Stablecoins and Tokenized Payments: How the US Dollar Stays Dominant in the Digital Era

Every tokenized asset trade has two legs: the asset leg and the cash leg. When BlackRock’s BUIDL investor redeems their tokens, they receive USDC — a digital dollar that settles in seconds, 24 hours a day, 7 days a week. When JPMorgan’s corporate treasury clients use Kinexys to settle intraday payments, they use JPM Coin — a tokenized bank deposit representing a dollar liability of JPMorgan Chase. When a DeFi protocol distributes yield to liquidity providers, it typically distributes USDC, USDT, or DAI.

Without stablecoins, the tokenized asset economy cannot function at real-time speed. Traditional US dollar bank transfers settle through the Fedwire system on business days between 9 AM and 6 PM Eastern — a settlement window that is incompatible with the T+0, 24/7 promise of tokenized finance. Stablecoins provide the always-on, programmable dollar that fills the gap between traditional bank settlement infrastructure and the continuous, borderless requirements of tokenized asset markets.

The legislative question — who can issue stablecoins, under what reserve requirements, and with what regulatory oversight — is not merely a financial regulation debate. It is a decision that will determine whether the United States maintains dollar hegemony in the tokenized global economy or cedes digital payment infrastructure to other currencies and jurisdictions. The stakes are that high, and the political debate reflects it.

Why Stablecoins Are the Cash Leg of Every Tokenized Transaction

The mechanics of stablecoin settlement deserve careful examination, because the technology’s function as financial infrastructure is often obscured by the speculative framing that dominates public discourse about crypto assets.

A stablecoin is a blockchain-based token designed to maintain a 1:1 peg to a reference asset — typically the US dollar. The peg is maintained through reserve backing: for every USDC in circulation, Circle holds one dollar’s worth of US Treasury bills and cash in segregated accounts at regulated financial institutions. The stablecoin token is the blockchain representation of that reserved dollar; redeeming the token destroys it and releases the underlying cash.

The functional superiority of stablecoins over traditional bank transfers for tokenized asset settlement derives from three characteristics:

Programmability. A stablecoin can be sent to a smart contract address, held in escrow pending on-chain conditions, distributed automatically to multiple recipients simultaneously, and integrated into complex multi-step transaction flows — all without human intervention. When BUIDL’s smart contract distributes daily yield to token holders, it sends USDC proportionally to every holder’s address in a single on-chain transaction. Replicating this with traditional bank transfers would require a fund administrator to generate thousands of individual wire instructions, submit them to the bank, and wait for each to settle through the Fedwire system during business hours.

Settlement finality. A USDC transfer on the Ethereum blockchain achieves irreversible settlement in approximately 12 seconds (one block, with high confidence after 12 confirmations — roughly 2.5 minutes). A Fedwire transfer achieves finality at the time of the transaction, but operates only during business hours. An ACH transfer takes 1-3 business days. For tokenized asset transactions that settle “T+0,” the cash leg must also settle at T+0 — which only stablecoins (or bank-issued digital currencies on fast rails like Kinexys) can currently achieve.

Global accessibility. A USDC transaction can be initiated from any jurisdiction, at any time, by any party with an Ethereum address and a wallet. The recipient does not need a US bank account — they need a blockchain wallet. For institutional DeFi protocols, hedge funds in Cayman Islands, sovereign wealth funds in Singapore, and asset managers in the UAE, the ability to receive USDC without maintaining a US correspondent banking relationship is a meaningful operational improvement over traditional cross-border dollar payments.

USDC: The Institutional Standard

Circle Internet Financial’s USDC has emerged as the institutional standard for on-chain dollar settlement — a position built through consistent regulatory compliance, transparent reserve management, and strategic integration with the institutional tokenization ecosystem.

USDC was launched in September 2018 as a joint venture between Circle and Coinbase, spun into Circle’s exclusive custody in 2023. Unlike Tether’s historically opaque reserve management, Circle has maintained monthly attestation reports from Deloitte documenting the full composition of USDC reserves: 100% held in US Treasury bills and cash at BlackRock’s institutional money market funds and regulated US banks. The BlackRock connection is not incidental — it is a strategic partnership that integrates the world’s largest asset manager into USDC’s reserve infrastructure, providing a level of institutional credibility that independently managed stablecoin reserves cannot match.

