The Stablecoin Paradox

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The Stablecoin Paradox

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Bibliographic details

• Authors: Eswar Prasad
• Published: November 18, 2025

Overview

• Title: The Stablecoin Paradox
• Author: Eswar S. Prasad
• Publication: F&D Magazine
• Date: December 2025
• Read time indicator: Less than a minute(0 words) Read
• Author credentials and related book: ESWAR PRASAD is a professor of economics at Cornell University, a senior fellow at the Brookings Institution, and author of The Future of Money. His latest book, The Doom Loop: Why the World Economic Order Is Spiraling into Disorder, will be published in February 2026.
• Central thesis: Stablecoins may concentrate financial power and reinforce the current structure of the international monetary system.

Evolution and function of stablecoins

• Original crypto ambition:
  • Bitcoin and blockchain aimed to cut out intermediaries and democratize finance.
  • Intended to provide broad access to banking and financial services without brick-and-mortar operations.
• Practical outcome:
  • Decentralized crypto assets like Bitcoin became speculative financial assets due to volatility and limited transaction capacity.
• Role of stablecoins:
  • Use blockchain technology but maintain a stable value by being backed one-to-one with reserves of central bank currencies or with government bonds.
  • Serve as more reliable mediums of exchange compared with volatile crypto assets.
• Governance and decentralization:
  • Stablecoins are the antithesis of decentralization: governance is controlled by the issuing firm, not by decentralized public consensus.
  • Issuers validate transactions rather than relying solely on a computer algorithm.

Benefits and use cases

• Payments and friction reduction:
  • Lowered costs and removed frictions in payments, particularly cross-border payments.
  • Facilitate remittances for economic migrants and enable importers/exporters to settle transactions instantaneously rather than waiting days.
• Potential inclusion:
  • Could provide people of all income levels access to digital payments and decentralized finance.
  • Small countries could gain easier access to global finance through integration with lower-friction payment systems.
• Technological adoption by incumbents:
  • Large commercial banks are adopting tokenization of deposits and blockchain features to make operations more efficient and extend reach.

Risks, market concentration, and distributional effects

• Concentration of economic power:
  • US legislation permitting broad corporations to issue stablecoins could let large corporations (examples cited: Amazon and Meta) leverage sizable balance sheets to dominate issuance.
  • Minting stablecoins by big tech would "ramp up the power of these corporations" and "lead to more concentration not more competition."
  • Large banks issuing stablecoins could undercut smaller banks (regional and community lenders) and entrench big players.
• Decentralized finance outcomes:
  • Outside of payments, decentralized finance has spawned complex speculative products and has not meaningfully improved outcomes for indigent households.
  • Retail investors may be hurt by speculative products that obscure risks.
• Risks to monetary sovereignty and currency substitution:
  • Dollar-backed stablecoins are in greatest demand and could indirectly boost dollar dominance of the global payment system.
  • Example: Circle, issuer of USDC (described as "the second most popular stablecoin"), has seen little demand for stablecoins pegged to other currencies such as the euro and the yen.
  • Stablecoins pose an existential threat to currencies of smaller economies, where users may prefer well-known corporate-issued stablecoins over local currencies that experience high inflation or volatile exchange rates.
• Systemic and illicit activity concerns:
  • Stablecoins could lubricate illicit financial activities, making money laundering and terrorism financing harder to police.
  • They threaten the integrity of payment systems by creating a disparate set of systems managed by private corporations.

International implications and central bank responses

• Reinforcement of current international monetary structure:
  • Stablecoins are likely to reinforce existing currency hierarchies, particularly bolstering the dollar's role.
• Central bank reactions:
  • Concerns about dollar-backed stablecoins for cross-border payments are motivating central banks (example: European Central Bank) to consider issuing digital versions of their currencies (digital euro).
  • Fragmentation in payment systems: euro area payments within its perimeter remain fragmented; cross-border euro payments within the area are not seamless.
• Policy space and small-economy exclusion:
  • National-level regulation is insufficient because the internet crosses borders; cooperative international regulation is preferable but unlikely given limited international cooperation.
  • Even with coordination, smaller economies with weaker financial systems and limited regulatory capacity may be excluded from rule-setting and subject to rules that pay little attention to their concerns.

Policy recommendations and regulatory directions

• Regulatory objectives:
  • Implement effective regulation that tamps down risks, leaves space for financial innovation, and ensures fair competition by curbing excessive concentration of economic power in the hands of a few companies.
• International approach:
  • Prefer cooperative, cross-border regulatory approaches over purely national regimes, because the internet and stablecoin networks are transnational.
• Domestic priorities for small countries:
  • Rather than issuing domestic stablecoins, fix inefficiencies in domestic payment systems and work with other countries to remove frictions in international payments.

Conclusion and trade-offs

• Positive catalytic role:
  • Stablecoins highlight inefficiencies in existing financial systems and demonstrate how technology can address payment frictions.
• Negative possibilities:
  • Stablecoins might lead to greater concentration of financial power and a new financial order characterized by more instability rather than the pro-competition, democratizing promise of crypto’s pioneers.

Source: "The Stablecoin Paradox," Eswar S. Prasad, F&D Magazine, December 2025.

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• The Stablecoin Paradox
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