The evolution of the dollar, from specie-backed notes to its modern fiat form, has been shaped by pivotal military, commercial and technological shifts. Now, dollar-denominated stablecoins are emerging as crypto’s ‘killer app’, prompting a re-examination of the dollar’s history and its role as onchain cash. The diverse stablecoin landscape of today echoes the wildcat banking era of 1836-65, raising concerns about the singleness of money.
The dollar’s road to global reserve currency status was protracted. While strong at present with over 57% of foreign exchange reserves, this position evolved over centuries. While the dollar’s reserve currency status remains robust, subtle shifts in commodities markets and emerging economies hint at possible long-term pressures. Yet, any material impact on the dollar’s reserve status may take decades to be tangibly felt.
The wildcat banking era of the 1800s in the US saw significant fragmentation, marked by a weak federal government and the rise of state-chartered banks. These ‘wildcat’ banks issued dollars with unique issuance, redemption and reserve models, often establishing remote branches to discourage or complicate redemption. This fragmentation led to widespread instability and bank failures, driven by disparity of value between different bank-issued dollars. Both federal and private banks initially issued specie-backed demand notes. The Civil War then underscored the scarcity of specie, leading to the introduction of ‘Greenbacks’ – dollars not backed by gold or silver, also known as legal tender.
The Federal Reserve
Established in 1913, the Federal Reserve System aimed to stabilise the US banking system and ensure the singleness of money – where all forms of money in the same denomination are interchangeable at par. This marked the US government’s first successful centralisation of dollar issuance and operation despite past attempts.
The Fed’s introduction addressed a key dilemma: the inherent tension between monetary freedom and the resulting divergence in design choices seen in wildcat banking and specie-backed currency suspensions. This dilemma was resolved by centralising currency issuance under a central bank. If we’re not careful, we risk repeating this pattern.
Divorcing from gold
The events of the second world war solidified the dollar’s role as a reserve currency. Enacted in 1945, the Bretton Woods System further established the dollar as the reserve currency by pegging it to gold. However, the 1971 Nixon shock completely severed this link, ushering in fiat currency, which is government-issued money with no intrinsic value and no backing by a physical commodity like gold. Unlike specie-backed money, fiat currency derives its value from trust in the issuing government and the rule of law. Historically, the dollar was only directly redeemable for gold for an aggregate of 97 years, or about 40% of US history.
The dollar is now undergoing another significant transformation with stablecoins. In the bull case, the market size of stablecoins could rise from $240bn today to $3.7tn by 2030 (Figure 1). This surge indicates stablecoins’ increasing acceptance across crypto-native and traditional finance. Dollar stablecoins offer value in three key dimensions, such as in store of value, cross-border payments and onchain settlement, facilitating atomic settlement within decentralised finance by allowing users to discharge obligations.
These benefits attract interest from traditional finance and tech giants, with companies like Stripe integrating stablecoins, and institutions like Fidelity Digital Assets exploring issuance. PayPal’s PYUSD, for instance, plans interest-bearing features, mimicking deposit accounts. Even Meta is reportedly re-evaluating its position in the stablecoin market despite its prior efforts with the de-commissioned Libra project.
Figure 1. Estimating stablecoin market size
Bear, base and bull cases
Source: Federal Reserve Bank, Bank of England, European Central Bank, PBOC, Citi Institute
Drawing parallels
While fostering innovation, the proliferation of stablecoins introduces challenges reminiscent of the dollar’s fragmentation in the 19th century. Overall, there are scores of dollar (and other currencies) stablecoins emerging – and this isn’t even including bank-issued deposit tokens.
An evolving landscape also means different levels of oversight, from state-regulated issuers to those in less clear environments. There is a notable shift in backing models, from cash/cash equivalents, such as USDC, PYUSD, to more complex, novel mechanisms like Ethena’s USDe.
However, these parallels between wildcat banking and the modern stablecoin landscape can reveal recurring challenges intrinsic to decentralised monetary systems (Figure 2). These include maintaining stability, ensuring trust in backing mechanisms and navigating regulatory complexities, regardless of technological framework. Wildcat banking serves as a cautionary tale, highlighting potential instability and public harm without robust governance and oversight.
Figure 2. Historical parallels between wildcat banking 1.0 and 2.0
Currency instability to fraud and systemic risk
The endgame: maximalism (with integrity)
As the old saying goes: ‘Those who cannot remember the past are condemned to repeat it’. Stablecoins significantly modernise the dollar, offering a more efficient, inclusive and programmable form of the world’s leading reserve currency. However, proactive measures are vital to prevent past mistakes and ensure the digital dollar’s integrity and stability.
Instead of a purely centralised model (like a potential US central bank digital currency), the focus should be on clear standards and frameworks for responsible private stablecoins. This involves developing a clearing and settlement layer for mutually compliant stablecoins, establishing clear regulatory guidelines, promoting cross-chain interoperability, encouraging responsible issuance, ensuring transparency, and auditing and mitigating bank runs.
Looking ahead, policy-makers globally are diverging on the optimal path for stablecoin integration: some choosing controlled growth in favour of public money while others are leaning into stablecoin innovation as an alternative to CBDCs.
In Europe, policy-makers are fearful of the consequences of a proliferation of private money and see it as their responsibility to control this growth. This comes in two forms: first, the imposition of an onerous regulatory framework, and while some entities are navigating these new regulations, certain stablecoin issuers have opted to withdraw from the European market, as exemplified by Tether. The European Union is also determined to keep central bank money at the heart of the payments system, hoping that the digital euro will limit demand for new forms of private money.
The US is embracing stablecoin innovation and encouraging individuals and businesses to make use of them. The development of legislative proposals, such as the Genius Act, reflects this inclination to promote innovation by establishing clear regulatory guidelines concerning aspects like licensing, reserve requirements and oversight. Also, the US has taken a harsher stance with CBDCs by banning its issuance, effectively paving the way for dollar stablecoins to thrive as the preferred modality.
The aim isn’t a single digital dollar, but rather a dynamic ecosystem of interoperable and well-regulated stablecoins that maintains the ‘singleness of money’, while activating the benefits of distributed ledgers. By applying these vital lessons and remaining steadfast in our vision for a safe and sound financial market, we can collectively unlock the dollar’s immense potential for billions of users and solidify its economic role in the 21st century.
Disclaimer: The views shared in this article reflect the author’s personal views and do not necessarily represent the views of the organisations with which he is or will be associated in the future.
Cameron Nili is Senior Manager at Accenture and former Executive Fellow for Digital Assets & Tokenization at the World Economic Forum.
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