USDC’s $45B+ circulation as of early 2026 represents a composition of use cases that differ significantly from Tether’s primarily crypto-trading use base. USDC is the preferred settlement currency for:

Institutional DeFi. Aave’s institutional pools, Compound’s treasury, Maker’s DAI backing — the largest DeFi protocols by TVL use USDC as their primary stable asset. Institutional participants prefer USDC over USDT because Circle’s regulatory positioning and reserve transparency provide clearer compliance treatment for investment managers subject to fiduciary standards.

Tokenized asset settlement. BUIDL redemptions in USDC. Franklin Templeton FOBXX distributions in USDC. Ondo Finance OUSG-to-USDC conversions. The integration of USDC into every major tokenized Treasury fund’s liquidity architecture has created a self-reinforcing standard: institutional investors expect USDC liquidity in tokenized products, so issuers integrate USDC, which deepens USDC’s institutional legitimacy.

Cross-border payments at institutional scale. Coinbase’s institutional payment services, Circle’s Business Account product, and direct blockchain settlement for international transactions use USDC as the settlement medium. For multinational corporations with cross-border payment needs in emerging markets where correspondent banking is slow and expensive, USDC offers faster settlement at lower cost.

Circle filed for IPO in early 2024 and has been navigating the offering process — a public market listing would provide a price reference for the institutional USDC ecosystem and give institutional investors a public equity exposure to stablecoin infrastructure.

USDT: The Volume Leader with Regulatory Risk

No analysis of stablecoins can ignore Tether’s USDT — the $140 billion stablecoin that dominates total circulation with approximately 64% market share. USDT processes higher daily trading volume than USDC across global crypto exchanges, and its penetration in emerging market economies — where dollar access through traditional banking is limited — is genuinely remarkable. In Turkey, Argentina, and Vietnam, USDT functions as an accessible dollar savings vehicle for populations with legitimate needs to hold dollar-denominated assets without US bank accounts.

But Tether’s regulatory positioning is the defining risk for institutional tokenization practitioners to understand. Tether is regulated in El Salvador and by the British Virgin Islands Financial Services Commission — not by any US financial regulator. Tether’s reserves have historically included commercial paper, secured loans, and other assets that would not satisfy a strict cash-equivalent reserve requirement. While Tether’s more recent attestation reports show an improved reserve composition (higher US Treasury holdings), the attestations are not audits, and Tether has resisted full audit from a major accounting firm.

Under the proposed GENIUS Act reserve requirements — 1:1 backing in cash, insured deposits, or short-duration US Treasury bills, with monthly attestation from a qualified auditor — Tether’s current structure would require significant modification. Tether has publicly indicated it is evaluating a US-compliant structure but has not committed to a specific pathway. If GENIUS Act passes in 2026 with strict reserve requirements, Tether faces a binary choice: restructure to comply (including moving reserves to US-qualifying assets and accepting US regulatory oversight) or exit the US market.

The implications for the stablecoin market if Tether exits the US market are substantial. $140 billion in USDT would need to either be converted to compliant stablecoins (primarily USDC, driving USDC’s circulation to $180B+ overnight) or exit the dollar stablecoin ecosystem entirely. Given that most USDT use is in offshore crypto trading rather than US institutional tokenization, the institutional market impact would be limited — but the crypto market impact of a forced USDT restructuring would be significant.

Bank-Issued Stablecoins: The Fed’s Preferred Future

The Federal Reserve has been circumspect about its preferred form of digital dollar infrastructure — but its communications are consistent in one respect: the Fed prefers bank-issued digital money over non-bank stablecoins. This preference reflects the Fed’s institutional interest in maintaining the primacy of bank deposits in the monetary system and its concern that non-bank stablecoins represent a form of money creation outside the regulated banking system.

