US stablecoin law threatens euro's role as dollar finds new digital leverage

The United States Senate passed the GENIUS Act on 17 June 2025, handing the dollar a structural advantage that European policymakers have spent years trying to counter. The legislation creates a federal licence for private companies to issue stablecoins, digital tokens pegged one-to-one to the dollar and backed by cash or short-term Treasury bills, while explicitly banning interest payments and re-lending of reserves. In effect, Washington has given the private sector a licence to mint dollar liabilities that circulate globally on public blockchains, yet remain anchored to the US banking system and, crucially, to the US Treasury market.

A new channel for dollar demand

Scott Bessent, the US Treasury Secretary, put the strategic logic bluntly on X in June: stablecoins could become one of the largest buyers of US Treasuries. With federal debt above $36 trillion and foreign official demand wavering, the GENIUS Act opens a fresh, private-sector conduit for offshore dollar demand to flow directly into US government securities. Brunello Rosa of Rosa & Roubini described the mechanism as a new system of liabilities that could give the dollar a new lease of life. The legislation also grants stablecoin holders a bankruptcy priority ahead of most creditors, a protection ordinary bank depositors do not enjoy.

The contrast with Europe could hardly be sharper. Donald Trump has barred the Federal Reserve from issuing a digital dollar, leaving the field to regulated private issuers. The European Union, by contrast, has bet on a central bank digital currency, the digital euro, while simultaneously passing the Markets in Crypto-Assets Regulation (MiCA), which sets strict rules for euro-denominated stablecoins. The ECB's digital euro is years from launch, limited to retail payments with holding caps, and not designed for corporate treasury use. That gap is where the competitive threat lives.

Europe's two-track response

The digital euro project was born from a different anxiety: the eurozone's lack of a home-grown retail payment rail, leaving merchants and consumers dependent on Visa and Mastercard. But as Rod Garratt of the University of California, Santa Barbara, told me, the arguments are far more geopolitical than improving payment services. If there is some type of war or political disruption, the view in Frankfurt is that Europe must control its own infrastructure. The ECB has also pitched the digital euro as a trusted anchor for depositors if confidence in commercial banks or sovereigns fractures again, a lesson drawn from the 2010-12 crisis.

European banks, initially hostile to a CBDC that could disintermediate them, have warmed to the digital euro as the lesser evil. Rosa noted the choice is between having their lunch eaten by US-issued stablecoins or by the digital euro. Yet the digital euro's design, holding limits, no interest, retail-only, makes it a poor substitute for the wholesale, interest-bearing, programmable dollar tokens the GENIUS Act enables. A European Parliament study warned that unless the digital euro has high or infinite holding limits, it will struggle to compete meaningfully with bank deposits and stablecoins.

The euro stablecoin counter-offensive

Into that vacuum steps AllUnity, a Frankfurt-based venture backed by Deutsche Bank's asset manager DWS. In April it secured BaFin approval to issue a euro-denominated stablecoin under MiCA, the first of its kind. Alexander Hoptner, AllUnity's chief executive, said 12 banks are in onboarding, including several large ones. If we as Europeans don't come up with a viable solution, then ultimately we will have to accept a US or Chinese solution, he argued. The logic is straightforward: euro stablecoins can serve corporate treasurers and cross-border settlement today, while the digital euro cannot.

But the regulatory ground is shifting beneath them. The ECB and the European Commission are locked in a dispute over MiCA's interpretation. The Commission, pursuing a simplification agenda and under pressure to close a trade deal with Washington, believes risks from non-EU stablecoins pegged to the euro are overstated and manageable. The ECB disagrees: in a panic, treating all tokens as interchangeable could force European institutions to backstop liabilities issued under looser oversight. The GENIUS Act is ambiguous on interchangeability, but its 1:1 reserve rule and bankruptcy priority give dollar tokens a structural credibility that euro tokens issued outside the EU lack.

Currency substitution fears

Piero Cipollone, the ECB's payments chief, warned the European Parliament in April of a looming risk of currency substitution, the phenomenon where a weaker currency's central bank loses control over its financial system and, ultimately, its economy. Lagarde spelled out the retail mechanics in June: if a stablecoin issuer offers 4.25 percent against a bank deposit at 2 percent, with full redemption guarantees, savers will switch. The GENIUS Act prohibits interest, but the legislation has not yet been reconciled with the House of Representatives, and ECB officials worry about workarounds such as lending stablecoins into tokenised money-market funds.

The concern is not theoretical. Tether, the largest offshore stablecoin issuer, holds $120 billion in US Treasury bills. Its chief executive, Paolo Ardoino, said demand is highest in cash-based economies with capital controls or currency instability, Lebanon, Argentina, Iran, where USDT often provides truer price signals than official rates. These people don't trust their national currencies, they want dollars, he said. Tether reaches everyday users through a grassroots network of local kiosk vendors. Ardoino framed USDT as a stop-gap where monetary plumbing has broken down, not a rival to mature payment rails, and quipped that if Tether is so scary for the European Union, we are in trouble as a European Union.

Infrastructure economics and the tokenisation race

Cost structures favour the US model. Dollar stablecoins tap into public blockchains, Ethereum, Solana, built over a decade by a decentralised global community. The digital euro's infrastructure costs remain unresolved, with the ECB and Commission still quibbling over funding. Meanwhile, traditional finance on both sides of the Atlantic is embracing tokenisation: real-time trade and settlement of assets, deposits and central bank money on shared ledgers. Garratt observed that this infrastructure is public, which means traditional finance can use it as well, whether the crypto industry wants them there or not. Banks that fail to adapt risk losing deposit bases to stablecoins with all-singing, all-dancing functionality, forcing them to be more selective with remaining funding and potentially shrinking credit for households and businesses.

Historical echoes and systemic risks

Barry Eichengreen, the economic historian, has warned that the GENIUS Act risks returning the United States to the 19th-century chaos of private bank notes that regularly collapsed. The singleness of money, the guarantee that private bank liabilities convert into central bank money on demand, is the bedrock of modern monetary stability. The GENIUS Act attempts to engineer that singleness through federal regulation, reserve requirements and bankruptcy priority. Whether it holds in a crisis is untested. Europe's MiCA regime imposes similar safeguards but without a federal fiscal backstop; the eurozone's incomplete banking union means no single deposit insurance or resolution fund stands behind euro stablecoins.

The next legislative hurdles

The GENIUS Act must still be reconciled with the House of Representatives, where the interest prohibition and interchangeability rules could change. In Brussels, the ECB-Commission dispute over MiCA interpretation will shape whether euro stablecoins issued in third countries can compete on equal terms. The digital euro's legislative framework remains under negotiation between the Parliament and Council, with holding limits and compensation models unresolved. AllUnity's token will test whether a MiCA-compliant euro stablecoin can attract corporate liquidity before the digital euro arrives. The first real stress test for either system may come not from policy but from a market shock that forces holders to test redemption guarantees at scale.