The fiscal frontline of dollarisation

The International Monetary Fund argues that tokenisation represents a structural transformation of the global financial system rather than simply a more efficient way of recording assets. For governments, banks and financial institutions, the challenge is no longer whether tokenisation may be adopted but how to modernise legal frameworks, settlement infrastructure and regulation before digital finance outpaces public policy. However, arguably a more insidious and structurally devastating consequence of agentic US dollar adoption lies in its impact on national debt markets. As agentic US dollar-stablecoins fully backed by US Treasuries and compliant with the anticipated GENIUS Act, gains legal tender status and widespread acceptance, US dollar-stablecoins may not merely displace local currencies in transactions - US dollar-stablecoins may actively drain the liquidity pools that sovereign states rely upon to finance their debt.

SWIFT - the US dollar dominates: it accounts for a massive 59.10% of all global payments

Source:X

For the United Kingdom, the ability to issue debt in its own currency (pound sterling) to a largely captive domestic audience has been a cornerstone of fiscal stability. This arrangement allows the government to manage deficits, fund public services and respond to economic crises with a degree of autonomy. However, the advent of agentic US dollar threatens to dismantle this architecture. By offering a digital, programmable alternative, backed by the highly liquid preeminent safe-haven asset (US Treasuries), agentic US dollar creates a compelling incentive for domestic capital to flee local bond markets, thus potentially creating a “sovereign debt trap”. This could lead to saving in the UK being placed into agentic US dollar, crowding out local UK based debt issuance, resulting a higher interest rates and the profound fiscal sustainability crisis in the UK. Understanding this dynamic is crucial for state treasuries as it represents a direct threat to national solvency and economic sovereignty. To understand the threat posed by agentic US dollar to national debt markets, one must first examine the traditional mechanics of sovereign borrowing and how agentic US dollar disrupts them.

The traditional sovereign borrowing model

In a conventional fiat system, a government such as the UK finances its deficit by issuing bonds/bills (Gilts). The primary buyers of these bonds are domestic financial institutions (banks, pension funds, insurance companies) and, to a lesser extent, foreign investors. This domestic buyer base is often described as “captive” because regulatory requirements, liability matching needs and a general preference for domestic assets compel these institutions to hold significant quantities of government debt. Furthermore, the Bank of England plays a crucial role in this ecosystem. Through open market operations and quantitative easing, the Bank of England can influence interest rates and ensure sufficient liquidity in the Gilt market - effectively acting as a buyer of last resort and keeping borrowing costs manageable for the UK economy.

The agentic US dollar disruption

Agentic US dollar disrupts this model by introducing a superior, highly accessible alternative for both transactional liquidity and savings. As we see growing adoption of AI-powered agentic US dollar further fuelled by US dollar stablecoins achieving legal tender status a significant portion of domestic capital could well migrate away from the local currencies in various jurisdictions including UK and the EU. This migration occurs through several channels:

• corporate treasury shifts - multinational and large domestic corporations hold their operational cash and reserves in agentic US dollar to reduce counterparty risk of fractional banking and seek to hold assets backed by short-dated US Treasuries coupled with the efficiency of 24/7 settlement. This reduces the pool of corporate deposits in domestic commercial banks which, in turn, reduces the banks’ capacity to purchase government bonds. However, currently many corporations do hold pools of capital in the denomination of the countries that they do business in.
• institutional reallocation - as agentic US dollar becomes a dominant medium of exchange and a recognised safe asset, institutional investors (pension funds, asset managers) may reallocate portions of their portfolios away from local government bonds towards agentic US dollar holdings.
• retail savings flight - whilst initially driven by institutional and corporate actors, the yield-bearing nature of agentic US dollar may eventually attract retail savings. Individuals seeking protection from local inflation or simply higher returns may convert their domestic deposits into agentic US dollar, further draining the domestic banking system of the deposits that ultimately fund sovereign debt purchases.

