For years, the prevailing assumption among policymakers and market observers was that central bank digital currencies (CBDCs), especially China’s digital yuan (e-CNY), would struggle to gain traction. Slow adoption, limited use cases, and public skepticism were expected to constrain their impact. New data from China, however, tell a different story.

Five years after its first pilot, the e-CNY remains the world’s largest live central bank digital currency experiment. By the end of November 2025, it had processed more than 3.4 billion transactions worth roughly 16.7 trillion renminbi (about $2.3 trillion). That represents a more than 800 percent increase from 2023, according to new data released by the People’s Bank of China (PBOC) at the end of December.

But this wasn’t the only news out of Beijing around the turn of the year. On January 1, a new management and measurement framework for the e-CNY took effect. Officials framed the adoption of this framework as a shift from the pursuit of “digital cash” toward deeper integration with the regulated financial system. Combined with China’s continued investment in wholesale CBDC infrastructure, most notably Project mBridge, these changes signal a more mature phase for the digital yuan. The question is no longer whether China wants a CBDC but what economic role Beijing expects the e-CNY to play at home and abroad—and how the e-CNY fits into a financial landscape increasingly shaped by stablecoins, cryptocurrency, a rise in gold holdings, and geopolitical tension.

What the e-CNY is—and what China wants to do with it

The digital yuan is often mischaracterized as a state-run competitor to private payment platforms such as Alipay or WeChat Pay. In practice, it serves a different function. The e-CNY is sovereign digital money: legal tender issued by the central bank, distributed through commercial banks, and designed to operate both online and offline. After five years of piloting, the e-CNY has not displaced private payment platforms; instead, it has been integrated selectively into public-sector payments, into government disbursements, and in controlled commercial settings. In many ways, the objective is not superior convenience but the preservation of a public digital money option as cash usage declines and private platforms dominate daily payments.

Institutional changes have also reinforced this shift. In October last year, PBOC Governor Pan Gongsheng announced the establishment of an E-CNY Operations and Management Center in Beijing to oversee the digital yuan’s systems and domestic infrastructure, complementing the Shanghai-based International Operations Center, which officially launched in September 2025 and is focused on cross-border use cases. Both centers fall under the jurisdiction of the PBOC’s Digital Currency Research Institute and are expected to operate in tandem—one focused on domestic system development and the other on international applications—to form what Pan described as a “two-winged” architecture supporting the digital yuan’s growth. Staff working on the e-CNY project grew from around forty to approximately three hundred in 2022, reflecting Beijing’s commitment to building robust operational capacity.

The proliferation of coordinating bodies signals a shift in priorities toward governance, supervision, and scale, but also toward a much broader geopolitical ambition. In his landmark June 2025 speech at the Lujiazui Forum, Pan placed the e-CNY within China’s vision for a “multipolar international monetary system,” arguing that such a system “can prompt sovereign currency issuers to strengthen policy constraints, enhance the resilience of [the] international monetary system, and more effectively safeguard global economic and financial stability.” Without naming the dollar explicitly, Pan warned that in times of geopolitical tension, “the global dominant currency tends to be instrumentalized or weaponized.” The e-CNY plays a key role in China’s ambitions on these fronts, especially for the internationalization of the renminbi and as a strategic counterweight to dollar hegemony.

In short, all these initiatives and messages show that China is getting the e-CNY ready for prime time.

From domestic aims . . .

At home, Beijing’s priority is adoption. This has been pursued primarily through incentives and the gradual integration of the e-CNY into public-sector and platform-based payment ecosystems. The digital yuan has been used for tax rebates, subsidies, medical insurance payments, and other public disbursements.

These applications allow the government to send money directly to specific recipients, track how it is spent in real time, and set rules on where it can be used. The same e-CNY features that improve efficiency, however, allow the state to have more visibility into transactions, raising persistent concerns about privacy and financial autonomy.

The most consequential shift is the introduction of interest-bearing features to the e-CNY. This moves the e-CNY beyond a pure payment instrument and closer to a savings-adjacent asset. By making the digital yuan interest-bearing, the PBOC clearly aims to make the CBDC more attractive and increase domestic adoption.

The move could be a game-changer. Other central banks have explored similar concepts on paper (the European Central Bank has discussed tiered remuneration for a potential digital euro, and Israel’s central bank has highlighted the importance of holding limits on user balances and of interest-rate tools). But China is the first major economy to operationalize such features at scale. An interest-bearing CBDC directly affects household saving behavior, bank funding, and monetary transmission, placing the digital yuan closer to the core of macro-financial policy.

The e-CNY may also serve as Beijing’s answer to stablecoins. While cryptocurrency trading and mining remain banned in mainland China, dollar-denominated stablecoins have emerged as an important source of liquidity and a growing tool for cross-border payments. But from China’s perspective, these instruments represent private digital monies operating outside direct state visibility. In many ways, the PBOC response has been to absorb the appealing functions of stablecoins, such as speed, programmability, real-time settlement within a sovereign, and a tightly regulated framework. Making the e-CNY interest-bearing may be a central part of this approach. It allows the digital yuan to compete not by mimicking crypto markets but by offering deposit-like features within the formal financial system. This is an interesting contrast to the debate currently playing out in Washington over whether stablecoins can be yield-bearing.

. . . to international ambitions

In 2025, China pursued an expansive strategy internationally, making the digital yuan one of the most prominent cross-border CBDC experiments to date. At the retail level, China is now testing the e-CNY in cross-border use in border regions and tourism-oriented economies such as Hong Kong, Macau, Laos, Thailand, Cambodia, and Singapore. Chinese tourists pay local merchants using e-CNY wallets issued by Chinese banks, with transactions executed through QR code. The PBOC has also experimented with limited foreign-user access, including pilot programs allowing foreign visitors to open capped e-CNY wallets in China and top them up using foreign bank cards.

At the wholesale level, China continues to develop Project mBridge, a cross-border payments platform designed to enable direct settlement between central bank digital currencies. Originally incubated under the Bank for International Settlements Innovation Hub, the project brings together the PBOC, the Hong Kong Monetary Authority, the Bank of Thailand, the Central Bank of the United Arab Emirates, and the Central Bank of Saudi Arabia. Early pilots led by the Bank for International Settlements (BIS) in 2022 processed just 164 transactions totaling roughly $22 million. In October 2024, the BIS stepped back from direct involvement, transferring governance fully to participating central banks.

Since then, activity on the platform has accelerated sharply. Under the partner central banks’ leadership, mBridge has processed more than four thousand cross-border transactions with a cumulative value of approximately $55.49 billion—representing a roughly 2,500-fold increase in transaction value since 2022. The digital yuan accounts for approximately 95.3 percent of total settlement volume. In November last year, the United Arab Emirates Ministry of Finance and the Dubai Department of Finance executed the first government financial transaction using the wholesale digital dirham on the mBridge platform. The transaction tested operational readiness and direct integration between government payment systems, settling funds without intermediaries. The pilot marked the formal launch phase of the United Arab Emirates’ wholesale CBDC and demonstrated mBridge’s viability for real-world public-sector payments. Looking ahead, mBridge is increasingly oriented toward trade settlement, particularly in energy and commodity-linked transactions, where China already plays a central commercial role.

Taken together, these developments point to a gradual expansion of the yuan’s internationalization through digital infrastructure. Rather than seeking to displace the dollar outright, China is building parallel settlement rails that reduce reliance on dollar-based systems. Project mBridge is unlikely to challenge dollar dominance directly, but it may incrementally erode it across specific corridors, sectors, and use cases.

What to watch in 2026

The PBOC’s priorities for the e-CNY in 2026 are likely to include deeper integration with the banking system, expanded use in trade settlement, and more direct competition with stablecoins by offering returns comparable to demand deposits. At the same time, Beijing is strengthening the institutional and technical foundations of the e-CNY as part of its broader goal of “steadily developing the digital [yuan]” under the country’s fifteenth five-year plan.

The e-CNY raises many of the same policy questions confronting other CBDC pilots, from privacy and oversight to technology and infrastructure. China stands out not for redefining these debates but for the speed at which it executed the e-CNY: few jurisdictions have moved as quickly or as comprehensively from experimentation to deployment, and if the PBOC continues at this pace, it is possible to see a full-scale launch this or next year. Given its scale, sophistication, and integration into national strategy, the digital yuan is likely to remain a central feature of China’s economy and of the global future of money debate for years to come.

Alisha Chhangani is the associate director for future of money at the Atlantic Council’s GeoEconomics Center.

Further reading

Central Bank Digital Currency Tracker

Our flagship Central Bank Digital Currency (CBDC) Tracker takes you inside the rapid evolution of money all over the world. The interactive database now tracks over 135 countries— triple the number of countries we first identified as being active in CBDC development in 2020.

The post What to watch as China prepares its digital yuan for prime time appeared first on Atlantic Council.

Executive summary

Financial-sector policymakers and financial service providers are facing both a real challenge and unique opportunity to drive economic inclusion for about three billion people and spur growth toward the Sustainable Development Goals (SDGs).

The good news from the World Bank’s Global Findex Database 2025 is that 79 percent of adults globally and 75 percent in low- and middle-income economies (LMIEs) now have a financial account of some kind. Mobile phones are even more ubiquitous, with 86 percent of adults globally and 84 percent in LMIEs having one, which in most contexts can be used to access financial services. This means about four out of every five people have the potential to save safely and borrow prudently to meet their financial needs and the potential to pay and be paid digitally. This is good news for the individuals, their families, and for these economies because, as the IMF has found,
financial inclusion serves as a catalyst for both economic participation and inclusive growth.

However, the majority of adults in LMIEs that have a financial account do not yet fully engage with the formal financial sector. Only 40 percent of adults in LMIEs (on average) saved formally and only 24 percent of adults in LMIEs (on average) borrowed from a formal financial service provider in the last year and even they do not necessarily have the type of credit they need.¹ There are, therefore, about three billion people who could actively engage in the formal financial sector, and they present both a challenge for financial sector leaders and an opportunity for accelerating inclusive growth.

The main reasons adults in LMIEs do not use formal digital financial services are affordability, lack of trust in service providers, and lack of products to meet their needs. Rapid advances in digital public infrastructure (DPI) and artificial intelligence (AI) have the potential to directly tackle these challenges. Together they can reduce costs, increase trust, and tailor products for individuals, thereby improving lives and driving growth:

• DPI has been endorsed by the Group of Twenty since India’s presidency in 2023.² Ninety-seven countries now have DPI-like digital payments; sixty-four countries have digital IDs, and 103 have data exchange—together reducing costs and increasing trust.³
• AI, by cheaply analyzing massive data sets, is turbocharging cost reduction and product tailoring, which translates into greater affordability and access for people on lower incomes.⁴

Yet, there are potentially problematic aspects to these exciting innovations. DPI has the potential for loss of data privacy (if privacy by design is not embedded), for rent extraction (if not an open-source platform), and for government surveillance (if DPI safeguards are not central).⁵ AI has the potential to turbocharge fraud, scams, and identity theft and compromise trust.⁶

Therefore, government financial-sector regulators and policymakers have urgent and important decisions to make about how to enact and enforce responsible guardrails in the financial ecosystem. These guardrails are essential so new customers have affordable, appropriate products, can trust their money and data are safe, and have effective recourse mechanisms if problems occur. National coordination at the highest level is essential, regional approaches including policy harmonization can be cost-effective, and urgency is imperative. Financial-service leaders also have key decisions to make about how to design affordable and responsible financial products that build trust, enable resilience, and foster financial well-being and economic growth. There is now a unique opportunity for financial-sector leaders to unleash economic potential for three billion people and accelerate inclusive growth.

Ruth Goodwin-Groen is a nonresident senior fellow with the Atlantic Council’s GeoEconomics Center. Goodwin-Groen brings thirty years of strategic and technical leadership in financial-sector development and financial inclusion in emerging markets to her current consulting practice, Goodwin-Groen Consulting. Her focus is on responsible digital financial inclusion and equality in financial services for women.

Goodwin-Groen is best known as the founding managing director of the United Nations-hosted Better Than Cash Alliance, which created a global movement from cash to responsible digital payments to achieve the Sustainable Development Goals. Alliance members and partners include over 113 governments, 229 companies, and most of the UN—accounting for over 90 percent of global gross domestic product.

Goodwin-Groen has a PhD in financial-sector development from the University of Bath, an MBA with distinction from Harvard Business School, and a Bachelor of Science with Honors from the University of Western Australia.

The author extends special thanks to those providing expert input on this paper: Isabelle Carboni, Expert Consultant; Eric Duflos, CGAP; Nicole Goldin, United Nations University-Centre for Policy Research & Atlantic Council; Leora Klapper, World Bank; David Porteous, Integral: Governance solutions; and Camilo Tellez-Merchan, Gates Foundation. She also deeply appreciates the input of Atlantic Council colleagues Josh Lipsky, Sophia Busch, and Juliet Lancey as well as those who contributed to the findings and recommendations of this report through their participation in two roundtable discussions at the Atlantic Council in April and October of 2025. See the Appendix for a list of the participants. This report was made possible in part by a grant from Tala.

New Atlanticist Oct 15, 2024

Advancing a twenty-first century approach to remittances

By Alisha Chhangani, Ananya Kumar

Valued at nearly $900 billion each year, global remittances have become a large portion of many nations’ gross domestic product. But transaction costs remain too high—a problem that policymakers should tackle at upcoming meetings in Washington and Rio de Janeiro.

Africa Americas

Issue Brief Sep 20, 2024

Toward a financial inclusion agenda for the global majority

By Nicole Goldin

Policymakers, investors, and innovators must advance a new financial inclusion agenda designed for the global majority.

Economy & Business Fiscal and Structural Reform

Issue Brief Nov 2, 2023

Asking the right questions: Can digital currency enable financial inclusion?

By Ananya Kumar

Cryptocurrencies and CBDCs have the potential to enhance financial inclusion. However, the lack of quantitative data makes it challenging to evaluate their impact. To assess their financial inclusion capacity, this paper builds a rubric for policymakers which includes layers of consideration.

Digital Currencies Economy & Business

At the intersection of economics, finance, and foreign policy, the GeoEconomics Center is a translation hub with the goal of helping shape a better global economic future.

Learn more

The post A three-billion-person challenge: The rising global market for financial leaders appeared first on Atlantic Council.

Crypto adoption is Venezuela’s response to US sanctions

In recent years, the United States has imposed sanctions on Venezuela in response to the Maduro government’s repression of opposition groups and “subversion of democracy.” Much of this US economic pressure has come since 2017, when the Trump administration issued a series of executive orders that it then expanded. In 2019, the United States enacted full blocking financial sanctions against PDVSA (the state-owned oil company Petróleos de Venezuela, S.A.) and the Central Bank of Venezuela. 

Venezuela’s oil sector was particularly exposed, given its complete reliance on PDVSA—a company already weakened by aging infrastructure and chronic underinvestment. This overreliance on PDVSA left both the energy sector and Venezuela’s broader financial system acutely vulnerable to financial sanctions.

This year, the Trump administration has increased economic pressure further, imposing a 25 percent tariff on buyers of Venezuelan oil in March. However, the Maduro government has not yielded to US economic pressure by ceding power. Instead, it has adopted sanctions evasion methods developed by China, Russia, Iran, and North Korea—a group for which my colleague Kimberly Donovan and I coined the term “Axis of Evasion” due to their shared tactics and cooperation in circumventing Western sanctions. 

Like Iran and Russia, Venezuela needed to receive oil payments from China outside the reach of Western financial oversight. Transacting with cryptocurrencies is one such evasion method, which North Korea, for example, has used in the past to launder the proceeds of cybercrime. Last year, Russia softened its restrictive stance on cryptocurrencies by allowing companies to use them in cross-border trade. Reports from this year indicate that Russia has been receiving oil payments from Chinese and Indian customers in Bitcoin and other cryptocurrencies, with transaction volumes reaching tens of millions of dollars. 