JPMorgan’s Kinexys Coin (formerly JPM Coin) is the most advanced implementation of the Fed’s preferred model. As a tokenized bank deposit — a liability of JPMorgan Chase, not an independently issued stablecoin — JPM Coin holders have the same credit exposure as JPMorgan deposit holders, regulated under the same federal banking framework that applies to all JPMorgan liabilities. For institutional users, this legal structure eliminates the counterparty risk question that non-bank stablecoin issuers require.

JPM Coin/Kinexys processes an estimated $10 billion or more in daily wholesale transactions — intraday repo, corporate treasury operations, and cross-border institutional payments. Unlike USDC, which is publicly issued and can be held by any Ethereum wallet holder, JPM Coin is exclusively a wholesale B2B product. It is not available to retail investors or even most corporate accounts — it requires an institutional relationship with JPMorgan and onboarding to the Kinexys platform.

Citi Token Services represents a similar model: tokenized bank deposits on a private blockchain, used for cross-border institutional payments. Bank of America and Wells Fargo have not yet launched comparable products but have publicly indicated they are in development.

The Fed’s position on a potential central bank digital currency (CBDC) remains cautious. The Federal Reserve Board has indicated it would not issue a CBDC without express Congressional authorization, and the political appetite for a retail CBDC has diminished substantially in the current Congress. A wholesale CBDC — a digital dollar issued by the Fed for use in interbank settlement — is a longer-term possibility that would complement rather than replace stablecoins and bank-issued digital money in the institutional tokenization ecosystem.

The GENIUS Act: What Legislation Would Actually Change

The Guiding and Establishing National Innovation for US Stablecoins Act (GENIUS Act) is the most consequential stablecoin legislation in US history — and it has advanced further than any previous attempt. Passed by the Senate Banking Committee on a bipartisan vote, the GENIUS Act would establish the first federal regulatory framework for “payment stablecoins” in the United States.

The GENIUS Act’s core provisions:

Definition of “payment stablecoin.” A digital asset that is issued to maintain a fixed monetary value, denominated in US dollars, and redeemable on demand. This definition encompasses USDC and USDT but likely excludes algorithmic stablecoins like the defunct TerraUSD, which maintained its peg through algorithmic mechanisms rather than reserve backing.

Permissible issuers. Under GENIUS Act, payment stablecoins can be issued by: (1) Insured depository institutions (banks with FDIC insurance) of any size; (2) Non-bank entities that obtain a new “payment stablecoin issuer” license from the OCC; (3) State-chartered entities under state stablecoin frameworks (with federal preemption for issuers above $10 billion in circulation).

Reserve requirements. 1:1 backing in cash, US Treasury bills with maturity of 90 days or less, or deposits at insured depository institutions. No commercial paper, no secured loans, no equities. This reserve requirement would require USDT to divest its historically broader reserve portfolio.

Monthly attestation. Large issuers (over $50B circulation) must engage a registered public accounting firm for monthly reserve attestation. This provision directly targets Tether’s resistance to full third-party audit.

Redemption rights. Payment stablecoin holders must be able to redeem at par within one business day. This requirement ensures that stablecoins function as genuine money substitutes rather than investment instruments.

The STABLE Act (Stablecoin Transparency and Accountability for Better Ledger Economy Act), the House companion bill, takes a stricter approach than GENIUS: it would require all stablecoin issuers with more than $10 billion in circulation to obtain a federal bank charter — a requirement that would effectively limit large stablecoin issuance to regulated banks. The practical difference between GENIUS and STABLE for Circle is significant: under GENIUS, Circle can obtain an OCC non-bank issuer license; under STABLE, Circle would need to become a bank. House-Senate conference committee negotiations on reconciling these differences are expected to be contentious.

The Dollar Dominance Stakes

The monetary policy implications of stablecoin legislation extend far beyond the immediate regulatory treatment of Circle and Tether. The US dollar’s reserve currency status — which enables the US to borrow cheaply, impose financial sanctions effectively, and influence global financial conditions — derives partly from the dollar’s dominant role in international trade and investment. In the tokenized global economy, that role will be determined in part by whether dollar-denominated digital money maintains its share of the stablecoin market.