The net result is a structural drain of liquidity from the domestic financial system into the US Treasury-backed agentic US dollar ecosystem. The “captive” buyer base for local government debt shrinks, fundamentally altering the supply-demand dynamics of the sovereign bond market. In other jurisdictions the impact of agentic US dollar will potentially depend on the existing ownership structure of each country’s debt market. However, the agentic US dollar will clearly need to address risks operational risks, cyber risk, the issuer governance, redemption risk, legal risk and any regulatory risks.

The “crowding out” effect and rising borrowing costs

As liquidity drains into agentic US dollar, the immediate consequence for the sovereign state is a pronounced “crowding out” effect in its own debt markets. This phenomenon, traditionally associated with excessive government borrowing crowding out private investment, is inverted: the superior appeal of a foreign-backed digital asset crowds out the government’s ability to borrow in its own currency. Notably, the erosion of the domestic buyer base is the primary driver of this crowding out. When commercial banks, pension funds and corporations reduce their holdings of local government bonds in favour of agentic US dollar, the state must find new buyers to finance its ongoing deficits and roll over existing debt. In the absence of a robust domestic bid, the government becomes increasingly reliant on foreign investors. However, foreign investors demand a premium to hold debt denominated in a currency that is losing its domestic dominance and utility. They may require higher yields to compensate for the perceived increase in currency risk and the declining liquidity of the local bond market.

The fundamental law of supply and demand dictates that, as the demand for local government bonds falls (due to the preference for agentic US dollar), the price of those bonds may drop and their yields may rise. Hence, the state may be forced to offer increasingly higher interest rates to attract buyers for its debt. This escalation in borrowing costs is not a temporary fluctuation but a structural shift. The yield on local government bonds must rise to a level where it becomes competitive with the agentic US dollar, plus a premium for the inherent risks of holding a depreciating and less utilised local currency. For a highly indebted nations, even a moderate increase in borrowing costs can have devastating fiscal consequences. The cost of servicing the national debt consumes an ever-larger portion of government revenue, leaving less fiscal space for essential public services, infrastructure investment and social welfare programs.

The sovereign debt trap and fiscal crisis

The combination of a shrinking buyer base and rising borrowing costs culminates in a severe fiscal sustainability crisis. This crisis is characterised by a vicious cycle that further undermines the state’s economic sovereignty; as borrowing costs rise, the government’s debt service burden increases. To meet these higher interest payments without drastically cutting public spending or raising taxes (both of which are politically difficult and economically contractionary), the government may be forced to borrow even more. This increased issuance of debt into a market with diminishing demand further drives up yields whereby creating a self-reinforcing spiral of deteriorating debt dynamics. In a traditional crisis, the central bank might intervene by purchasing government bonds (quantitative easing) to suppress yields and ensure market functioning. However, in a highly dollarised economy dominated by agentic US dollar, this tool loses its efficacy. If the central bank attempts to monetise the debt by creating more local currency to buy bonds, it risks accelerating the flight to agentic US dollar. Moreover, economic agents, anticipating inflation and further depreciation of the local currency, may more rapidly convert their holdings into the stable, US-backed alternative. The central bank’s intervention, rather than stabilising the situation, exacerbates the currency substitution and deepens the crisis.

Ultimately, the sovereign debt trap leads to a profound loss of fiscal autonomy. When a state can no longer finance its operations affordably in its own currency, its policy choices become severely constrained. It becomes beholden to the demands of international bond markets and the monetary policy decisions of the US Federal Reserve (which dictates the yield on the US Treasuries backing agentic US dollar). Countries outside the US may be forced to implement harsh austerity measures, sell off state assets or seek external bailouts, therefore effectively ceding control over its economic destiny. This is the essence of the “economic vassalage”, a condition where a nation’s fiscal policy is dictated not by its elected representatives but by the structural realities of a dollarised digital economy. However, some economists will no doubt argue that that central banks have a range of other ways tools to influence their economies, including:

• reserve requirements
• macroprudential regulation
• liquidity facilities
• foreign exchange intervention
• capital flow management (in some jurisdictions)

The concern is these tools could be insufficient against the structural forces unleashed by agentic USD adoption.