The Venezuelan government has spent several years experimenting with cryptocurrencies, most notably with the launch of the state-backed petro (PTR), which was launched in 2018 and collapsed in 2024. As US sanctions on Venezuela intensified in 2019 and the years since, the Maduro regime grew increasingly interested in leveraging digital assets to facilitate oil transactions—leading to US Department of Justice indictments against individuals brokering these deals. Over the past year, Caracas has turned to USDT, a dollar-pegged stablecoin issued by the offshore company Tether, as an alternative vehicle for international payments.

Tether has previously faced scrutiny over its alleged involvement in illicit finance and money laundering. Notably, Tether has also worked with the US Department of Justice in an investigation that led to the dismantling of the online infrastructure supporting Garantex, a sanctioned cryptocurrency exchange implicated in facilitating Russia sanctions evasion and money laundering by transnational criminal organizations. By 2024, Tether had also frozen forty-one wallets that were using USDT to evade sanctions on Venezuela’s oil. 

By the end of first quarter of 2024, PDVSA began requiring new clients to use digital wallets and make payments in USDT for spot oil deals. Subsequently, Venezuelan authorities enabled a limited number of banks and exchange houses to offer USDT to private companies, in exchange for bolívars. In July alone, an estimated $119 million in cryptocurrencies were sold to the private sector. This shift marked the growing use of cryptocurrencies, predominantly USDT, as a substitute for physical US dollars in domestic financial flows. While crypto still represents only a small share of total oil trade by value, it plays an outsized strategic role by offering sanctioned regimes a parallel payment channel outside traditional banking.

Sanctioned oil trade schemes between China and Venezuela

Similar to other “Axis of Evasion” countries, Venezuela transports oil to China via shadow fleet tankers—sometimes called “ghost ships”—employing at-sea evasion tactics such as turning off trackers during ship-to-ship transfers and rebranding the Venezuelan crude oil as Malaysian. By 2020, official Chinese imports of Venezuelan oil dropped to zero, while Malaysian oil imports surged to a sixteen-year high. 

Like Iran and Russia, most of Venezuela’s oil is refined by small independent Chinese refineries known as teapots, primarily located in Shandong province. Although China officially halted imports of Venezuelan crude after sanctions in 2019, China remains the primary destination for Venezuelan crude exports. In September, approximately 84 percent of Venezuela’s exported oil went there, either directly or indirectly. Thus, it is widely reported that Venezuelan oil goes to China, and that Venezuela ends up with USDT. What remains unknown—and needs investigation—is the payment chain that connects these two facts.

New Chinese investments in Venezuela’s oil sector

Venezuela has historically had investments from Chinese companies in its oil sector. While China National Petroleum Corporation halted operations in Venezuela in 2019 due to the risk of US secondary sanctions, reports from August indicate that the smaller China Concord Resources Corp (CCRC) is investing one billion dollars in two Venezuelan oil fields. In May 2024, CCRC signed a twenty-year shared production agreement, aiming to produce sixty thousand barrels per day by the end of 2026. Under this deal, lighter crude will be supplied to PDVSA, while heavier crude will be exported to China. 

This development carries two major implications. First, it challenges the strategic framework through which the United States has traditionally approached sanctions on Venezuela. Washington has long operated under the assumption that escalating sanctions on Venezuela’s oil sector would deter foreign companies from operating there due to the risk of secondary sanctions—and, until now, that assumption has largely held. A twenty-year production agreement with a smaller Chinese firm, however, suggests that Beijing may no longer be willing to adjust its trade and investment decisions in Venezuela according to US sanctions.

Second, if CCRC can indeed raise production to the stated levels and deliver half of the output to Venezuelan authorities, restricting the Maduro regime’s access to cryptocurrencies may become the only remaining lever to curb its oil revenues. That said, CCRC has no prior drilling experience, underscoring the need for caution and close monitoring of whether it can realistically meet its production targets.

What should the US do next

Recent reporting by Reuters and the New York Times indicates that sanctioned entities—including PDVSA—are now using crypto to receive oil payments. To ensure the Maduro regime is not using cryptocurrencies to undermine the Trump administration’s sanctions strategy, the US government, in coordination with partners and allies, should build out the intelligence picture regarding Venezuela’s use of stablecoins and other digital assets to evade sanctions. After identifying the key actors and wallets involved, the government can use targeted sanctions and law enforcement actions, consistent with past actions against Venezuelan oil-trade–related schemes. It should also share relevant information with private-sector partners, particularly stablecoin issuers and exchanges. The government should then request their cooperation on freezing wallets linked to sanctioned individuals, which issuers and exchanges have done before.

Understanding how to counter sanctions evasion through cryptocurrencies is critical—not only in the context of Venezuela, but for the overall integrity of US financial sanctions. Our Axis of Evasion research shows that sanctioned regimes often replicate one another’s tactics to bypass restrictions. With Russia’s oil giants Lukoil and Rosneft now under sanctions, Moscow is likely to adopt Venezuela’s approach of using stablecoins to facilitate oil payments from Chinese buyers. Developing a clear strategy for how US sanctions and law enforcement authorities address the use of dollar-pegged stablecoins and other cryptocurrencies is therefore essential. Doing so would not only disrupt Venezuela’s ongoing sanctions evasion efforts. It would also send a powerful signal to other heavily sanctioned countries that the United States will not tolerate the use of digital assets to undermine its sanctions regime. 

Maia Nikoladze is the associate director of the Economic Statecraft Initiative at the Atlantic Council’s GeoEconomics Center.

Energy Sanctions Dashboard

This dashboard focuses on US sanctions and restrictive measures placed on crude oil from Russia, Iran, and Venezuela—including the unintended consequences and the lessons learned.

The post How Venezuela uses crypto to sell oil—and what the US should do about it appeared first on Atlantic Council.

• Introduction
• Part 1: Identity in the United States
• Part 2: Existing digital IDs in Japan and the EU
• Part 3: Policy recommendations for the United States

Introduction

The proliferation of public and private services online has necessitated the creation of verifiable and usable digital IDs globally. These electronic, reusable, and portable representations of identity can not only improve convenience for those accessing services but also reduce cost, waste, and fraud, especially when applied in the provision of benefits by federal and state authorities. Importantly, if designed with intention, they can improve access and enhance the inclusion of those with limited or no access to traditional and analog identities. Digital IDs also can be imbued with technological capabilities that both reduce the burdens on government providers and citizens and the privacy harms, especially to personal data, and enhance the security of our data ecosystem.

Digital identity is often fraught with controversy however due to implications for the privacy of individuals, both in the United States and elsewhere. It can spur new risks of state surveillance and cyberattacks, and lead to the exclusion of social groups. These harms are indeed serious and require clear governance standards for the responsible deployment of digital identity, strong provisions to protect consumer rights, and mechanisms to redress violations.

To that end, our paper is divided into three sections. In part 1, we begin with the stakeholders responsible for identity use and credentialing in the United States, followed by an overview of the landscape of benefits provision and its pain points, leading to an overarching assessment of the United States and its use of digital ID in benefits provision currently. In part 2, we look at Japan and the European Union (EU), which are slightly ahead in both their deployment of digital identities and governance frameworks that aim to ultimately impact global standards for digital identity. Given the lessons for the rollout of digital identity in Japan, the EU, and our initial US assessment, in part 3, we provide four key policy recommendations for the responsible development of digital identities for benefits provision in the United States.

Part 1: Identity in the United States

Citizens in the United States usually have multiple identity documents, issued by both state and federal authorities for various purposes such as access to public services, tax identification, and travel. In 2005, Congress passed the REAL ID Act, requiring state-issued identity cards like driver’s licenses to adhere to a similar format and convey the same information.¹ Under this act, the Department of Homeland Security (DHS) was given federal authority to implement and enforce REAL IDs. In recent years, the DHS Transportation Security Administration (TSA), in partnership with states, has also introduced mobile driver’s licenses, which are verifiable at limited airports throughout the country.² Other forms of verifiable credentials, such as ID.me, can link multiple federal and state agencies, such as the Internal Revenue Service (IRS) and the Social Security Administration (SSA), with private companies (such as those that provide health insurance) through one form of identity. In parallel, Login.gov is an another secure single sign on service developed by the General Services Administration (GSA) that allow users to access multiple government services using a single account.

Further analysis of seventy-two unique programs and services delivered by thirty-five High Impact Service Providers (HISPs) show a multitude of additional login options that are being used. Most notably, thirty programs and services require an applicant to call or email the agency as the only option available to access benefits. These findings highlight how there are still outstanding challenges to adopting digital identity and the increased citizen burden associated with navigating a fragmented landscape of technology options.

US benefits provision and improper payments

Benefits to individuals are the largest federal expenditure for the US government. By category, they amounted to the following in 2024: Social Security ($1,454 billion), Medicare ($1,031 billion), Medicaid/Children’s Health Insurance Program/Other Medical Care ($810 billion), Veterans benefits ($319 billion); and other benefits ($634 billion) (for Temporary Assistance for Needy Families, or TANF; Supplementary Security Income, or SSI; housing assistance; child tax credit, etc.)³ The SSA administers Social Security and SSI as well as Medicare enrollment.⁴ The Centers for Medicare and Medicaid Services (under the Department of Health and Human Services) oversees Medicare and Medicaid reimbursements. HHS also distributes TANF block grants.⁵ The US Department of Agriculture (USDA) funds the Supplemental Nutrition Assistance Plan (SNAP) and free/reduced lunch; the Department of Housing and Urban Development (HUD) provides funding for housing assistance; and the Department of Labor is responsible for unemployment insurance (UI), workforce development programs, and employment-related benefits.

In 2022, one in three Americans were enrolled in at least one public assistance program. Social Security and Medicare each cover 20 percent of Americans, and Medicare is the largest benefits program by enrollment,⁶ followed by SNAP (11.7 percent), and free and reduced lunch (8.8 percent).⁷ Beneficiaries of Medicare, Social Security, and the Department of Veterans Affairs benefits program interface directly with the federal government in benefits disbursal and access, but other forms of public benefits are mostly administered at the state level. All agencies are required to utilize direct deposits to transmit federal funds. However, there is some limited use of checks across benefits disbursal. Payment Processing Centers calculate benefits and process payments, but actual disbursal is conducted by Treasury payment systems.⁸

In July 2024, the Office of the Inspector General of the Social Security Administration released a report citing $71.8 billion in improper payments between Fiscal Year 2015 and FY 2022. This figure is less than 1 percent of all the benefits payments made by the SSA.⁹ More broadly, a study by the Government Accountability Office (GAO) estimated losses of $162 billion in improper payments across sixty-eight programs in 2024.¹⁰ This has come down from pandemic-period highs of $281 billion.¹¹ Of the $162 billion in 2024, $85 billion were improper payments in Medicare and Medicaid.¹² While this reflects self-reported improper payments, the GAO also estimates that the government loses between $233 billion to $521 billion annually to fraud and improper payments.¹³ While recommendations from the GAO have primarily included enhancing existing reporting, data sharing, and analytics to prevent fraud and improper payments, we explore the status of digital identities in benefits provision in the United States below; later in the paper, we explore  lessons learned in other jurisdictions.

Using digital IDs for benefits in the United States

Login.gov (under the General Services Administration’s purview) is a government provided ID-verification service that allows approval of credentials across websites from various partner federal agencies. As of September  2024 (i.e., the end of FY 2024), Login.gov reported seventy-two million active users and 3.3 million identity-verified accounts at the Identity Assurance Level (two of three), or IAL2-level.¹⁴ Login.gov is used by over fifty agencies, most notably the VA and SSA. Enabling verification methods on a Login.gov account requires state-issued ID, a Social Security number (SSN), and a phone number. ID.me is a market-provided ID-verification service that is also used across various federal agencies in a similar capacity. In April 2025, ID.me had 145 million users, including seventy million IAL2‑verified individuals.¹⁵NIST provides the IAL as a guiding framework of digital identities in the United States. Both Login.gov and ID.me are considered to meet criteria for IAL2. The SSA accepts both Login.gov and ID.me as credentials for creating mySocial Security account. Through mySocial Security account, individuals can apply for benefits and manage their payments. While funded federally, Medicaid, TANF, SNAP, and housing assistance (among others) are administered at the state level and thus verification processes can differ substantially. ID.me’s single sign-on (SSO) service is used by Arizona as means of accessing a beneficiary’s AHCCCS (Arizona’s Medicaid provider) account. Similarly, various states allow the use of the ID.me-provided SSO to access unemployment insurance. This was a result of a boom in applicants during the COVID-19 pandemic. Use of the SSO service outside of housing benefits is very limited at the state level. Several states, such as Illinois, Colorado, and California, have centralized benefits under a common web portal.

Login.gov was widely implemented as a response to a 2017 federal mandate requiring agencies to implement an SSO platform for accessing an agency’s websites.¹⁶ While it has been widely adopted by federal agencies, there have been complaints and concerns about the service. While the IRS allows taxpayers to use ID.me to access services, it has not implemented Login.gov for services, citing Login.gov failure in meeting the IAL2 standard.¹⁷ The IRS uses the service at the IAL1 level, but recent data breaches continue to raise questions about the service’s security and reliability.

In a GAO investigation, nine of twenty-one participating agencies cited issues with Login.gov’s lack of fraud controls and visibility into authentications.¹⁸ Another twelve reported concerns over IAL2 noncompliance. The current director of GSA’s Technology Transformation Services has previously thrown his support behind Login.gov and hopes to “accelerate Login’s roadmap.”¹⁹

The above sections on the benefits provision, related fraud, waste, and abuse and the rollout of digitization lead to the following overarching assessment of the US model:

• The federal government is an important player in the identity issuance, credentialing, verification, and data-management system. However, it does so in partnership with private players, and both sectors face similar vulnerabilities and risks, especially related to personal data transfer, storage, and use.
• The identity landscape in the United States is highly fragmented across individual holders, issuers, and those that accept verifiable credentials. Multiple standards, both technological and regulatory, exist across states, agencies, and private issuers and verifiers of identities.
• A related lack of interoperability and the failure to recognize that individuals often interact with different layers of the identity ecosystem lead them to be the least able to bear and use their own identity.
• The costs of transition from analog to digital forms of identity are large but surmountable. They often do not include the frictions and delays associated with adoption by identity users and providers.
• Improper payments are the biggest challenge for benefits service providers in the United States. Therefore, ID improvements in the provision of benefits need to be designed with the purpose of reducing improper payments and substantively impacting waste, fraud, and abuse.
• The refinement of technology, including blockchain and privacy-enhancing technology (PET), presents new opportunities to create IDs that can be used across various functions and be linked to multiple verifiers. On the other hand, use of technology can also heighten the risk environment for identity holders and issuers and should be an important consideration when developing digital IDs.

The next section of this paper puts these assessments in context with the developments in the EU and Japan on digital identity.

Part 2: Existing digital IDs in Japan and the EU

Japan launched its digital identity platform, the My Number Card (MINC), in 2016. The MINC features an integrated circuit chip that stores personal information and simplifies interactions with government and financial institutions, supporting services like social insurance applications, tax filings, job assistance, and bank-account setup. Since its launch, around a hundred million cards have been issued. The Digital Agency, established in 2021, also oversees the implementation and regulation of digital transformation initiatives, including digital ID systems.²⁰ The cards themselves are issued by the Japan Agency for Local Authority Information Systems (which is jointly organized at the municipal and prefecture level).²¹

The European Digital Identity (EUDI) Wallet is a digital ID solution designed to enable EU citizens, residents, and businesses to securely identify themselves and verify personal information both online and offline. It builds on the foundation of the eIDAS (Electronic Identification, Authentication, and Trust Services) regulation.²² Developed by the European Commission, its main functions are cross-border recognition and harmonization. The European Commission is investing in four large-scale pilot projects to test and develop the wallet’s functionality.²³ These pilots involve approximately 360 entities, including private companies and public authorities from twenty-six member states and Norway, Iceland, and Ukraine.²⁴

Digital ID governance and implementation framework

Digital ID creation in both the EU and Japan follows a layer-based framework that consists of a highly centralized governance and implementation effort led by the federal authorities within the respective jurisdictions. The first layer is ID issuance by a government agency. The second layer is ID creation, governance, and implementation and comprises trust and verification intermediaries, such as providers of the personal ID, qualified electronic attestation of attributes, electronic seals, and other authentic sources. The third layer is entirely implementation based, consisting of “relying” on ID-accepting institutions, which are the private and public institutions that enable ID use. The fourth layer is made up of software and hardware. The final layer is made up of participants: In both cases below, these are individuals or small and medium enterprises holding digital IDs.