The current arithmetic is favorable: 98%+ of all stablecoins are dollar-denominated. The euro stablecoin market (EURS, EURT) is a rounding error. Yen stablecoins are nascent. There is no significant CNY stablecoin in global circulation. This dollar dominance in digital money is the digital equivalent of the petrodollar: the global standard not because any treaty requires it, but because the dollar’s liquidity, its institutional infrastructure, and its historical role as the world’s reserve currency make it the natural medium for global settlement.

The risk to this dominance comes from over-regulation rather than under-regulation. If the US GENIUS Act passes with provisions so restrictive that major stablecoin issuers choose to incorporate offshore — or if the compliance burden is so heavy that non-US stablecoin frameworks become more attractive — global stablecoin issuance could migrate to jurisdictions with more accommodating frameworks: Dubai, Singapore, the UK, Hong Kong. Any migration of stablecoin issuance offshore reduces the Fed’s visibility into global dollar liquidity and reduces the US government’s ability to enforce financial sanctions through the stablecoin system.

The Treasury Department, the Fed, and the OCC have all communicated awareness of this risk in congressional testimony. The policy consensus, across administrations, is that some stablecoin regulation is necessary to protect consumers and maintain financial stability — but that the regulation must not be so burdensome as to drive the dollar-stablecoin market offshore. Whether the GENIUS Act achieves this balance will be determinable only after it takes effect and the market’s response is visible.

What Stablecoin Legislation Means for Tokenized Asset Markets

For institutional practitioners in the tokenized asset space, stablecoin legislation is not an abstract policy question — it is a direct input into operational planning. Specifically:

USDC’s path to institutional dominance will accelerate if GENIUS passes. A federal regulatory framework that USDC satisfies and USDT does not will drive institutional migration from USDT to USDC for any US-nexus transaction. This migration is already occurring — the share of tokenized asset transactions settled in USDC vs. USDT has shifted toward USDC over the past two years, and federal regulatory clarity will accelerate the trend.

Bank-issued digital money will expand. Post-SAB 121 reversal and post-GENIUS Act passage, major banks will have both the regulatory clarity and the economic incentive to launch their own tokenized deposit products. JPMorgan’s Kinexys model will be replicated by Bank of America, Wells Fargo, and others. Institutional tokenized asset markets will have multiple competing “settlement currency” options — USDC, bank-issued stablecoins, and eventually a Fed wholesale CBDC.

DeFi protocols will face a compliance fork. If GENIUS Act defines payment stablecoins and regulates their issuers, DeFi protocols that integrate regulated stablecoins (USDC, bank-issued) will need compliance systems that verify they are not facilitating unregistered securities transactions. This is not prohibitive — Aave Arc already has a KYC-permissioned pool — but it will accelerate the bifurcation of DeFi into a compliant institutional layer and a non-compliant retail/anonymous layer.

The stablecoin regulation debate will resolve in 2026 or 2027. When it does, the outcomes will be concrete: a defined list of permissible stablecoin issuers, a reserve standard that all dollar stablecoins must meet, and a legal framework that institutional treasury departments, compliance functions, and investment committees can rely on. That clarity — imperfect as the specific legislation will inevitably be — will unlock institutional tokenized asset adoption at a pace that the current ambiguous environment cannot support.

For the tokenized asset infrastructure that relies on stablecoin settlement, see our Wall Street tokenization analysis. For BlackRock BUIDL’s USDC redemption mechanism, see our BUIDL deep dive. For the DeFi protocols where stablecoins serve as the primary liquidity currency, see our TradFi-DeFi convergence analysis.

External authority references: Federal Reserve — Stablecoins: Growth Potential and Impact on Banking and US Treasury — The Future of Money and Payments.

Donovan Vanderbilt is the founder of The Vanderbilt Portfolio, an independent intelligence network covering institutional finance and digital asset markets. This analysis is for informational purposes only and does not constitute investment advice.