233 billion capitalization, is primarily pegged to the US dollar. Nearly 97% of this sector comprises US dollar-backed stablecoins, thereby reinforcing the greenback’s dominance rather than counteracting it.

Emerging central bank digital currencies (CBDCs) may provide a framework that could challenge the role played by both stablecoins and cryptocurrencies in general. Nevertheless, analysts warn against assuming that any single entity is poised to replace the dollar entirely. The consensus emphasizes the depth and liquidity of US financial markets and the institutional infrastructure underpinning its status as a safe haven.

While nations navigate this complex overlay of currency dynamics, the potential for cryptocurrencies and other digital assets to reshape global finance remains ambiguous. Adaptations in adoption, coupled with regulatory clarity, will be crucial in determining the future trajectory of currency dominance on the world stage.