Outside this layer-based framework are the European Commission or Japan’s Digital Agency, respectively, along with supervisory and regulatory authorities, and various schemes for the governance of the trust layer.

Standards creation and gaps

EU’s eID framework is part of a larger packet of regulatory standard-setting action on data sovereignty and privacy. Japan is similarly aligned with its G7 presidency action plan for the free flow of data with trust and wider push for digitalization of services. Regulatory actions have emphasized privacy protection, data management and flow decisions, and ID harmonization/mobility/interoperability. Generally, across both jurisdictions, there is an emphasis on governance and assessment frameworks over technical standards on verification, privacy, and cybersecurity.

Additionally, the EU and Japan have established an MoU with each other for collaboration in exploring use cases and mutual recognition.²⁵

Identity theft-based benefits

Across the EU, identity-theft-specific benefits fraud statistics are limited, but individual member states have published figures that provide useful context. In Finland, the Social Insurance Institution (Kela) reported 1,104 suspected benefit fraud cases in 2024 totaling €7.15 million—about 0.43% of all benefits paid, down from 0.45% in 2023 and 0.79% in 2020.²⁶ While these figures cover all detected benefit fraud rather than identity-theft cases alone, Kela attributes part of the reduction to stronger digital verification, such as the national Incomes Register, which enables real-time income checks. Estonia, often cited as Europe’s digital identity pioneer, maintains low fraud rates through integrated verification across multiple government services. Although EU-wide identity-theft-specific data is not available, evidence from countries further along in the digital identity pathway, like Finland and Estonia, suggests that robust, integrated systems can help drive overall fraud down. The upcoming European Digital Identity (EUDI) wallet, set for implementation by 2026, could further standardize and strengthen verification measures across member states.

In Japan, fraudulent public assistance cases—including all forms from undeclared income to misrepresentation—account for less than 0.5% of total payouts.²⁷ No public data isolates identity-theft-driven cases, and Japan’s reporting on fraud statistics is generally limited. While the My Number digital identity system is fully deployed, there is no evidence to confirm a measurable decline in identity-theft-specific benefits fraud.²⁸ Digital identity systems can contribute to benefits fraud reduction, but effectiveness depends heavily on implementation quality, system integration, and supportive legal frameworks.

Use and expansion

The EU is still in the pilot phase. Meanwhile, 75 percent of the Japanese population (93.08 million citizens as of September 2024), has a My Number ID card.²⁹ This uptake is in line with the growth of other digital services provided by the Japan Agency and with growth in favorable attitudes toward digitalization in Japan. This agency conducts annual assessments and evaluations of the system, and communicates expansion plans along with new use cases (e.g., entertainment, most recently) and community management.

Policy goals

Both jurisdictions are attempting two tiers of policy goals. On the ID user and holder level, the policy goals are associated with reducing administrative burden and time, enabling efficiency and reducing cost. The second tier of goals has to do with national digitalization priorities, built on actions to realize economic benefits from better use and management of private data and public services. In addition to this, the EU has a goal of ID harmonization and portability across its member states, in line with its long-term policy goal of integration.  

Putting these learnings from the EU and Japan in context with the overarching assessments in Part 1 of the paper, the next section provides policy oriented recommendations for the development of digital IDs for benefits provision in the United States.

Part 3: Policy recommendations for the United States

Given the lessons from the rollout of digital identity in the EU and Japan (Part 2), and with the context of the current use of digital identities in benefits provision in the United States (Part 1), we conclude this paper with appropriate policy recommendations to responsibly prompt the next generation of digital IDs in the United States. These recommendations, calibrated with appropriate regulations to protect the personal data of US citizens and residents, can effectively resolve existing friction in the use of digital identities in the United States, and enable the creation of an innovative ecosystem of financial products, ultimately positively impacting the financial health of the public sector, corporations, and individuals.

Policy goal 1: Incentivize private sector in the identity governance and implementation framework by creating a technology sandbox

There is an important aspect of incentivization in digital identity that drives its uptake among users and holders and broader deployment across a range of functions. Jurisdictions like the EU, Japan, and emerging markets like India, have each given a central role in this to the public sector, making access to public services the main incentive to drive ID use. The US private-sector-driven innovation model and strong foundations of individual privacy offer an alternative governance model, which can now be provided through the maturation of privacy-enhancing technologies. A governance framework should build on strong foundations for privacy, data management, as well as reciprocity and portability in digital ID for holders. Importantly, we recommend the creation of a public-private sandbox that can incentivize private-sector participants to test out new technologies and create models that address existing gaps and new risks in the cyber domain. The purpose of this sandbox should be to inform future technological and governance standards needs, reduce pain points of improper payments, and maximize digital ID deployment in the United States.

Policy goal 2: Create innovative, federated technological models that combine benefits delivery and digital identity

What is clear in our assessment of the EU and Japan is their global standards-setting ambition, largely seen in governance frameworks. Moreover, through regulatory actions they have been able to mandate interoperability requirements and have embraced verifiable credentials based digital identity technologies to address coordination challenges. To help further the state of the art, the United States has an opportunity to develop models for a federated technology stack for benefits delivery that integrates digital identity and novel payment solutions for use by the government and the private sector alike . This requires investment in research and development, especially incorporating new technologies for decentralization in pilot projects. Emerging regulatory clarity in digital assets can also inform these pilot projects and explore the feasibility of using self-hosted wallets and payment stablecoins.

Policy goal 3: Minimize ID based threat vectors in benefits disbursement

Part 1 of this paper puts into perspective the role of improper payments in benefits disbursal in the US, as well as the highly fragmented verification process used by US agencies and their private sector partners. This enables scaling of phishing attacks and other scams, with innovation by fraudsters outpacing security in our public infrastructure and private sector services. Quantifying the problem is difficult due to a lack of transparency about fraud attack data, which undermines public trust in both government and private sector services. Put in context with the lessons from the EU area digital ID roll-outs, we see a clear need for robust and integrated system of verifications, used across agencies, for a variety of end purposes. These should be aimed at reducing the duplication of efforts, beginning at the verification stage, as well as the costs associated with detection. Furthermore, law enforcement agencies and public benefit service providers should engage periodically to assess the continuously evolving threat landscape and create information sharing strategies that can help provide early indicators to inform mitigation options.

Ananya Kumar is the deputy director, Future of Money, at the GeoEconomics Center.

The author would like to thank Sanith Wijesinghe and Alisha Chhangani for their research and support on this paper. 

This work was supported by the MITRE Independent Research & Development Program

Issue Brief Nov 2, 2023

Asking the right questions: Can digital currency enable financial inclusion?

By Ananya Kumar

Cryptocurrencies and CBDCs have the potential to enhance financial inclusion. However, the lack of quantitative data makes it challenging to evaluate their impact. To assess their financial inclusion capacity, this paper builds a rubric for policymakers which includes layers of consideration.

Digital Currencies Economy & Business

Report Jul 10, 2025

Exploring the global digital ID landscape

By Coley Felt, Will LaRivee

The worldwide adoption of digital identity systems varies significantly across regions and implementation approaches.

Africa Digital Policy

Issue Brief Oct 21, 2024

How digital public infrastructure can support financial inclusion

By Katherine Hadda and Anit Mukherjee

As digital transformation accelerates, Digital Public Infrastructure (DPI) is at the forefront of the global push for financial inclusion. This paper examines how DPI frameworks, particularly those pioneered in India, are bringing financial services to previously underserved populations.

Digital Policy Financial Regulation

At the intersection of economics, finance, and foreign policy, the GeoEconomics Center is a translation hub with the goal of helping shape a better global economic future.

Learn more

The post Trustworthy digital identities can set the standards for secure benefits provision in the US appeared first on Atlantic Council.

New entrants are reshaping the stablecoin ecosystem, which was long dominated by few issuers. Just last week, Wyoming launched its own stablecoin. Traditional financial firms are moving in, too. JPMorgan, for instance, recently launched JPMD, a token modeled on stablecoins, for institutional clients. E-commerce giants are experimenting as well: Walmart and Amazon are weighing launching their own stablecoins in an effort to broaden their use from purchases to savings and rewards. This echoes the development of the Starbucks app—which remains an impactful use-case for developing a closed loop payments platform and wallet. Financial players are choosing to partner with each other on new products, seeking to capture market share and work across different functions such as tokenized treasuries and money market funds. A stablecoin ecosystem is emerging as banks and fintech players see a more legally clarified scope for custody, reserve management, and the integration of stablecoins into existing business models.

Beijing shifts from skepticism to strategy

Enthusiasm for stablecoins extends far beyond the United States. In June, the Governor of the People’s Bank of China, Pan Gongsheng, clarified his central bank’s stance on stablecoins—noting that alongside central bank digital currencies (CBDCs), they could facilitate cross-border payments and shape the financial system’s future. This marks a notable shift given China’s previous crackdown on privately issued cryptoassets. Meanwhile, Hong Kong concluded a nearly two-year consultation process to pass stablecoin regulation in May 2025, which finally took effect this month. Reportedly, more than forty companies have already applied for issuer licenses, and the Hong Kong Monetary Authority is expected to approve a select few, with an initial focus on business-to-business applications.

Chinese e-commerce giants JD.com and AliBaba are also interested in launching stablecoins in Hong Kong, where JD.com participated in sandbox testing during the consultation process. To date, experiments have primarily included dollar-denominated stablecoins and stablecoins pegged to the Hong Kong dollar (HKD), which has been tied to the US dollar since 1983 through the Linked Exchange Rate System. At the same time, Chinese companies and state-owned enterprises are also exploring stablecoins backed by offshore yuan (CNH)—and China is simultaneously conducting the largest pilot of its own CBDC, the e-CNY, which currently has seven trillion yuan in circulation.

The rise of yuan-backed stablecoins

The rationale behind China’s pursuit of a yuan-backed stablecoin strategy is not immediately obvious. After all, the e-CNY already faces stiff competition from domestic digital wallets issued by Alipay and WeChat Pay, which together cover over 90 percent of the retail market. Outside of e-commerce driven opportunities—which will coexist with traditional payment methods—it is unclear how a stablecoin could profitably compete in China’s retail payments market. Moreover, if highly controlled actors such as state-owned enterprises and influential Chinese technology companies were to issue stablecoins, they would blur the line between a CBDC and a stablecoin. This would raise similar privacy and surveillance concerns as those associated with CBDCs.

One reason Beijing may pursue yuan-backed stablecoins lies in its concern regarding the use of dollar-denominated stablecoins. Like other countries, China has expressed concerns about dollar-denominated stablecoins, which are primarily used to provide liquidity for crypto-asset transactions, dollarize savings, and facilitate sending money abroad—the latter two driving capital flight. China’s legal restrictions have shielded it from extensive use of dollar-denominated stablecoins. Still, Beijing may see stablecoins backed by offshore yuan or the Hong Kong dollar (HKD) as a tool to curb capital flight or regional remittance payments.

A bid to counter dollar dominance?

There is, of course, an underlying consideration of competition with the United States—as with most of Beijing’s regulatory and technology policy decisions. One theory holds that yuan-denominated stablecoins could further internationalize the yuan, leading to a more multipolar currency system instead of a dollar-dominant one. However, several factors suggest otherwise:

For one, the primary use of stablecoins remains in crypto markets, where dollar-denominated tokens can provide liquidity and reduce transaction limitations. With the passage of GENIUS, there is increased confidence in the reserve-backing of dollar-denominated stablecoins, which help them maintain relative value stability. A yuan-denominated stablecoin would likely be less useful as a stable value marker due to lower confidence in yuan-denominated backing assets, and low trust in Chinese financial markets and regulators.

Moreover, while rhetoric from both the United States and China often conflates currency dominance with stablecoin issuance and adoption, interest in dollar- or yuan-denominated stablecoins reflects, but does not meaningfully replace, the international use of those currencies. In other words, the demand for dollars by foreigners drives the demand for dollar-backed stablecoins abroad, not the other way around. Therefore, even as increased stablecoin use can enhance the financialization of the currency abroad through a rise in treasury or bond holdings by foreign issuers of stablecoins, it will not meaningfully impact its traditional role in cross-border transactions.

China’s stablecoin play has its limits

From Beijing’s perspective, a successful offshore yuan-denominated stablecoin could replace some existing yuan-denominated transactions, increase the purchases of offshore or “dimsum” bonds, and even make them technologically more efficient. However, it is unlikely to compete with the demand for dollar-based networks, as reflected in the use of dollar-denominated stablecoins. 

Despite the growing private sector driven interest in China in yuan-backed stablecoins, their use case remains in domestic retail markets, especially in the e-commerce space. Hong Kong’s new licensing regime is also likely to bring some wholesale (business-to-business) applications to light. Lines between public and private issuers of stablecoins will continue to blur—opening up new operational and regulatory questions. However, the strategic relevance of a yuan-backed stablecoin in internationalizing the yuan is limited by the fact that dollar-backed assets ultimately provide more value for investors, both in the crypto-asset ecosystem and outside of it.

Ananya Kumar is the deputy director for future of money at the Atlantic Council’s GeoEconomics Center.

At the intersection of economics, finance, and foreign policy, the GeoEconomics Center is a translation hub with the goal of helping shape a better global economic future.

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1. What is most important to know about the three bills?

These three bills aim to provide regulatory clarity for the cryptocurrency industry, which has long been operating in a gray area, with unclear agency oversight and undefined consumer protection and compliance requirements. With these three bills, the Trump administration and Congress aim to fill these regulatory gaps and propel a broader agenda for innovation and US competitiveness in digital assets. 

The GENIUS Act, which Trump signed into law today, creates the first federal regulatory framework for stablecoins, with rules for issuers and backing requirements. The CLARITY Act, which now goes to the Senate, transfers jurisdiction over digital assets from the Securities and Exchange Commission to the Commodity Futures Trading Commission and defines and establishes rules for crypto-asset exchanges, brokers, and dealers. Finally, the CBDC Anti-Surveillance State Act, which is also headed to the Senate, prohibits the Federal Reserve from issuing a central bank digital currency (CBDC) without congressional approval. There is still a lot of work to do to address remaining gaps, but these bills are a first step. Most importantly, these regulations are only effective when paired with consistent and fair enforcement

—Alisha Chhangani is an assistant director at the Atlantic Council’s GeoEconomics Center. 

2. What will the impact be for Americans?

The most likely outcome is that more companies, including banks, are going to jump into offering crypto assets. We’ve already seen several major financial institutions indicate that they want to get more involved in crypto. As JPMorgan Chase CEO Jamie Dimon said Tuesday when asked about stablecoins, “We’re going to be in it and learning a lot, and [a] player.” Now that there is finally more regulatory clarity, you can expect the traditional finance players, sometimes called TradFi, to engage more with these rapidly developing technologies. For Americans, this means your bank may soon be offering you stablecoins and possibly even tokenized ways to invest in the stock market. None of this will happen overnight, but in a year or two the way we bank could look significantly different. 

This also can come with risks. What happened with Silicon Valley Bank in 2022 is a cautionary tale. If banks get too involved with something speculative—whether it’s in the digital economy or not—then there is a risk that some kind of failure in one part of the market could create a larger financial crisis. These bills are aimed at helping ensure the assets offered are safe, but it’s clear there’s much more work to do on that front. 

