Stablecoins are increasingly emerging as a complementary force to the traditional Eurodollar market and potentially a disruptive alternative in the global financial ecosystem. Whilst not yet positioned to fully replace this massive shadow banking system, stablecoins represent a significant evolution in how dollar-denominated value moves across borders. This article explores the relationship between these financial mechanisms, their current trajectories and the implications for global finance and national security. The Eurodollar market encompasses US dollar-denominated deposits held outside the United States, primarily in international banks and offshore accounts. And with an estimated value at approximately $13 trillion, this shadow banking system has been fundamental to global liquidity since the 1950s. The market serves multinational corporations, governments and financial institutions seeking dollar access without direct US regulatory oversight. Key characteristics of the Eurodollar market include:
· deep liquidity - with over $13 trillion in offshore dollar liabilities as of 2023 (more than double the amount in 2008), the market provides essential funding for global trade and investment.
· credit intermediation - offshore banks lend these dollars to various entities, enabling global trade and funding. Approximately 60-70% of global trade financing depends on Eurodollar flows.
· regulatory arbitrage - operating beyond US banking regulations, the system offers flexibility but introduces specific risks, particularly during liquidity stress periods.
The Eurodollar system has repeatedly played a central role in financial crises. During the 2008 Global Financial Crisis, confidence in counterparties collapsed, freezing Eurodollar funding and requiring Federal Reserve intervention with over $580 billion in swap lines. Similarly, the 2019 Repo Crisis saw dollar shortages spike repo rates from 2% to 10% overnight, highlighting the system's vulnerabilities.
Stablecoins vs Eurodollar market: a strategic crossroads
Source: TeamBlockchain
Stablecoins such as USDT (Tether) and USDC (Circle) are blockchain-based digital representations of fiat currency, with an investment objective to track the US dollar. Offering 24/7 global access, unlike traditional banking systems constrained by operating hours, stablecoins facilitate continuous transactions regardless of time zones or banking holidays. Stablecoins can settle near-instantly compared to the traditional T+1 to T+3 timeframe in the Eurodollar market. Using smart contracts stablecoins usher in programmable payments enabling automated, condition-based transactions as well as being able to integrate with decentralised finance (DeFi) applications. Transactions can occur directly between parties without multiple banking intermediaries, so improving efficiency and reducing costs. According to the Bank of International Settlement, approximately 99% of stablecoin volume is denominated in US dollars, echoing the dollar dominance of the Eurodollar system. When comparing these two financial mechanisms, several distinctions and similarities emerge:
Eurodollar v Stablecoin
Source: TeamBlockchain
· short-term perspective - stablecoins currently lack sufficient liquidity and institutional trust to replace Eurodollars in large-scale interbank lending or trade finance. They function more as complementary tools within specific digital ecosystems.
· medium-term outlook - stablecoins are increasingly positioned to disintermediate foreign exchange brokers, remittance providers and certain shadow banking liquidity functions. This is particularly relevant in emerging markets with limited correspondent banking access.
· long-term potential - if stablecoins secure central bank backing, regulatory clarity and widespread institutional adoption, they could indeed transform into the new digital Eurodollars - programmable, borderless and integrated across traditional finance and decentralised financial systems.
Stablecoins present significant national security considerations, particularly regarding US financial influence. Historically, the dollar's global dominance has been amplified by regulated banks, correspondent networks and payment systems such as SWIFT. This infrastructure not only facilitates commerce but serves as a mechanism for enforcing sanctions and projecting American influence. Stablecoins operate on decentralised infrastructure without traditional oversight, potentially undermining this leverage. Recent reports of Russian arms smugglers using Tether to bypass sanctions and acquire billions in weaponry highlight these concerns. Furthermore, whilst some officials argue that stablecoins lack sufficient scale to pose significant threats, history suggests caution. The Eurodollar market was once dismissed as inconsequential before becoming integral to global finance; stablecoins may follow a similar trajectory through utility and rapid adoption rather than official endorsement. Meanwhile, the international regulatory landscape adds complexity. The European Union, Japan, the United Kingdom and other jurisdictions are establishing regulatory frameworks that may legitimise new classes of dollar-backed assets potentially independent of US institutions. If these jurisdictions embrace dollar-based stablecoins before the US implements coherent regulation, they could gain strategic control over financial infrastructure the US can no longer effectively influence. The decentralised nature of stablecoin networks complicates enforcement of anti-money laundering laws, flow monitoring and sanctions implementation. Unlike banks obligated to regulatory compliance, wallets and smart contracts on permissionless blockchains operate without intermediaries. As adoption grows, the ability to move substantial sums through minimally regulated channels could empower sanctioned entities to circumvent restrictions.
Several trends are reshaping both the Eurodollar system and the stablecoin landscape:
· tighter us monetary policy - interest rates above 5% are increasing dollar funding costs, potentially stressing emerging economies with substantial dollar-denominated debt. Countries with significant refinancing requirements could face liquidity challenges if rates remain elevated.
· local currency financing growth - in 2023, approximately 30% of China's trade was settled in yuan, up from 15% in 2020. This shift signals a gradual move away from offshore dollars, particularly in Asia.
· technological disruption - central bank digital currencies (CBDCs) such as China's Digital Yuan have processed over $100 billion in transactions. These digital currencies could offer faster, more cost-effective alternatives to traditional Eurodollar markets.
· changing US Treasury demand - foreign ownership has decreased to 30% of total issuance, down from over 40% a decade ago. Continued decline could weaken the Eurodollar system's foundation.
· emerging market resilience - countries such as India have built substantial foreign exchange reserves (approximately $600 billion) to buffer against potential dollar liquidity shocks.
The evolution of global payment systems brings various investment implications - emerging markets with substantial dollar-denominated debt may face liquidity risks, making currency diversification an attractive option; countries such as China and India, transitioning towards local currencies, could offer more stable long-term environments; CBDCs have the potential to transform global payments, enhancing efficiency; and, hedging against rising funding costs and potential dollar liquidity crises can be achieved with safe-haven assets such as gold and short-duration bonds. Therefore, these factors should guide strategic investment planning in the evolving financial landscape. Stablecoins are not yet positioned to fully replace the Eurodollar market but represent an increasingly significant complementary force with disruptive potential. Their advantages in settlement speed, accessibility and transparency make them attractive alternatives, particularly in regions with limited traditional banking access. However, the question facing global financial markets is not whether stablecoins will matter but how significantly they will reshape dollar-based finance. For the US, this presents both opportunity and challenge since there exists a limited window to develop regulatory frameworks that protect national interests whilst enabling responsible innovation. The parallels to the early Eurodollar era are striking. Just as offshore dollar markets eventually transformed global finance beyond their initial expectations, stablecoins could fundamentally alter how dollar-denominated value moves worldwide. Whether they ultimately complement or disrupt the traditional Eurodollar system depends largely on regulatory approaches, institutional adoption and technological development in the coming years. Therefore understanding these parallel systems and their potential convergence or collision has become essential for investors, policymakers and financial institutions navigating an increasingly complex global monetary landscape. With proper regulation and integration, stablecoins could enhance rather than undermine the dollar's global position, but achieving this balance requires thoughtful, forward-looking policy approaches that acknowledge both the opportunities and risks these technologies present.
This article first appeared in Digital Bytes (20th of May, 2025), a weekly newsletter by Jonny Fry of Team Blockchain.