The strategic imperative for state treasuries

As reported by the German Institute for International Security Affairs: “The European Union’s primary worry regarding “US dollarization” revolves around monetary sovereignty and financial coercion.” For institutions such as His Majesty’s Treasury, recognising the mechanics of this sovereign debt trap is the first step toward formulating a defence as the traditional playbook of fiscal management could prove to be insufficient in the face of the agentic US dollar. Non-US Treasuries must fundamentally re-evaluate their debt issuance strategies - relying on a captive domestic audience is no longer a viable long-term plan. They must explore ways to make local debt more attractive, potentially by linking yields to inflation or GDP growth, although these measures come with their own risks and costs. More radically, treasuries may need to consider issuing debt directly in agentic US dollar or creating new classes of digital sovereign bonds that offer features competitive with stablecoins, such as programmability and instant settlement. However, issuing debt in a foreign-controlled currency (even a digital one) carries significant exchange rate and sovereignty risks. The reality is that defensive measures alone may not suffice. To escape the sovereign debt trap, nations must offer a structural alternative to agentic US dollar that preserves their ability to finance themselves whilst meeting the market’s demand for digital, yield-bearing and secure assets. This necessitates a paradigm shift in how sovereign value is conceptualised and monetised. If the traditional model of fiat currency backed by fractional reserves and future tax revenues is failing, states must look to their tangible assets. This points toward the necessity of a “double-backed” solution-a sovereign digital instrument that combines the stability of a US dollar peg with the tangible backing of tokenised national property. This concept, which may be explored in detail in the final article of this series, represents the only viable path to reclaiming fiscal autonomy in the age of agentic US dollar.

The cost of inaction

AI-powered, programmable, Treasury-backed digital dollars could increase the velocity and scale of cross-border capital flows whereby making sovereign debt markets more sensitive to changes in investor preferences than they have been historically. Unlike Eurodollars, offshore dollar deposits, money market funds or Treasury ETFs, agentic USD combines self-custody, programmability, 24/7 settlement and AI-native functionality within a single digital asset. It is designed not only to store value but also to enable autonomous machine-to-machine commerce, so allowing AI agents to hold, transfer and deploy capital without relying on traditional banking infrastructure. For state treasuries, the failure to anticipate and mitigate this sovereign debt trap may result in a catastrophic loss of fiscal autonomy. The ability to fund public services, manage economic shocks and maintain national sovereignty may be severely compromised as the state becomes increasingly reliant on, and vulnerable to, a US-controlled digital monetary ecosystem. The time for theoretical debate has passed; the strategic imperative now is to develop robust, structural alternatives that can compete in the new digital reality and preserve the financial independence of the nation state.

London Digital Escrow has developed a mathematical framework detailing the potential impact an agentic US dollar could have on draining capital liquidity in the UK. The UK risks a quiet erosion of monetary sovereignty: capital could drain from domestic markets at scale, potentially £500-700bn within two years, as businesses and savers favour a superior, yield-bearing digital dollar. The consequences extend beyond liquidity with diminished local credit creation (particularly for SMEs), gradual gilt yield pressure and a creeping loss of control over the monetary transmission mechanism. Whilst not triggering an immediate crisis, this shift threatens to rewire the financial plumbing of the economy, favouring those with seamless access to dollar-based rails and at the same time marginalising sterling-denominated activity. Policymakers must confront whether Britain can retain a viable national currency in an era of programmable global money. The choice before policymakers is stark: act now to develop structural alternatives, or risk ceding monetary and fiscal sovereignty to a US-controlled digital monetary system.

In article 5 of the Agentic US dollar we will focus on the concept of a double backed stablecoin. As AI agents begin choosing how money is stored and transferred, the future of monetary sovereignty may depend less on issuing digital currencies than on issuing digital assets people and machines want to hold. This article proposes a sovereign double-backed US dollar stablecoin. Collateralised by both US Treasuries and tokenised real estate.

This article first appeared in Digital Bytes (7st of July, 2026), a weekly newsletter by Jonny Fry of Team Blockchain.