—Josh Lipsky is the chair of international economics at the Atlantic Council and the senior director of the Atlantic Council’s GeoEconomics Center.

3. What will the impact be outside of the United States?

From a policy standpoint, countries around the world have to consider the impact of dollar-denominated stablecoins on their domestic markets, while balancing their policies on stablecoins denominated in their own fiat currency (such as euro-backed or yuan-backed stablecoins) and crypto assets at large. While all the bills are focused on the domestic US market, foreign jurisdictions have been closely following these developments in Congress. Reactions from abroad have largely echoed concerns about financial stability arising from the influx of dollar-denominated stablecoins, especially (but not exclusively) from emerging markets. Other reactions have also included concerns about US President Donald Trump’s personal ventures with the crypto industry and how that could influence his policymaking. Jurisdictions abroad tend to believe that the United States is being myopic with its digital asset policies, with little examination of long-term impacts on the global economy.  

Increasingly, I see advanced economies and emerging markets doubling down on measures to protect their domestic financial stability. This includes more of an emphasis on their central bank digital currencies and adjustments to their existing stablecoin regulations, as well as creating new ones in light of developments in the United States.

—Ananya Kumar is the deputy director for future of money at the GeoEconomics Center.

4. How will these bills advance US leadership on digital assets globally?

One of the bills, the CBDC Anti-Surveillance State Act, is focused on banning the Federal Reserve from issuing a retail CBDC. A retail CBDC would be used by the general public for commercial and peer-to-peer transactions, such as buying a cup of coffee. In contrast, a wholesale CBDC would be used by financial institutions to settle interbank and securities transactions. 

Supporters of this bill say they are worried about potential harms to personal privacy and about government control of daily transactions. At the same time, this bill would make the United States the only country in the world to have banned a CBDC and a global outlier in CBDC development. Importantly, the bill could potentially also undermine the Federal Reserve’s critical work on cross-border payments innovation. The Federal Reserve is actively involved in Project Agora, alongside six other central banks, to make international payments more efficient and secure by integrating tokenized central bank money and commercial bank deposits. Halting this work risks leaving the United States behind in shaping the next generation of global payment infrastructure.

This is all happening as countries increasingly pursue alternative payment systems designed to bypass the dollar. Without US leadership in cross-border payments innovation, other countries—including China—could fill the void, setting technical standards, governance norms, and financial networks that diminish the role of the dollar. This erosion of leadership also poses a national security risk, limiting the United States’ ability to monitor illicit finance and enforce economic sanctions.

—Alisha Chhangani

***

As things stand now—due to the lack of global consensus on the role of dollar-backed stablecoins and crypto assets—I see a rocky road ahead for global governance of digital assets. If there is one takeaway from the Atlantic Council GeoEconomics Center’s Cryptocurrency Regulation Tracker, it’s that jurisdictions can’t go at crypto policies alone. Creating a responsible, innovative ecosystem will take global cooperation. 

The passing of the GENIUS Act offers the United States a chance to bring in other countries to respond to their concerns regarding dollar-backed stablecoins. Moreover, next year’s US presidency of the Group of Twenty (G20) is the perfect forum to do so. If the United States wants to advance its leadership on the global stage, it should take the momentum from “crypto week” and translate it into a moment of global consensus-building and cooperation.

—Ananya Kumar

Cryptocurrency Regulation Tracker

Cryptocurrencies may significantly alter financial structures and transform the next generation of money and payments. Governments around the world are looking to create regulations to prevent the harms caused by cryptocurrencies while encouraging the innovative capabilities of cryptocurrencies. We analyze how 75 countries have regulated cryptocurrency in their jurisdictions.

Central Bank Digital Currency Tracker

Our flagship Central Bank Digital Currency (CBDC) Tracker takes you inside the rapid evolution of money all over the world. The interactive database now tracks over 135 countries— triple the number of countries we first identified as being active in CBDC development in 2020.

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The stablecoin race began in 2019 when Facebook proposed the stablecoin Libra (later re-named Diem). Central banks responded by developing central bank digital currencies (CBDCs) in order to remain relevant in the digital payment space. Private and public sector entities generally agree on the benefits of this transition; including increased efficiency and decreased costs for payments system, especially cross-border transactions. However, national policy preferences about digital payment mechanisms are diverging.

China and the EU are pursuing CBDCs issued on a unified ledger. China’s established government-issued CBDC (“e-CNY”) experiment has reached cumulative transactions of $7.3 trillion. However, the decision to formally adopt the e-CNY has yet to be made. China has not been shy about its intention to use the e-CNY as part of its geopolitical competition with the United States by expanding international use of the RMB. 

European Central Bank (ECB) President Christine Lagarde has also promoted the digital euro to expand the international role of the euro. The ECB has just approved a plan to settle distributed ledger technology transactions using central bank money. However, legislative initiatives to authorize issuing a digital euro have stalled, in part because it is perceived as competing with bank deposits.

The UK supports wholesale CBDCs, viewing a digital pound as a natural evolution to current digital cash transfers among enterprises rather than as a geopolitical initiative. Unlike the ECB and the People’s Bank of China, the Bank of England is building an external programmable ledger that will be managed by external private sector third parties.

The United States opposes CBDC issuance, instead prioritizing dollar-based stablecoins issued by private sector entities. The outstanding amount of stablecoins exceeds $200 billion, dominated by two US companies: Tether and Circle. The vast majority of their stablecoins are pegged to the US dollar, effectively enhancing the efficiency and reducing the costs of current global payments. Maintaining the peg has propelled these stablecoin companies to become significant holders of short-term US Treasury securities; they are now the third-largest purchasers of US Treasury bills in 2024 (of almost $40 billion) after JPMorgan and China. The concentration of liquidity in dollar-based stablecoins paired with their portability on the blockchain and strict regulatory requirements in other jurisdictions create considerable barriers to privately issuing stablecoins backed by currencies other than the US dollar.

The growing global use of dollar-based stablecoins is worrying major central banks. They fear that increased dollar-based stablecoin usage will unleash currency substitution effects and drive digital dollarization. The ECB, for example, asserts that a digital euro is “crucial for bolstering European sovereignty” in order to ensure the effective transmission of monetary policy, decrease reliance on US based card payment platforms, and maintain the legal tender nature of the euro. In other words, the ECB increasingly sees itself as competing with privately issued stablecoins backed by the US dollar.

The evolving US regulatory framework for crypto assets

President Trump pledged during the 2024 election to make the United States “the crypto capital of the world.” Congress and federal regulators have quickly embraced the concept. Strong bipartisan support in the Senate resulted in the GENIUS Act passing in the Senate week after bring introduced. Additional market structure legislation is expected in the Senate during the summer. These two Senate bills, along with the CBDC Anti-Surveillance State Act (banning Federal Reserve issuance of a digital dollar without Congressional approval), will be up for vote in the House of Representatives during the week of July 14.

By taking up the Senate-passed versions of the stablecoin and crypto market structure bills, the House of Representatives leadership is signaling an intention to pass the Senate versions without changes. The move effectively scuttles initial House efforts to extend full banking regulation to stablecoins. However, the Senate bill incorporated the House prohibition on nonbank stablecoin issuers from paying interest on stablecoin holdings. The framework likely to pass Congress thus carves out a competitive niche for banks, enabling them to protect their deposit base by issuing their own stablecoins or by offering tokenized bank deposits, which could pay interest to deposit holders.

Proponents assert that the a federal framework for stablecoins will expand market growth to $2 trillion by 2030 and secure “dollar dominance” over the global financial system. Since stablecoins must be backed by dollar-based liquid assets, growth in the sector can be expected to increase demand for US Treasury securities.

Geopolitical implications

The prospect of quickly expanding the dollar-based stablecoin market after the Senate passed the GENIUS Act raised alarm bells, particularly in China and Europe.

In China, state-sponsored media responded to the Senate vote by calling for issuance of yuan-based stablecoins “sooner rather than later.” Beijing’s template could be Hong Kong’s May 2025 Stablecoins Ordinance. The rule permits stablecoin issuance referencing the HK dollar and other major currencies while enhancing stablecoin oversight and consumer protection.

EU reactions to the Senate vote were mixed. ECB President Lagarde’s testimony to the European Parliament after the vote characterized stablecoins as creating “risks for monetary policy and financial stability,” in part because they could interfere with the transmission of monetary policy. A recent European Parliament research report acknowledges the ECB’s domestic and geopolitical concerns about dollar-backed stablecoins but identifies a number of issues regarding the digital euro, including personal privacy and competition concerns. The Bank for International Settlements also recently validated objections to dollar-backed stablecoins based on financial stability and monetary sovereignty concerns, while adding technical architectural objections to reliance on distributed ledgers. 

China and the EU are not alone. The Atlantic Council’s CBDC Tracker notes that as of July 2025, a record high number of governments (forty-nine) have launched formal CBDC pilots. Given heightened geopolitical tension, many of these countries might accelerate their CBDC projects and implement stablecoin oversight regulations in response to US stablecoin policy initiatives.

For example, leaks to the Financial Times indicate that the European Commission plans to recognize and regulate privately issued non-euro stablecoins, despite the de facto prohibition against such instruments in the Market in Crypto Asset Regulation (MiCAR).

However, CBDC initiatives face other hurdles besides competition with stablecoins—most notably, lackluster demand. European democracies have not yet secured legislative mandates to issue CBDCs. Tepid legislative support may reflect lacking public enthusiasm. However, CBDC test usage has increased in India and China.

Despite the increase in 2024, public acceptance of the e-CNY has been low. Demand remains strong for the e-CNY’s competition. Familiar mobile payment platforms (Alipay, WeChat Pay) constitute 90 percent of mobile payments (2.5 billion users), which in turn account for 73 percent of domestic payments. This dynamic may concern Europe, whose digital euro is expected to compete with US-based card payment companies.

In Jamaica, the IMF reports that the domestic CBDC only accounts for 0.1 percent of cash in circulation.  Its deployment was relatively modest, with payments limited to government fees, taxes, and traffic tickets. Recent public surveys in the UK and the EU indicate limited awareness of, and lukewarm public support for, the digital pound and the digital euro respectively.

Ultimately, rapid US stablecoin policy formulation will trigger predictable global reactions. Many central bankers, especially in China and Europe, have increasingly vocalized their opposition to extending the dollar’s global role into the digital arena through privately issued stablecoins. However, their capacity to use CBDCs to compete with dollar-based stablecoins requires faster action and stronger political support than what have been seen so far. The United States retains the advantage in this new arena of geopolitical competition—for now.

Hung Tran is a nonresident senior fellow at the Atlantic Council’s GeoEconomics Center and senior fellow at the Policy Center for the New South; and a former senior official at the Institute of International Finance and International Monetary Fund.

Barbara C. Matthews is a nonresident senior fellow at the Atlantic Council’s GeoEconomics Center. She has had the honor to serve as the first US Treasury Attache to the EU in Brussels and as Senior Counsel to the House Financial Services Committee.  Currently, she is the Founder and CEO of BCMstrategy, Inc., a company that generates AI training data and signals regarding public policy.

At the intersection of economics, finance, and foreign policy, the GeoEconomics Center is a translation hub with the goal of helping shape a better global economic future.

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Stablecoins have established their value as a medium of exchange within the land of decentralized finance and cryptocurrency investing. Today’s total stablecoin market cap is about $255 billion (of this, 99 percent is in USD-denominated stablecoins). With all the new regulatory and industry activity in the space, market participants and industry leaders appear to be expecting large-scale stablecoin adoption for use in domestic and international payments. Yet, stablecoin usage is complicated for consumers, and large-scale adoption would entail macro-financial risks.

Nine challenges to widespread stablecoin adoption may be getting overlooked in all the excitement.

Frictions and risks for users

• Network transaction fees: When stablecoins are sent over a blockchain network, they are typically subject to variable network transaction fees (such as “gas” in Ethereum), just as other cryptocurrency transactions are. These fees compensate the decentralized network of validators who approve of transactions and maintain the security of the blockchain. In simple terms, sending a stablecoin, whether domestically or abroad, usually requires the user to pay a variable transaction fee. Do the future users of stablecoins intend to pay fees for every transaction?
  
  To be fair, centralized payment systems often require a service fee that is paid to the network operator, although this is generally born by banks (who may pass fees on to merchants) rather than by retail end-users in domestic contexts. There are also possibilities for users to side step blockchain transaction fees, such as by employing a “layer 2” network. This network is an add-on transaction layer that waits to settle a sender and receiver’s netted or batched transactions on the main blockchain to reduce fees and improve throughput. While it can be effective, it does add complexity and lower the security of the transaction, all else equal.
  
  Rather than sender transaction fees, some blockchains compensate validators by subsidizing from other sources or by paying a higher “block reward,” which is an automated generation of new cryptocurrency paid to the validator. Regardless, a secure, decentralized transaction validation process has economic costs. Stated more pointedly in a recent Bank for International Settlements report, “the more stringent the degree of consensus needed, the more wasteful the rents required.”
  
  
• Fragmentation of money and wallet acceptance: From a practical and technical perspective, stablecoins fragment the money in your wallet. A user cannot combine stablecoin balances into one sum or combine these balances with their other currency holdings, unless they convert them in an exchange. This may be fine if someone holds a few types of stablecoins, as people today may have a few bank and e-money accounts. Yet with numerous banks and other institutions considering issuing stablecoins, one must question whether people would really hold multiple stablecoins at once, and why.
  
  Moreover, stablecoins are issued on diverse blockchain platforms with formats that are not always compatible with all wallets. Sending money to an incompatible wallet that cannot accept the stablecoin can, from a technical perspective, lead to losing control of funds. Many closed-loop payment networks today—such as PayPal and many e-money providers like Venmo in the United States—only enable payments to users of that service. Yet, the user can’t make the mistake of sending such funds in the first place.
  
  
• Fraud risks: The immediate and irrevocable nature of stablecoin (and other cryptocurrency) payments raises the risk of fraud. There is little time to pre-screen transactions or to block or reverse them after a mistake has been made or illegal activity detected. These challenges have harmed fast payment system users owing to those systems’ immediate fund transfer. Fraud risks facing both fast payment systems and cryptocurrencies include account credential theft and takeover (“non-authorized” payment fraud), and impersonation, romance scams, and purchase or invoice scams (“authorized” payment fraud). Blockchain analysis company Chainalysis estimates $12.4 billion of fraud across cryptocurrency globally in 2024 and warns of a growing and increasingly professionalized fraud ecosystem.
  
  Fast payment systems are developing processes and best practices to address these risks, such as standardized fraud resolution policies, fraud reporting and information-sharing, dispute resolution and loss recovery rules, and technology for fraud monitoring and confirmation of recipients.  Will stablecoin networks develop similar systems? For instance, will US stablecoin customers who experience credential theft and send unauthorized payments have protections like Regulation E that protects users against this risk in payments today? The United States’ Consumer Financial Protection Bureau proposed expanding “Reg E” to stablecoins, but the agency has turned away from consumer protections toward novel digital currency under the Trump administration. Meanwhile the United States’ GENIUS Act does not appear to include meaningful fraud protection measures.
  
  
• Bank and exchange intermediation: To move from stablecoins to fiat money today (and vice versa), a user needs to open an account at a cryptocurrency exchange that connects to their bank. While feasible in most jurisdictions, doing so adds an extra step to using stablecoins. This is also a major reason why “banking the unbanked” with stablecoins is often a circular proposition; one needs a bank account to move out of stablecoins into fiat currency. Regulated cryptocurrency exchanges, like banks, also require identifying information as part of a regulatory know-your-customer process, which can pose inclusion challenges to those lacking government-issued documentation.
  
  If banks issue stablecoins in the future, they may sidestep the need to engage with a cryptocurrency exchange. But banks remain in the picture. They also may seek income by charging fees to users for converting their stablecoins to and from bank deposits. 
  
