IMAGINE a world in which the US dollar, already the lifeblood of global finance, transforms into a digital juggernaut — flowing through blockchain rails to tighten America’s grip on global capital. This isn’t speculative fiction. It’s the emerging reality, and its name is stablecoins.
These dollar-pegged crypto tokens are quietly redrawing the financial map. On 28 July, Jürgen Schaaf, an adviser to the European Central Bank, sounded the alarm. He warned that dollar-backed stablecoins could ‘dollarise’ the eurozone — eroding the ECB’s monetary sovereignty and reshaping the very structure of European economic control. This is not merely Europe’s problem. It is a global turning point.
Stablecoins — digital tokens pegged to fiat currencies — offer frictionless, cross-border transfers on blockchain networks, bypassing traditional banking rails. As of July 2025, the stablecoin market has ballooned to $250 billion. A staggering 99 per cent of that is dollar-denominated, driven by market leaders such as Tether and Circle, according to Financial Times reporting. By contrast, euro-pegged stablecoins account for just €350 million. This disparity reveals not only user preference, but also the widening geopolitical rift in the digital monetary order.
Schaaf, writing in an ECB blog, cautioned that widespread adoption of dollar-backed stablecoins in Europe could fatally weaken the central bank’s ability to set effective policy. Should these tokens dominate payments, savings, or settlement functions, traditional tools such as interest rates and liquidity controls may no longer bite. The eurozone would then resemble dollarised emerging markets — nations that appear sovereign, yet are yoked to US monetary cycles. Frankfurt’s levers of control would matter less than Washington’s interest rate decisions.
And yet, even as these risks mount, the underlying stablecoin infrastructure remains shaky. A June 2025 report by the Bank for International Settlements described stablecoins as ‘poor money’ — highlighting their lack of central bank guarantees, exposure to illicit flows, and limitations in credit generation. The risks are not hypothetical. The 2022 collapse of Terra-Luna, which triggered contagion across decentralised finance, remains a cautionary tale. Schaaf echoed this concern, warning that a large-scale run on a dominant token could destabilise the broader system. The BIS’s view is not abstract theory — it is a flashing warning light.
Europe is responding. The digital euro, in development by the ECB, is being framed as a ‘solid line of defence.’ Unlike private stablecoins, a central bank digital currency would carry institutional trust, legal clarity and sovereign backing. A decision on its launch is expected by the end of 2025. Meanwhile, the EU’s Markets in Crypto-Assets regulation — fully in force since December 2024 — sets strict rules for euro-linked stablecoins, aiming to carve out digital space for the euro in a dollar-dominated domain. Projects like Pontes and Appia, launched in July, aim to modernise payments across the bloc using blockchain infrastructure.
But the climb is steep. The dollar’s first-mover advantage is vast, powered by liquid capital markets, reserve currency status and global reach — all reinforced in the digital domain. As State Street recently noted, the US benefits from scale, trust and institutional alignment. The digital euro, by contrast, still faces public scepticism. An ECB survey found persistent concerns about privacy and centralised control — issues that threaten adoption, no matter the project’s technical merits.
Meanwhile, other powers are building their own digital arsenals. China’s e-CNY is already deployed in pilot regions, and Hong Kong’s new stablecoin ordinance positions it as a regulated hub for digital assets. These developments reflect a global race not just for innovation, but for monetary influence in a future where code, not coinage, carries weight.
At its core, the stablecoin contest is less about currency mechanics than geopolitical leverage. Dollar-backed tokens are amplifying US financial primacy in real time — attracting capital flows into American platforms, regulated (or lightly so) under frameworks such as the recently enacted GENIUS Act. That law gives the US a permissive, fast-moving regulatory edge. Other jurisdictions, meanwhile, grapple with fragmented rules and legacy concerns.
For Europe, the challenge is not simply to catch up, but to avoid being digitally sidelined. Schaaf and other ECB voices have called for international coordination. Without aligned standards, stablecoin issuers may exploit regulatory gaps — locating operations in the most favourable jurisdictions while exporting systemic risks elsewhere. This ‘regulatory arbitrage’ could leave even the most robust financial systems exposed.
The risks are even greater for emerging markets. These economies, often dependent on foreign capital and vulnerable to external shocks, are especially susceptible to digital dollarisation. The BIS has warned that unchecked stablecoin expansion could further undermine local monetary authority — turning domestic economies into satellite systems orbiting the Federal Reserve.
What, then, is the path forward?
Europe must double down on its digital euro efforts, not merely as a defensive tool but as a platform for innovation. Parallel to that, euro-pegged stablecoins — such as the EURAU token launched under MiCA rules by Deutsche Bank — need institutional support. Without liquidity, acceptance, and regulatory clarity, these alternatives will remain niche.
Globally, financial regulators must prioritise coherent frameworks. The aim should not be to stifle innovation, but to ensure that the digital economy does not reproduce the fragilities of the last century’s financial order — only faster. Stablecoins must be safe, transparent, and interoperable across borders, without allowing dominant jurisdictions to entrench themselves unilaterally.
Central banks also face a cultural challenge. To remain relevant, they must marry credibility with agility — adopting some of the operational speed and user-focus of private fintech firms. Doing so does not mean abandoning their mandates, but updating their playbooks.
The United States, for its part, is not waiting. With a digital dollar ecosystem growing under regulatory blessing, Washington is executing a de facto financial Marshall Plan. In this new system, stablecoins are not just efficient payment instruments. They are geopolitical tools — programmable dollars with programmable influence.
They harvest not just transactions, but trust, capital, and control — leaving others scrambling to respond. Europe’s digital euro is a meaningful start, but it may already be running a race in which the winner is far ahead. The question is no longer whether the euro can compete. It’s whether any currency can.
This is not merely a monetary debate. It is the new Bretton Woods moment — forged not in post-war halls, but on codebases and token ledgers. The longer the world delays in recognising the shift, the tighter the dollar’s digital grip becomes.
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Dr Imran Khalid is a freelance contributor from Karachi.