  
• Limits to cross-border remittance savings: Stablecoins are often described as a silver bullet for reducing international remittance costs. Yet, they still involve an irreducible foreign exchange conversion cost. Moving from USD deposits to a USD stablecoin does not involve a foreign exchange transaction, but moving from a USD stablecoin to, say, Turkish lira would. Coupled with the user-facing requirements mentioned above—bank and potentially cryptocurrency exchange accounts, identification documentation, network transaction fees, and the need to critically avoid mistakes or fraud when sending funds—stablecoins’ superiority as a cost and inclusion solution to cross-border remittances is far from self-evident.

Economic challenges and risks

• Bank deposit and liquidity challenges: When a customer acquires stablecoins at the cost of their bank deposits, that bank will see a drop in retail deposits, which are a sticky, inexpensive source of capital for banks to conduct their lending activities. Crowding out deposits could thus dampen lending activity. Still, depending on the jurisdiction, stablecoin issuers can be required to keep funds backing the value of their issued stablecoins at regulated depository institutions. In this case, lost retail deposits return to banks (although not necessarily the same ones). However, they constitute unsecured wholesale funding, which can be volatile and weaken a bank’s liquidity coverage ratio. A run on stablecoins implies rapid withdrawal of these funds, posing stability risks to banks. Additionally, as with other wholesale entities, a stablecoin issuer expecting illiquidity at a bank may attempt to rapidly withdraw its deposits, as Circle attempted with its $3 billion in deposits at Silicon Valley Bank in 2023.

• Business model risk: The core business model as it stands today of firms issuing stablecoins backed by reserves (Tether, Circle, and others) will face sustainability challenges in environments with lower interest rates. Today, the dominant source of revenue for stablecoin issuers is the yield they earn on their reserves, often in bank deposits or short-term treasury bills. Circle made 99 percent of its revenue from this source in 2024. Lower interest rates will compress this revenue. In some cases, major issuers appear to have misled the public about holding 100 percent cash equivalents, when they were actually holding short-term corporate debt with a higher yield.

• Overseas challenges of dollarization and sanctions evasion: Some enthusiasts are excited about the idea of perpetuating US dollar usage abroad with USD stablecoins. However, this overlooks serious risks to the foreign country. Unintended dollarization, or more generally, currency substitution, can harm the country by reducing the effectiveness of its monetary policy for managing business cycles. Namely, the local central bank would normally be able to manage the cost and value of its currency as one tool to provide relief in recession. This is less effective when households and firms hold less of this currency.
  
  The use of stablecoins today to circumvent sanctions should also be noted. Tether’s USD stablecoin, for instance, has reportedly enabled billions of dollars in sanctions evasion globally.
  
  Because of the risks of illegal activity, including the evasion of sanctions and other capital flow management measures, currency substitution, and other challenges, authorities abroad may take measures to limit stablecoin usage in foreign currency in their jurisdictions. In Europe, the MiCA stablecoin regulation enables authorities to restrict non-euro stablecoin usage in the region if it interferes with monetary sovereignty, monetary policy, or financial stability.  
  
  
• Deviation from par value (de-pegging): Today, a dollar is a dollar. With bank oversight and deposit insurance, we don’t question the issuer’s safety before receiving payment. Strong stablecoin regulation would ideally provide similar confidence. However, stablecoins are pegged to dollars—they aren’t dollars themselves, and this peg could break. Numerous stablecoins have temporarily lost their pegs in secondary market trading. Circle’s USDC briefly de-pegged in 2023 due to Silicon Valley Bank concerns, where it held deposits. In a more extreme example, TerraUSD, an algorithmically managed stablecoin, was the fourth-largest in the world with an $18 billion market cap before its collapse in 2022.
  
  This challenge recalls the free banking era when recipients questioned the currency issuer’s brand and strength—a practice we’ve since left behind. The question is whether the benefits of stablecoins outside of cryptocurrency investing—a case still in development—are worth this and other notable challenges.   

With more than $250 billion in market cap, stablecoins have proven useful for cryptocurrency investing. As the ecosystem evolves, their value for everyday payments remains to be seen. While there’s considerable excitement about this potential, the dialogue often overlooks significant frictions, risks, and inefficiencies involved with large-scale stablecoin adoption.

Ashley Lannquist is a contributor at the Atlantic Council and former Digital Finance Expert at the International Monetary Fund.

*Note: Circle is a partner of the Atlantic Council’s GeoEconomics Center. This article, which did not involve Circle, reflects the author’s views.

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Thank you Chairman Hill, Ranking Member Waters, and distinguished members of the Committee for holding this hearing continuation and the honor of the invitation to testify on the future of digital assets. I applaud your leadership in convening the Committee on this important issue and continuing the years-long efforts of this Committee across several Congresses to evaluate and build legislation around a clear, comprehensive, and competitive cryptocurrency regulatory framework. I hope my testimony will be helpful in considering some of the most important aspects of frameworks needed to drive innovation in a secure, competitive, safe, and sound digital finance ecosystem that reinforces national security interests, defends consumers, and preserves personal liberty.

I have spent my career working at the intersection of national, economic, and technological security. I have spent two tours at the National Security Council (NSC) leading cryptocurrency initiatives; led crypto and cybersecurity policy at the US Financial Crimes Enforcement Network (FinCEN), the US anti-money laundering and countering financing of terrorism (AML/CFT) regulator; and served on advisory boards for the US Commodity Futures Trading Commission (CFTC), the Idaho Department of Finance, and the New York Department of Financial Services (NYDFS). Over recent years, I have observed massive growth, collapses, experimentation, exploitation, and innovation across the digital asset market. Of course, innovation and exploitation in finance are not unique to digital assets, and the risks and benefits of one blockchain system are not equivalent across all assets — they depend significantly on the design and features of specific systems. To make best use of the benefits and mitigate the critical risks, we need to ensure that technology, operations, and policy are aligned along critical safeguards and also with driving competitive and liquid US markets.

That brings us to this critical juncture – the current alignment and implementation of protections in digital assets is not working. The status quo has not benefited consumers, markets, or national security. As just one example, the largest heist in history just occurred in February of this year targeting this sector, perpetrated by North Korean actors as part of their revenue generation to fund activities like their proliferation program. This incident also was not in a vacuum but instead was yet another cyber theft as part of a years-long building trend in this industry exploiting both pervasive cybersecurity and AML/CFT vulnerabilities. This is just one example, which sits alongside highly volatile markets that have lost trillions and defrauded consumers, but also an environment that is reportedly set to drive the best developers abroad rather than inspiring them to stay here and build to agreed upon guardrails. Inaction by both government and industry will not achieve desired outcomes for protecting consumers or businesses.

I applaud Congress for continuing to elevate the issue of digital asset legislation to ensure appropriate regulation in the United States. Despite calls from some to avoid regulation of digital assets that may seemingly legitimize an immature sector, I maintain that regulation is critical to give a north star that demands legitimate and responsible activity within an industry with many actors who aim to bring positive evolutions in finance and cryptocurrency. Regulation also provides legitimate authorities and levers to supervisors and enforcement agencies to hold accountable illicit actors that seek to defraud consumers, launder criminal proceeds, and undermine the integrity of the US financial system. As I have testified to previously, clear and comprehensive guardrails are necessary to protect consumers, national security, and US competitiveness in financial innovation. While timely progress is critical after several Congresses being unable to establish a comprehensive approach, these frameworks must also be deliberate, thoughtful, and comprehensive of the real and present risks, as well as opportunities, that we have observed in the digital asset ecosystem and broader financial system.

The stated goals of the Digital Asset Market CLARITY Act of 2025 (the “Clarity Act”) to help address regulatory gaps and to provide clarity for an industry seeking it are laudable. Unfortunately, the tenets of the proposed legislation as drafted appear to be overly complex, forging notable gaps for coverage under consumer and market protections rather than closing them; leave insufficiently or unaddressed key areas like meaningful implementation and enforcement measures, countering illicit finance, and cybersecurity; and depart from the long bipartisan-stated principles of technology-neutrality that would enable regulations to persist in the face of technological innovations.In my testimony, I briefly offer opportunities for addressing those issues and preserving a framework built on the key pillars of sound market regulation and national security interests. I draw many of these recommendations from the groundbreaking work of the Commodity Futures Trading Commission (CFTC) Technology Advisory Committee (TAC), where I co-chaired a group of 19 incredible industry, government, and academic experts to produce a first-ever comprehensive review of risks and opportunities in decentralized finance (DeFi), with outlined steps for policymakers to take build the framework for DeFi. I encourage legislators to consider these measures especially where existing digital asset market structures differ from traditional financial market structure, and urge you to be extremely deliberate when choosing to depart from long-tested principles needed to preserve integrity of markets, such as consumer protections, resilience against exploitation and shocks, and addressing separations of functions and conflict of interests.

Regulatory gaps and potential for confusion

As I mentioned above, seeking to provide regulatory clarity, in both authority and application, are important at this critical juncture. It will establish clear rules of the road for responsible actors to engage and innovate in the space as well as ensure strong footing for regulators and enforcement agencies to oversee markets and investigate wrongdoing. A clear framework will also (finally) help level the playing field for US firms that have long been more compliant than many foreign-operating cryptocurrency businesses that exploited their savings in non-compliance as a competitive advantage against more responsible US companies.

The Clarity Act as currently written attempts to provide clarity through defining regulatory jurisdictional bounds between the Securities Exchange Commission (SEC) and CFTC as well as defining key terms of assets to establish scope of coverage as securities versus digital commodities. The bill also includes some important protection measures, specifically around areas like segregation of customer assets, limited disclosures such as around token structure and conflicts of interest, and registration requirements.

However, the Clarity Act is still absent many important protections that we have observed to be critical to protect consumers and markets in the wake of a crisis. Within the 236 pages of the bill are confusing and ambiguous definitions and missing elements that pave the way for regulatory arbitrage and exploitation:

• No clear non-securities spots market authority: This bill does not appear to clearly outline authority over spots markets for assets that are not securities. The definition of “digital commodity” may be restrictive insofar as to only cover a limited set of tokens, which would leave potentially hundreds of tokens unregulated and/or without clear guidance on its applicability even if they function as financial assets.
• Unclear definitions and impacts on securities laws: There are various definitions in the bill whose challenges with clarity may subvert the drafters’ intent to provide clarity and defend against regulatory arbitrage. Some definitions may be seen to be crafted to frame large exemptions from responsibility decentralized finance, such as in defining concepts like groups and common control in a a “decentralized governance system,” which in the bill is a system where participation (not even active involvement, just the pretext of participation) is “not limited to or under the effective control of, any person or group of persons under common control.” In another example, the bill treats assets called “investment contract assets” as digital commodities, though “investment contracts” have generally been a key element of securities laws.
• Conflating decentralization and maturity: The test for decentralization in the bill is described as a test of blockchain maturity. In a sector where projects that are (or at least claim to be) decentralized are being targeted and exploited for weaknesses in their code, cybersecurity, and irrevocability of mistakes or illicitly acquired assets, it is confusing on why a greater extent of decentralization — a concept that is also vague in the bill — inherently means maturity rather than other markers of good governance and operations. The decentralization test also introduces some confusion that may challenge real-world implementation, and is unclear on how such a feature impacts an asset functioning like a commodity versus a security. Current and former regulatory leadership has warned against arbitrary carve-outs of protections like under securities laws simply based on complex issues like decentralization that so far have largely been met with convoluted definitions that risk exemption significant amounts of high-risk investment-related activity. This also threatens potentially creating the opposite of a future-proofed regulatory approach that cannot keep up with future technological innovation.

National security and the critical role of enforcement

n the wake of serious national security threats like billion+ dollar hacks by rogue nations, growing integration of cryptocurrency as a tool for transnational organized crime, market manipulation and fraud that can threaten system integrity and stability, as well as pressure from adversarial nations seeking to develop and leverage alternative financial systems to weaken and circumvent the dollar, it is clear that strong safeguards, including for US competitiveness, are needed. This framework also demands we ensure policy and enforcement approaches both domestically and internationally create a level playing field for US firms – often the most compliant firms in the world – to be able to compete fairly. Otherwise, the foundation we build these systems on risk faltering, with the potential to not only reap significant harms but also prevent us from harnessing the greatest positive potential that is possible from a secure and innovative digital finance ecosystem.

There is limited discussion of either illicit finance or cybersecurity in the Clarity Act—many more pages are honed on establishing large regulatory carve-outs than on establishing expectations, driving needed industry standards or sponsoring research and development, or appropriating necessary resources to ensure appropriately scaled and timely enforcement of these critical requirements. Also important to note, especially in light of recent changes in enforcement posture—beyond just creating the policy framework, the government and industry must work to apply and enforce the framework. A policy that isn’t enforced or implemented does nothing to benefit consumers nor US firms with stronger compliance programs that have been operating at higher costs and less competitive advantages than many foreign-operating firms.

I have testified previously to the critical needs for strengthening AML/CFT and sanctions authorities in the cryptocurrency space, which generally have been suggested to be saved for “comprehensive market legislation.” Such enhanced protections like appropriations for skilled enforcement and investigative personnel, sharpening tools like 9714/311 designation authorities, ensuring extraterritorial application of regulations and/or through designations of entities of high national security risk, creation of an enforcement strategy to scale timely enforcement against the most egregious violators, or resourcing public-private partnerships like the Illicit Virtual Asset Notification (IVAN) program are missing from the legislation but could be easily added in to help strengthen the holistic cryptocurrency framework. In the face of disbanding of the Department of Justice (DOJ) National Cryptocurrency Enforcement Team (NCET)14 and significant downsizing and weakening of enforcement offices and personnel across the US Government, the legislation could help ensure that tools are being honed to better address the worst actors in the space. Only with meaningful enforcement can policy be truly impactful and can we reward the best actors in the space, which are typically American companies.

An alternative approach for consideration – Joint, targeted, adaptable, and balanced

I support calls for a legislative solution that enables nuance and distinct treatment across various assets based on their economic function and which will ensure persistent clarity and flexibility for regulators to address significant risks of fraud, manipulation, and investor exploitation that we have seen in the space. The legislation should also guide regulators with key principles, many of which are similar to those outlined in the Clarity Act, and should be done in full view of the benefits that some aspects of digital assets uniquely provide, such as an unprecedented level of market transparency for on-chain financial activity to enable greater market surveillance and oversight.

An alternative approach may help meet the intent of the drafters while giving time for greater exploration and experimentation while meeting near-term calls for the most beneficial transparency needs of the market, which I have observed to most consistently be calls for a clear pathway to registration. I encourage policymakers to consider a much more streamlined approach if a more complex bill proves too difficult to reconcile:

• Dual rulemaking: Similar to efforts undertaken in the wake of the 2008 Financial Crisis and pursuant to the joint rulemaking efforts directed in Title VII of Dodd Frank, Congress could again direct the SEC and CFTC to jointly develop a framework and rulemakings to give greater specificity and adaptability to approaches to ensure appropriate coverage but at least one of the markets regulators.
• Mandate for sandboxes and clear registration pathways: In the interim while the SEC and CFTC craft their approach, Congress could direct a near-term establishment via sandboxes, provisional registrations, and other requirements with clear guardrails to help ensure clear near-term coverage while giving the time needed to thoughtfully evaluate the more complex issues like dual-registered entities, defining tokens, defining the jurisdictional hand-off, and how to address DeFi. Policymakers should consider looking to the United Kingdom’s current joint efforts between the Bank of England and the FCA under the Digital Securities Sandbox for inspiration.
• Clarify commodity spots market authorities: The legislation should specify clearly authority to the CFTC over commodity spots markets, or at a minimum digital commodity spots markets.
• Explicit appropriations and mandate for additional AML/CFT and cybersecurity initiatives: The legislation would also optimally integrate near-term resourcing, not just authorizations, to ensure the ability to effectively police bad actors in the system, which should include the earlier-referenced initiatives like expanded targeting authorities, appropriations, public-private partnerships, and cybersecurity and information sharing standards.
• Undertake steps to address the regulatory perimeter and controls with DeFi: Finally, legislators should direct the SEC and CFTC to jointly undertake the steps recommended by the CFTC TAC in evaluating how to evolve market structure in addressing issues like the unique constructs in DeFi. These steps include mapping ecosystem players, processes, and data; assessing compliance and requirements gaps; identifying risks; evaluating options, benefits, and costs of changes to the regulatory perimeter, and surging research and development and standards partnerships.

With guardrails established and more consistent oversight by Congress, this approach, implemented through administrative procedure and thoughtful regulation with public engagement, I think is likely the best way to achieve a comprehensive and enduring framework.

In closing, I’d like to again underscore my gratitude for the honor of the opportunity to speak with you all today. It is critical that the United States make timely progress on establishing and implementing cryptocurrency regulatory frameworks, which should leverage years of effort on defining critical holistic protections that also reinforce the central role in the financial system and as a leader in technological innovation.

Thank you.

Fellow

Carole House

Nonresident Senior Fellow

GeoEconomics Center

Cybersecurity Digital Currencies

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That’s why the world’s financial leaders are closely watching the debate playing out in Congress right now over the future of stablecoin legislation. Next week, the Senate will likely take up the GENIUS Act, which will define the responsibilities for US stablecoin issuers and clarify who is responsible for oversight. 

Stablecoins are cryptocurrencies whose values are pegged to a specific underlying asset. This makes them “stable”—at least in theory.

Currently, 98 percent of stablecoins are pegged to the US dollar, but over 80 percent of stablecoin transactions happen outside the United States. 

Countries around the world are taking notice. In April, Italy’s finance minister, Giancarlo Giorgetti, said that new US policies on dollar-backed stablecoins present an “even more dangerous” threat to European financial stability than tariffs. His argument was that access to dollars without needing a US bank account would be attractive to millions of people and could undermine the effectiveness of monetary policy not just in Europe but around the world.

In many ways, it’s an old problem with new technology. Dollarization—the situation where citizens in another country try to swap their local currency for dollars—has been a risk in emerging markets and developing economies for decades. In the early 2000s, for example, a range of countries from Ecuador to Zimbabwe to Argentina had difficulty managing the demand for dollars instead of local currency. In each situation, years of economic pain followed in these countries. 

Now stablecoins are making it cheaper and easier for people around the globe to get ahold of what is still the single most in-demand asset in the world.

Instead of the old way of having to go to a bank and exchange local currency for US dollars, which is time consuming and often involves significant fees, stablecoins make dollars seamlessly available to anyone with a cell phone.

US officials argue that this benefits the United States. When I interviewed Federal Reserve Governor Christopher Waller, who oversees payments at the central bank, about this issue in February, he said that stablecoins “could be in any fiat currency,” such as pounds or euros, “but everyone wants dollar-denominated stablecoins.” He added that “if we can get good regulation, allow these things to go out, this will only strength the dollar as a reserve currency.”

Waller’s point was that if stablecoin issuers need to back up their coins with Treasuries or other liquid assets, the increase in stablecoin usage around the world will generate even higher demand for dollars. The whole point of a stablecoin is that you can fully convert it into a dollar if you want to—meaning the issuers need to have those dollars on hand.

US Treasury Secretary Scott Bessent has put it even more bluntly. “We are going to keep the US the dominant reserve currency in the world, and we will use stablecoins to do that,” he said in March.

If so, the United States should tread cautiously. 

The global proliferation of stablecoins means that some companies will take advantage of the demand and issue stablecoins that claim they are digital versions of the dollar but in reality aren’t fully backed by dollars.   

If that company failed, it wouldn’t just cost consumers their savings. It could trigger a run on all kinds of financial assets.

Think back to the collapse of the algorithmic stablecoin TerraLuna in 2022. Over $45 billion in value for TerraLuna holders was wiped out within a week. But since that time, stablecoin volumes have increased across the world by over 60 percent. 

The current patchwork of regulations around the globe creates more confusion, more friction in payments, and ultimately higher costs for consumers. 

Already, that’s what’s happening. As new research from the Atlantic Council GeoEconomics Center shows, some countries want to create their own central bank digital currencies to compete with stablecoins, while other countries are trying to regulate the wallets that hold stablecoins. 

Instead of waiting for new regulatory fences to be built up in the coming years, the United States should show that it recognizes the concerns other countries have about dollar-backed stablecoins. The legislation in front of Congress helps domestically by creating transparency and reporting requirements, but it does little internationally.

This is where the Group of Twenty (G20) comes in. The United States has a golden opportunity to help set international standards around digital assets, including the risks and regulations associated with stablecoins, during its G20 presidency next year. A key first step would be creating a new G20 payments roadmap. 

A first roadmap was agreed to in 2020 and delivered important innovations on faster payments. But technology has rapidly changed in the past five years, and it’s time for an upgrade. 

If the United States made stablecoins a focus this year, it would raise the bar across the world and ensure that dollar-backed stablecoin users in all countries are getting what they bargain for—an actual dollar—instead of an imitation of one. 

The rest of the world will welcome US leadership in this space and will take it as a sign that, at least when it comes to the future of the dollar, the United States is not looking to export instability.

Josh Lipsky is the chair of international economics at the Atlantic Council and senior director of the Atlantic Council’s GeoEconomics Center. 

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Within the Trump administration, there appear to be competing and sometimes contradictory perspectives over what dollar dominance means for US policy interests. The perspectives mirror broader debates beyond the White House about the role of the US dollar. Three divergent playbooks—around the dollar as a reserve, payment tool, and store of value—are worth exploring, not least because they are increasingly at odds.

The “America first” dollar

For Trump, the dollar’s international role appears to be of a piece with his broader “America first” philosophy. Trump’s statements suggest that he sees the use of the dollar in global payments as a symbol of US nationalism. During his campaign, for example, Trump threatened to impose 100 percent tariffs on nations from the BRICS group of emerging economies and others seeking to build alternative currency blocs aimed at undermining “the mighty US dollar.” In his words: “You leave the dollar, you are not doing business with the United States.”

Trump’s renewed tariff policy risks undermining dollar dominance by disrupting the economic relationships that have sustained the global dollar system. The many countries that run trade surpluses with the United States value holding and using dollars in international trade. This is because the dollar boasts strong network effects and highly liquid markets. It offers ease of trade and the convenience of invoicing and settling in a single dominant currency. This creates a cycle: Dollars flow out when the United States imports more than it exports, and then those dollars come back as foreign investment in US assets. If the United States reduces imports significantly—via tariffs or trade restrictions, for example—fewer dollars flow abroad. There are already signs that this is happening: Foreign investors have sold $63 billion in US equities between March and April 2025, and the US dollar index is down 8 percent this year. This marks a major retrenchment given that foreign investors entered 2025 with a record 18 percent ownership share of US equities.

Although tariffs are paid by US importers, they also hurt foreign exporters by reducing demand for their goods. Importantly, these tariffs signal that the United States is willing to use its dominant position in global trade and finance as a tool of coercion. In response, affected countries may seek to reduce their dependencies on the United States by developing alternative payment systems, trading in local currencies, and diversifying their reserves. These likely consequences may be an incentive for the administration to pursue a more moderate tariff policy than originally announced, as is already happening, at least temporarily.

Trump also sees domestic innovation in private sector financial technology as central to sustaining the dollar’s global role. On January 23, Trump signed an executive order encouraging the development of dollar-backed stablecoins issued by private firms to enshrine dollar dominance. As much as 80 percent of the flow of dollar-backed stablecoins is happening outside of the United States, and countries such as Argentina, Brazil, and Nigeria have seen significant adoption of stablecoins for remittances or as a hedge against local currency instability. 

US Treasury Secretary Scott Bessent and Federal Reserve Governor Christopher Waller have emphasized that stablecoins could reinforce the dollar’s primacy by creating new demand for US Treasuries, since almost 99 percent of stablecoins are dollar-denominated. While the widespread adoption of dollar-backed stablecoins could reinforce dollar dominance, it also introduces new vulnerabilities. For example, stablecoins could potentially accelerate de-dollarization, especially if nations become concerned about excessive dollarization of their economies and threats to monetary sovereignty. 

According to the Atlantic Council’s central bank digital currency (CBDC) tracker, there has been a global increase in retail CBDC development since the Trump administration took office—potentially signaling that countries are creating domestic digital alternatives specifically designed to limit the proliferation of dollar-backed stablecoins in their economies. Moreover, if inadequately regulated, stablecoins could pose systemic risks—such as triggering bank runs or forcing the liquidation of reserve assets during periods of financial stress, destabilizing Treasury markets. Furthermore, widespread stablecoin adoption without appropriate regulations could lead to shadow payment systems evading traditional oversight, undermining sanctions and monetary policy.

Internal tensions within the Trump administration on digital assets are already emerging. Trump’s inner circle of business leaders appear to favor the broader adoption of digital assets to bolster US competitiveness, while national security officials seem to worry that stablecoins could facilitate money laundering and terrorism financing, as well as undermine Washington’s ability to effectively wield sanctions. The ultimate role of stablecoins in the dollar’s international standing will depend on whether these two groups can reconcile the multiple priorities at stake.

The dollar as an economic burden

But there are other views on the dollar in the White House, as well. Stephen Miran, the chairman of the White House Council of Economic Advisers, has argued that the dollar’s reserve currency status comes at a steep cost to American workers and industry. In November 2024, Miran framed the dollar’s reserve currency status as a structural liability—one that forces the United States to run persistent trade deficits and maintain an overvalued dollar to meet global demand for safe dollar-denominated assets. At the time, Miran proposed unconventional remedies, including purposely devaluing the dollar to create a multipolar currency system to share the reserve status burden. 

Miran seems unconcerned about the dollar’s share of global central bank reserves but acknowledges the risks of a weaker dollar—primarily that investors might abandon dollar assets, increasing US borrowing costs. His proposed solution is to “term out” US debt by convincing countries to exchange short-term holdings for one-hundred-year bonds. While this would lock in foreign investment and reduce rollover risk, the extremely distant maturity could undermine trust rather than build it. Reserve holders prioritize liquidity and flexibility, so dramatically extending maturities might backfire, accelerating diversification away from dollar assets as the currency depreciates.

A fractured coexistence

At the heart of these competing views lies a critical tension that policymakers must address: The dollar serves multiple functions globally, and each function demands distinct strategic approaches.

Miran’s critique focuses on the dollar’s role as a reserve currency. Trump’s BRICS tariff threats, by contrast, focus on the dollar’s payments role. And the Federal Reserve and Treasury’s emphasis on stablecoins is best understood as an attempt to bolster the dollar’s store-of-value function. These are different hats that the dollar wears, and they often require divergent policy responses. Managing one of the hats without due attention to the others risks internal contradictions that could erode the very dominance policymakers seek to preserve.

It is unclear which side within the administration will ultimately have more influence, leading to uncertainty about US policy in the interim.

So what’s the dollar strategy, then?

To maintain long-term dollar dominance, the Trump administration should focus on creating a cohesive policy that reconciles the dollar’s multiple roles and avoids conflicting policy actions. Central to this effort should be a commitment to financial stability (avoiding large-scale tariffs, significant currency manipulation, and cryptocurrency spillover). The world is more likely to view the dollar as trustworthy when it sees the United States as a stable and reliable custodian of foreign assets.

Here are three specific ways the White House can pursue a strong, cohesive dollar policy:

Promote responsible innovation and oversight of dollar-backed stablecoins: The administration—particularly national security agencies, the Treasury, and the Federal Reserve—should actively monitor risks posed by the global proliferation of dollar-backed stablecoins. Policymakers should not ignore the accelerated dollarization of emerging markets and potential restrictive responses. Regulation alone is insufficient; clear enforcement mechanisms are needed to ensure compliance and mitigate systemic risk.

Seek stability through strategic trade measures: The administration should prioritize a stable trade policy and eliminate broad, across-the-board tariffs. Instead, it should apply targeted measures to address specific instances of nonmarket practices and currency manipulation. This would help preserve the dollar’s role by maintaining global investor confidence and ensuring continued dollar circulation in trade without disrupting broader relationships or supply chains.

Reinforce institutional credibility and policy coordination: Reaffirming the Federal Reserve’s independence is important for maintaining global confidence in US monetary policy, capital markets, and the dollar’s long-term strength. At the same time, the administration should enhance the coordination of analytic efforts and ensure consistency across agencies in messaging and policy implementation on dollar-related issues. This could be achieved by more effectively leveraging existing interagency structures, such as the National Security Council and the National Economic Council. Or, if necessary, it could be done by creating a new, dedicated coordination mechanism. The key objective is to deliver greater clarity, predictability, and coherence in the government’s approach.

Above all, policymakers should recognize that the greatest threat to the dollar is not external—it is the erosion of trust in the United States’ political and legal institutions. The dollar is not just backed by the size of the US economy; it is backed by faith in the rule of law, the sanctity of contracts, an independent central bank, and the stability of democratic governance. Structural advantages—network effects, deep capital markets, and the dollar’s centrality to global payments—make its dominance resilient. But these foundations are only as stable as the legal, political, and institutional frameworks behind them. If that foundation weakens, then no number of tariffs or volume of stablecoins can preserve the dollar’s central role in the global system.

For now, there is no viable alternative to the dollar. But the Trump administration’s competing and fractured view on the dollar’s various roles may cause enduring harm to its long-term dominance.

Alisha Chhangani is an assistant director at the Atlantic Council’s GeoEconomics Center.

Israel Rosales contributed to the data visualization in this article.

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That was made clear at this year’s International Monetary Fund and World Bank Spring Meetings, where financial leaders warned about job loss and increasing poverty rates across these countries. 

But there are changes African countries can make to better withstand the economic headwinds they are facing. One such opportunity they should immediately seize lies in strengthening their approaches to combating money laundering and terrorist financing. By addressing deficiencies in legal and regulatory frameworks and by adjusting for developments in financial technology, African countries can bolster financial inclusion and tap economic growth opportunities—while preventing the abuse of the global financial system by nefarious actors. 

Key deficiencies seen across Africa—in the form of weak legal and regulatory frameworks, limited institutional capacity to conduct financial supervisory or enforcement activities, and a high degree of informality of economic activities—make it difficult to combat money laundering, terrorist financing, and other illicit financial flows. The Financial Action Task Force (FATF), a global money laundering and terrorist financing watchdog, keeps track of jurisdictions that do not meet global standards to combat money laundering, publicly identifying jurisdictions with weak performance on a “black list” and “grey list.” The black list hosts only three countries (North Korea, Iran, and Myanmar), but on the grey list, fourteen of the twenty-five countries (just over half) are African. Grey listing can result in serious reputational and economic damage, with negative spillover effects on economic growth, borrowing costs, foreign investment flows, and financial inclusion efforts—a particularly concerning impact considering that in Sub-Saharan Africa, less than half the population has a bank account. Given these effects, African countries have worked to make significant improvements to their anti-money laundering and combating the financing of terrorism (AML/CFT) frameworks. Over the past few years, several countries that were once placed on the grey list have been removed, including Zimbabwe, Botswana, Morocco, and Mauritius.

One piece of the regulatory puzzle involves cryptocurrencies. FATF Recommendation 15 for combating money laundering and terrorist financing directs countries to identify and assess “risks emerging from virtual asset activities.” FATF data from March indicates that of the forty-one Sub-Saharan African countries with publicly available data, only seven countries were rated “compliant” with Recommendation 15, indicating that the country successfully met the global standard. For African countries looking to become more compliant, there are positive examples on the continent to draw upon; for example, South Africa was recently upgraded to “largely compliant” with Recommendation 15 and is continuing to make progress towards full compliance. 

At the same time, African governments must also harness the power of digital finance to weather today’s economic headwinds. According to the International Monetary Fund, as of 2022, just 25 percent of countries in Sub-Saharan Africa formally regulated cryptocurrencies, and two-thirds had implemented restrictions, with six countries having outright banned cryptocurrencies. The impact of this approach leaves the investors and entrepreneurs who are interested in Africa’s digital assets sector inclined to hold back investments due to the excessive regulatory uncertainty and possible regulatory swings. Africa is one of the fastest-growing crypto markets in the world, and crypto assets are actively used across the continent. 

Recent reporting from Chainalysis suggests that the cryptocurrency value received by Sub-Saharan Africa was less than three percent of the global share between July 2023 and July 2024. While this is a small global share, there is significant variance in adoption rates across the continent’s fifty-four countries, with a number of countries still rating relatively high in global adoption: Nigeria ranked second worldwide, and Ethiopia, Kenya, and South Africa also ranked in the top thirty countries. From 2022 to 2023, bitcoin was legal tender in the Central African Republic, but finance experts raised concerns about the lack of electricity and infrastructure and the high risk of money laundering and terrorist financing. One thing is certain: digital assets—including cryptocurrencies—are changing the financial landscape of the region. 

That digital finance can transform Africa’s financial landscape should be viewed positively. Africa’s population is set to increase from 1.5 billion in 2024 to 2.5 billion in 2050. This is the moment for African governments to leverage the economic power of their demographics, but to do that, they will need to consider public policies that support greater financial inclusion. Of the eight countries that will account for more than half of the global population growth between now and 2050, five of them are in Africa; two of them are global leaders in crypto adoption rates.  

As populations age and enter the workforce, African governments should consider how best to promote technological innovation in their societies, including in financial technology. Cryptocurrency adoption in African countries can be used for small retail transactions, for sending or receiving remittances, as a hedge against inflation, for business payments, and, potentially, for solving sticky foreign exchange issues in places such as Central Africa, where such issues dramatically reduce foreign investments. Due to its decentralized nature, cryptocurrencies can help people bridge the gap in access to financial services and formal banking systems in many countries across the continent.  

On one hand, governments have tried to use digital assets to boost financial inclusion, tax revenue, and small retail transactions with limited success; and on the other, countries have banned, unbanned, regulated, and deregulated cryptocurrencies, leaving a patchwork of regulatory frameworks across the continent for consumers and business to navigate. With such jurisdictional regulatory arbitrage and limited enforcement mechanisms, nonstate actors, including terrorist groups in Africa, are able to take advantage of the technologies and services that can move money the fastest and cheapest—and in ways that are least likely to be detected or disrupted. That can lead these actors to cryptocurrency.   

While serving as head of delegation to both the Central and West African FATF-style regional bodies, I heard from African government officials repeatedly that there were no digital assets being used in their countries and that their AML/CFT regulatory regimes were sufficient. This is simply not the case. African countries should consider policies to encourage the adoption of emerging financial technologies, including cryptocurrencies and other digital assets, while still exercising great care to avoid creating conditions allowing for regulatory arbitrage between countries or monetary unions that can be exploited by bad actors seeking to launder money or finance terrorism. Beyond policy frameworks, African governments should empower their enforcement agencies with the appropriate resources to ensure that policies, laws, and regulatory frameworks protect the integrity of the global financial system.  

Benjamin Mossberg is the deputy director of the Atlantic Council’s Africa Center. 

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First, the significant effect that government-led instant payment systems can have on citizens and the financial market transforms financial inclusion and market structures. Second, decisions made during the early stages of the process, such as system pricing and ownership structure, shape the power dynamics between local and international players, as well as incumbent and new entrants. 

These lessons are shaping an emerging framework governments can use to evaluate their need for central bank-led immediate payment systems, their potential structure, organizational features, and trade-offs involved in implementing a similar approach. The framework is composed of a three-step approach, including prerequisite weighting (i.e., “do we need this system”), the preparations needed to hit the ground running, and the process of setting up new immediate payment systems.

Pix and UPI: Initial development to growing pains

But first, it’s important to understand how immediate payment systems have developed into what they are today. 

Over the last decade, India and Brazil launched their instant payment systems, UPI and Pix, on a national scale, reshaping their payment landscapes. With 350 million UPI users and 140 million Pix users, about 25 percent of India’s population and approximately 65 percent of Brazil’s population use the systems. One of every eleven adults in the world uses either Pix or UPI to send or receive immediate payments. 

Brazil’s immediate payments policy is a payments-first approach. The Brazilian Central Bank (BCB) owns Pix and pushes it to cooperate with domestic private market players, focusing mainly on immediate payments and adjacent products. The system was launched in 2020 after a two-year ideation and development period.

Pix is the most quickly adopted immediate payment system in the world. As of the second quarter in 2024, it had reached 15.4 billion quarterly transactions. Its growth was fueled by a high degree of cooperation with the local financial ecosystem, as well as the fact that institutions with over 500,000 transacting accounts were required to participate, creating a network effect.

India developed UPI as a part of its Digital Public Infrastructure (DPI) program and implemented it as a part of a broad tech stack. Its approach to both DPI and UPI has long been for the state to develop the basic infrastructure, including a digital identity pillar, data exchange pillar, and payments pillar, allowing private sector innovation on top of the existing system.

UPI was developed under the National Payments Corporation of India, which is independent of India’s central bank and owned by various private banks. It became India’s most popular digital payment method, processing over 75 percent of the nation’s retail digital payments.

However, UPI’s growth was initially slow. It only reached 10 million monthly transactions in 2017 and took about three years to reach 1 billion monthly transactions. The growth was later expedited due to India’s demonetization, which started in 2016, the COVID-19 transition away from cash, and internationally backed payment providers entering the market.

Both Pix and UPI have significantly increased financial inclusion, supported growth in the fintech sector, and become the payment standards in their respective countries. However, their impact has not been entirely positive. Their use has also increased fraud and reshaped the power balance between different players in their markets.  

Winners and losers: Market impacts in Brazil and India 

Both systems transformed their respective markets, benefitting some players and reducing the market power of others. 

The table below provides a snapshot of the market dynamics, highlighting each of the key players, their initial power and interest mapping (green for high, yellow for medium, and red for low) and the power shifts in the market caused by Pix. Power shifts are categorized into market share and decision-making power—red with a downward-facing arrow indicates a decrease, green with an upward-facing arrow signifies an increase, and yellow represents retained power or a mixed trend.

In Brazil, Pix has transformed the financial sector by benefiting new domestic players while challenging incumbents and credit card schemes. 

Brazilian neobanks and fintech startups have grown significantly by leveraging Pix’s cost model to attract new customers. They take advantage of the optional fee structure for its value offer, including no fees for consumers and bearing the mandatory fees for businesses. Eliminated transaction fees and immediate payments increased consumer trust. It made digital payments more accessible, particularly for the previously unbanked population. Small businesses and micro-entrepreneurs have also gained access to low-cost, instant transactions, fostering financial inclusion and reducing reliance on cash. This, in turn, drove an increase in such banks’ target addressable market (i.e., relevant customer base).

However, traditional banks and credit card networks have been disrupted. Before Pix, Brazilian banks charged significant fees for interbank transfers, but Pix’s free and instant model eroded this revenue stream. As a result of Pix’s launch, traditional banks’ revenue from payments decreased by 8 percent between 2020 and 2021.

Credit card companies are seriously threatened by Pix. In 2022, BCB’s governor predicted that Pix would make credit cards obsolete. However, transaction data tells a more complicated story. With Pix introducing new consumers into the market, banks are leveraging “maturing cohorts” of consumers to offer them credit cards. Before Pix, credit card payment volumes were at a 12.7 percent annual CAGR (compound annual growth rate) between 2018 and 2020. After the launch of Pix, CAGR almost tripled, reaching 31.7 percent between 2020 and 2022.

UPI’s rapid adoption in India similarly transformed the power balance in the market and benefitted payment technology providers. 

Large-scale third-party application providers (TPAPs), particularly Google Pay and PhonePe, dominate the UPI transaction space, accounting together for over 80 percent of UPI transactions. These players leveraged UPI’s no-cost model to gain significant user adoption. Consumers and merchants have also benefited from seamless, real-time payments without additional fees. 

However, traditional banks struggle with UPI’s zero-fee structure, as it increases transaction volumes and associated costs without direct revenue gains. Some banks have pushed for the introduction of transaction fees to compensate for operational costs. For that reason, in 2022 RBI introduced subsidies for small transactions to banks, which they can share with TPAPs. In 2024, these accounted for 10 percent of PhonePe’s annual revenue. Credit card companies have also faced increasing competition. However, similar to Brazil, credit card usage volume has actually increased following UPI’s scaling. From a declining CAGR of 7.3 percent between 2018 and 2020 in payment volume, after UPI scaled, credit card growth reached a 24.2 percent CAGR between 2020 and 2022.

Big tech vs. local tech: Divergent approaches

A key distinction between Pix and UPI is their approach to global technology firms (“big tech”) and multinationals generally.

BCB has actively blocked big tech from entering the market, emphasizing the need for domestic control over digital payments. This approach is part of a general policy to strengthen the domestic ecosystem over incorporating multinational players. In 2020, for example, BCB suspended WhatsApp’s Brazilian immediate payments offering launch. It cited regulatory concerns and the potential risk to financial stability, launching Pix later that year. This strategy has helped the local fintech ecosystem and brought domestic players, mainly neobanks, to the front of the stage. 

In contrast, India’s approach has allowed big techs and multinational players to participate in the UPI ecosystem and often relied on them for last mile delivery, and consumer onboarding, driving its scaleup. Google Pay and PhonePe, respectively backed by Alphabet and Walmart, quickly dominated.They could offer payments as a loss leader (i.e., sell at a loss to attract customers to other, profitable products) while benefiting from other products over time. 

While doing so accelerated lagging adoption rates, it has also led to concerns about data privacy and market concentration. 

The Indian government has since explored regulatory measures, such as imposing a 30 percent market share cap on individual TPAPs, though enforcement has been repeatedly delayed. Another claim voiced by government officials in the debate is that, given UPI’s universal nature, providers are interchangeable, thus eliminating anti-competitive claims.

This divergence in strategies and outcomes reflects the broader debate about whether emerging economies should embrace or limit big tech’s role in financial infrastructure.

Stages of implementation

Based on Brazil and India’s experiences, a three-stage framework emerges for countries considering immediate payment systems adoption.

The first stage of weighting prerequisites involves assessing the need for a state-led payments system based on three factors: the existence of alternatives (e.g., a strong credit card presence), expected change (primarily driven by the level of financial inclusion, development costs, and the size of the economy), and state capacity. As a result, countries with low banking penetration and high reliance on cash are more likely to benefit from such systems. 

The second stage involves getting ready to hit the ground running, focusing on implementation and scaling. Understanding the existing market conditions and the shifts anticipated from the introduction of the system is crucial. Additionally, selecting an appropriate governance model—whether a central bank-led approach like Pix, a consortium-led model like UPI, or a provider model—plays a vital role in determining long-term implications. Lastly, the fee structure will also influence both adoption and market entry and should be actively established at this stage. 

The final stage involves setting up a long-term process by establishing cooperation mechanisms and managing externalities. Policymakers must implement regulatory adjustments based on market responses to address issues such as monopolization and consumer protection against fraud. They should also explore engagement mechanisms for local players through forums and bilateral consultation schemes, focusing on gaining knowledge and legitimacy as well as efficiency considerations. 

While many regions worldwide consider the future of payments, this framework can serve as an initial point of assessment. There is no perfect “one size fits all” solution. However, states’ varied ability to execute and enforce participation, the size of their economies, and the preexisting market structures significantly influence decisions concerning the “what” and the “how” of launching immediate payment systems.

Pix and UPI offer several additional insights into how state-led payment systems can reshape economies. 

While Brazil focused on domestic financial players and regulatory control, India leveraged global technology firms for swift adoption. Consequently, Brazil fostered the expansion of its local fintech ecosystem, while India established an environment with significant multinational involvement. 

In both cases, incentives for private market players aligned to support the growth of credit card provision as a subsequent step after initially introducing consumers to the financial system through Pix and UPI. While there is room for discussion about the implications of this step, it is a definitively critical point to consider when launching such systems and weighing their outcomes.

Lastly, the key lesson from these models lies in the decisions made by policymakers to initiate transformative processes. Both models illustrate the potential of such systems to enhance financial inclusion, disrupt traditional banking, and reshape economies, thereby aiding in their advancement. These lessons from UPI and PIX can be narrowly applied to public sector entities looking to create state-led systems, however, it is important to consider that market structure transformation might not be the ideal solution for every economy, especially more advanced economies which have a larger share of private sector players. Ultimately within a jurisdiction, policymakers bear the ultimate responsibility of acting to launch immediate payment systems.

Polina Kempinsky is a second-year Master of Public Policy student at the Harvard Kennedy School. This paper is part of Polina’s PAE (Policy Analysis Exercise) for her program, which explores the instant payment systems of Brazil and India.

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We have each advised or chaired executive branch agencies involved in digital asset policy and co-authored articles about why and how to regulate stablecoins. One of us testified before Congress in February about the pending legislation. We share concerns about the illicit use of stablecoins and the speculative nature of much of the crypto market. But stablecoin legislation is likely to be enacted this year: the Trump administration prioritized the issue in its digital assets executive order three days after the inauguration; Republican leaders in the Senate and House, together with Sacks, promised to pass stablecoin legislation within the administration’s first one hundred days; and bills have been passed out of both House and Senate committees. Therefore, the focus now should be on how best to regulate stablecoins, not whether to do so. 

Stablecoins, moreover, already exist—the market capitalization is now over $230 billion and growing rapidly, almost all in dollar-pegged stablecoins. If the United States does not create a credible regulatory framework, the risks associated with stablecoins will only increase. In addition, the United States will lose the ability to set standards for liabilities denominated in its own currency because other jurisdictions are rapidly creating frameworks that permit dollar-based stablecoins. 

The two bills under active consideration in Congress—the GENIUS Act in the Senate and the STABLE Act in the House—create some helpful guardrails to ensure that stablecoins are indeed stable. But the bills also contain significant flaws. Here are six ways that the bills must be improved to establish an effective stablecoin regulatory regime.

1. Close the foreign issuer loophole

The biggest weakness in both bills is that they do not adequately regulate offshore stablecoin issuers. This means they both fail to regulate Tether, the largest issuer of dollar-pegged stablecoins. This foreign issuer loophole, or “Tether loophole,” completely undermines the purpose of US stablecoin legislation.  

Both bills require a company that “issues” stablecoins in the United States to be licensed and supervised by a federal or state regulator and comply with a host of prudential requirements. These include ensuring that tokens are fully backed by high-quality reserves and meet capital and other risk management requirements; they also limit issuers’ activities. But if the stablecoins are issued offshore and simply flow back into the country, the GENIUS Act imposes no restrictions on the issuer or on the use of those stablecoins as long as the issuer is able to “seize, freeze, burn or prevent the transfer of” tokens at the direction of law enforcement. These are powers that most stablecoin issuers already wield. 

The foreign issuer loophole in the GENIUS Act puts US stablecoin issuers at a serious regulatory disadvantage, as they will be required to operate under prudential and supervisory requirements that won’t apply to many foreign-issued stablecoins. Indeed, it incentivizes new issuers to incorporate offshore and existing domestic issuers to relocate to jurisdictions with more attractive, less effective regulatory frameworks. Consumers will also face confusing choices, as US prudential standards, bankruptcy provisions, and other consumer protections will apply to some payment stablecoins circulating in the United States but not others.

The STABLE Act provides an eighteen-month grace period after which an offshore issuer must be “subject to” a supervisory regime in another country that is deemed comparable to the US regime, or else its stablecoins cannot be offered or sold by “a custodial intermediary.” But this approach, too, is inadequate. The bill does not impose a prohibition on the use of stablecoins that are offered and sold without the involvement of a custodial intermediary. What’s more, the STABLE Act does not have a clear enforcement mechanism applicable to foreign stablecoins, suffers from material drafting ambiguities that could cause legal uncertainty, and envisions insufficient penalties for noncompliance. 

Legislation that encourages stablecoin issuers to incorporate abroad undermines the goals the administration laid out in its executive order on digital assets, including promoting US leadership in financial technology and protecting the dollar. Moreover, if the stablecoin market continues to grow at anything near its current pace, the scale of dollar-denominated liabilities created offshore could become systemically important, as was the case with Eurodollars. While those offshore dollar deposits started off small, by the early 2000s, they had exceeded the total deposits held by banks in the United States. The US government will ultimately have to reckon with a large offshore stablecoin market, as it had to reckon with Eurodollars. 

A better approach can be found in proposed bipartisan stablecoin legislation negotiated last year by Representative Patrick McHenry, then chairman of the House Financial Services Committee, and Representative Maxine Waters, the ranking member. The McHenry-Waters bill—which was not taken up before the last Congress ended and has been reintroduced by Waters this year—would make it illegal to “engage in the business of issuing a payment stablecoin, directly or indirectly in the United States through any means or instrument of transportation or communication in the United States, or by persons in the United States.” In addition, it would impose stiff civil and criminal penalties on those who offer or sell any unlicensed stablecoin in the United States or to any US person.

Replacing the foreign issuer loophole with a strong extraterritorial provision could still be coupled with provisions under which a foreign issuer, in lieu of registering in the United States, can be licensed and supervised by a jurisdiction that Washington deems to have equivalent rules. But any such “substituted compliance” arrangement should be at least as robust as what is already in place for globally systemically important banks and derivatives clearinghouses—including, for example, joint supervisory arrangements between the United States and foreign regulators for large issuers. 

2. Enhance the Treasury Department’s authority to prevent illicit finance

One strength of the GENIUS Act relative to the STABLE Act is that it requires issuers to implement a variety of measures to prevent illicit activity, including the ability to freeze and seize stablecoins at the request of law enforcement (although the latter is not a substitute for jurisdiction over foreign issuers, as noted above). But a more comprehensive approach is needed because stablecoins can be transferred on decentralized blockchains without any involvement by the issuer. The legislation should provide the Treasury Department with broad authority to address illicit finance concerns. This should include the authority to issue blocking orders with respect to on-chain protocols—such as mixers, tumblers, and other arrangements—that malevolent actors can use to disguise illicit transactions or sanctions evasion and thwart law enforcement efforts. Congress should also provide the Treasury Department’s Office of Foreign Assets Control with the same jurisdiction and authority over US dollar stablecoin transactions that it already has over other dollar-denominated transactions. 

3. Balance state and federal authority

Both bills provide for dual state and federal paths for the chartering, regulation, and supervision of a stablecoin issuer. The STABLE Act requires that a state’s regulatory standards must meet or exceed the federal standards, whereas the GENIUS Act has a weaker “substantially similar” standard. However, the STABLE Act does not provide for adequate joint federal-state supervision of large issuers, thus creating the risk that a systemically important issuer could be supervised only by state authorities. By contrast, the GENIUS Act appears to require joint supervision of issuers with a market capitalization in excess of ten billion dollars (although the drafting is unclear on several critical issues). The strengths of each bill should be combined in the final legislation. 

4. Limit the activities of affiliates of stablecoin issuers

Both bills include relatively tight activity restrictions on stablecoin issuers, but neither imposes any group-level activity or affiliation restrictions. Stablecoin issuers that are subsidiaries of insured depository institutions would presumably still be subject to restrictions under the Bank Holding Company Act (BHCA). However, the affiliates of nonbank stablecoin issuers would be free to carry on other types of business activities, as well as to lend money to, and borrow money from, any affiliated stablecoin issuers. Group or affiliate restrictions help prevent financial distress in a related entity from spreading to the stablecoin issuer and jeopardizing its commitment to maintain a stable nominal value for its stablecoins.

In addition, unlike bank regulation under the BHCA, the absence of such restrictions on nonbank issuers would provide an unobstructed path for large technology platforms to directly enter the market for money and payments—and thereby exploit their enormous network effects, privileged access to customer information, and other comparative advantages to further concentrate and entrench their already significant market power. In contrast, the McHenry-Waters bill combined tight activity restrictions on stablecoin issuers with corresponding group-level activity and affiliation constraints, which should be included in stablecoin legislation going forward.

5. Make a specialized procedure for stablecoin issuer bankruptcy protections

Another area in which the two bills need improvement is bankruptcy protections. As we have noted elsewhere, a specialized resolution procedure for insolvent stablecoin issuers, similar to what the United States has for banks, would be preferable to applying standard Chapter 11 procedures for stablecoin issuers. That would ensure that token holders get repaid quickly and in full, whereas Chapter 11 could force holders to wait until the end of an uncertain, lengthy, and costly process and face a risk of getting back only a fraction of what they are owed. A specialized procedure would also minimize the risk that an issuer’s failure leads to further runs or more widespread contagion. While the McHenry-Waters bill contemplated such a specialized regime, neither bill pending now in Congress takes this approach. Rather, they include provisions designed to improve how stablecoin issuers would be resolved in Chapter 11 bankruptcy.

The GENIUS Act provides a slightly better set of bankruptcy protections than the STABLE Act—including carving stablecoin reserves out from an issuer’s bankruptcy estate, giving holders priority over other claims, creating a procedural right for lifting the automatic stay, and returning reserves to holders. But these protections should be strengthened. First, the applicable regulator should be able to lift the automatic stay and restrict an issuer’s ability to pledge reserves (which could undermine recovery by the holders and thus spark potential destabilizing runs). Second, because most holders acquire stablecoins in the secondary market and not directly from the issuer, the legislation should make clear that all holders have a claim in bankruptcy. 

6. Strengthen consumer protections

Both pending bills are relatively light on consumer protections. Ideally, they should contain some protections relating to the disclosure of terms, settlement procedures, fraudulent and unauthorized transfers, and dispute resolution, rather than leaving those issues to private ordering. But at minimum, there are two areas in which changes to the GENIUS Act introduced just prior to the committee vote made it inferior to the STABLE Act and should be reversed. First, the application of consumer privacy protections under the Gramm-Leach-Bliley Act to stablecoin issuers was deleted. This should be reinstituted, and ideally, privacy protections should be strengthened beyond what is required under that law. The second change to the GENIUS Act concerns custodial arrangements for reserves and stablecoins. Both bills require custodians to meet traditional standards imposed in securities law and other areas, but the GENIUS Act was amended to require those standards only for custody of stablecoins pledged as collateral, not for stablecoins generally as in the STABLE Act. This, too, should be reversed. 

***

Beyond the weaknesses we have noted, the stablecoin bills are also a missed opportunity to modernize the US payment system by creating a technologically neutral federal regulatory framework and expanding access to Federal Reserve master accounts and other core payment infrastructure. The bills also do not address the use of stablecoins by crypto intermediaries or the broader challenges of regulating the crypto market—issues that congressional leaders say they will take up next. While we would ideally like to see all of these and other issues addressed, given the politics of the moment, some version of the pending stablecoin legislation will likely be passed soon. It is therefore vital to make the legislation as strong as it can be. The risks of an unregulated stablecoin market are growing each day. Legislation that helps safeguard consumers and markets from some of these risks is better than no stablecoin legislation at all. 

Timothy Massad is a research fellow and director of the Digital Assets Policy Project at the Kennedy School of Government at Harvard University and a former chairman of the Commodity Futures Trading Commission and assistant secretary of for financial stability at the Treasury Department.

Howell E. Jackson is the James S. Reid, Jr., professor of law at Harvard Law School and served as a senior adviser on digital asset policy for the National Economic Council during the Biden administration. 

Dan Awrey is the Beth and Marc Berg professor of law at Cornell Law School and a senior adviser (detailee) with the US Treasury Department.

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Over the past five years, however, Hong Kong has dealt with serious geopolitical headwinds from China. The protests of 2019-2020 captivated the world, and the resulting National Security Law, enacted to tighten Beijing’s control over the city, have left a deep mark on Hong Kong. When we arrived there on March 17, many of the people we met went out of their way to tell us how different the city was than before. 

Of course, it wasn’t just the new law that has changed the atmosphere in Asia’s main financial hub. Hong Kong has also dealt with the aftermath of the COVID-19 pandemic, the resulting economic slowdown in the city and elsewhere in China, and its own budget issues. But earlier this year, Hong Kong seemed to be turning a corner. Five years on from the passage of the law and with some signs of economic stimulus from mainland China, the city appeared poised to recapture a little of its lost magic. Then, a series of new headwinds emerged, each one threatening the city and, by extension, economic growth across the region. Here’s what we heard on the ground in our conversations with individuals in both the public and private sectors. 

1. US economic slowdown is a self-inflicted wound 

Gross domestic product (GDP) forecasts for the United States continue to be revised downward from expectations at the beginning of the year. While we were in Hong Kong, data showed that US core inflation came in slightly below expectation but consumer sentiment declined further. The bankers we spoke to in Hong Kong realized the same thing that their counterparts in New York realized a few weeks ago: US President Donald Trump is serious about tariffs. Federal Reserve Chair Jerome Powell’s press conference on March 19 dominated financial coverage in Asia, especially his point that tariffs would be inflationary.

How did people in Hong Kong react? Uncertain, chaotic, and destabilizing—these were the words we heard used to describe the trade actions of the Trump administration in conversation throughout the week. It was interesting to us that multiple people wanted to emphasize that China was now a “stabilizing” force in the international system while the United States was the opposite. Take it or leave it—that was the message nearly everyone we met wanted to deliver. The other sentiment expressed was relief that the United States was fighting a trade war with Canada and not—at least not yet—with China. Many bankers were surprised the tariffs were only at 20 percent, believed China could largely mitigate the effects at that rate, and felt Beijing was eager to start trade negotiations with the White House. 

2. China’s green shoots may be a false spring 

At China’s premier annual economic and political event, the “two sessions” conference earlier in the month, Chinese officials attempted to bolster investor and consumer confidence in the Chinese economy and project Beijing as the protector of the multilateral system. Many banks we met with felt China was finally turning the corner when it came to stimulus.

But after our formal meetings, we got a bit of a different message from analysts. The macroeconomic data on China shows only moderate investment growth, much less than the government action that is needed to address the short- and medium-term problems. These problems include lagging implementation of fiscal reforms and a property market that has not come close to recovery. As one banker put it to us, “They are doing just enough to stay stuck in neutral.” 

3. Technology is China’s game-changer—but may trigger a backlash

This year, there’s been a shift in the narrative on China’s economy, propelled by successes in technology in electric vehicles and artificial intelligence. Through automaker BYD and AI platform DeepSeek, China seems again to have found the two-step formula of past success: First, create lower-cost products that are high on the technological value chain, potentially improving exports and domestic productivity. Then, find emerging markets that want these exports and can’t afford the cost of Western tech. It’s Huawei all over again. 

All of this goes to show that the approach of limiting exports to China, including advanced semiconductors, can be overcome through massive investments in human capital and computing. The question is how the Trump administration will respond to this newest wave of breakthroughs. On TV while we were on our trip, there was a great deal of coverage of BYD’s latest advancement, an electric vehicle that could charge in as fast as five minutes. As the broadcasters pointed out, five minutes is faster than visiting a gas station.

4. The dollar continues to bind Hong Kong to the West

The strongest link between the United States and Hong Kong remains the Hong Kong Dollar (HKD), which has been pegged to the US dollar since 1983 through the Linked Exchange Rate System. The peg, of course, means that Hong Kong imports its monetary policy from the United States. The HKD permits capital inflow and outflow through offshore renminbi (CNH) clearing, differentiated from onshore renminbi (CNY), which faces stricter capital controls. China obviously benefits from this capital inflow, but it appears increasingly concerned about capital flight occurring through HKD as a conduit. In the short term, China is unlikely to change the peg, but we are twenty-two years away from the expiration of the original terms of the British handover of Hong Kong in 2047. At that point, the future of HKD and Hong Kong more broadly will be as much about territorial sovereignty and geopolitical realities as its role in global finance.

But this goes beyond currency. Hong Kong had previously positioned itself as the site of renminbi internationalization and a market for “dim sum” bonds (offshore renminbi-priced bonds issued in Hong Kong by Chinese and international companies), but the price for unfettered internationalization—loosening up the capital controls—is not something Beijing is seemingly willing to pay. At the same time, while we were there, multiple people told us there’s interest in expanding the “dim sum” bond market. That kind of move would get the attention of bankers and regulators all over the world.

On the regulatory side, Hong Kong’s legislators intend to pass stablecoin regulation smoothly, with regulators moving quickly to establish licensing frameworks that support the growth of domestic fintechs and attract new businesses. Some bankers we spoke with are worried about potential dollarization in neighboring emerging markets from stablecoins, and the international spillovers from the Trump administration’s crypto policy both for financial stability and illicit finance. 

These tenuous interlinkages are a part of the tension of Hong Kong. It is a city built on furthering a Western capitalist system—but is increasingly not governed that way. 

Hong Kong remains the quintessential geoeconomic city, but its future is uncertain. In the decades after the Cold War, Hong Kong could balance between East and West since both systems benefited from mutual access to the city. Now this question has been raised: What are the US and Chinese long-term interests in maintaining Hong Kong as the gateway between East and West? The answer is being decided now, and everyone in the city can feel it. 

Josh Lipsky is the senior director of the Atlantic Council’s GeoEconomics Center. He was previously a senior advisor at the International Monetary Fund. 

Ananya Kumar is the deputy director, future of money, at the Atlantic Council’s GeoEconomics Center.

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For starters, the plan stems from a 2024 proposal by Senator Cynthia Lummis and largely functions as a centralized repository for assets that have already been seized by the federal government—for example, as part of criminal proceedings. That might be “budget neutral,” as the order says, but it is not a reserve in the traditional sense of a gold reserve used by central banks to redeem depositors or pay international debts. As a prominent Bitcoin thinker succinctly put it, “[t]here is no ‘strategic’ value in a crypto reserve.”

The executive order directs the government to simply hold (or later on, perhaps buy and hold) assets like bitcoins. Although the order vaguely criticizes the government’s “premature sales” in the past, “HODL’ing” (as the expression goes) may or may not be fiscally prudent, depending on whether or when to sell the assets. Separately, there are serious questions about if it is prudent for the government to essentially invest in select digital assets, as opposed to generating revenue in other ways. At the very least, the Secretary of the Treasury should develop concrete criteria and an authorization process for periodically selling or buying digital assets, to add transparency and provide an orderly means of decreasing volatility exposure. Senator Lummis’s original proposal, for example, contained some selling thresholds.

Second, the White House crypto czar David Sachs estimated that the federal government’s reserves comprised 200,000 bitcoin worth a staggering $17.5 billion at recent prices. If those numbers are still accurate, that would equal more than the total amount of gold held at almost all Federal Reserve Banks. That cannot be right as a matter of monetary policy. Even putting aside the polarizing debates about the long-term value of bitcoin (or lack thereof), the size of the new strategic reserve seems disproportionate given the risks and functions of the assets involved. Consistent with a transparent sales process, the Treasury should rightsize any digital asset reserve and use the remaining proceeds for other government programs.

Third, the cybersecurity challenges of having a centralized digital asset pool are not trivial, as the Atlantic Council highlighted in a prior report. Yet the executive order says nothing about how to start securing this new stockpile. Sacks tweeted that the pool would be akin to a “digital Fort Knox.” But Fort Knox has legendary security, is operated by 1,700 specialized employees, and adjoins a military base with 26,000 trained personnel. It is unclear what office, if any, at the Treasury could manage such a gargantuan security task for a digital asset reserve. The endeavor would be particularly difficult after the Department of Government Efficiency—or DOGE—unceremoniously disbanded teams of engineers like those in the 18F division, who were renowned for their private sector expertise. By contrast, Senator Lummis’s 2024 proposal highlighted security measures for “state-of-the-art physical and digital security” through inter-agency cooperation.

Perhaps most importantly, the ultimate risk of the executive order is that it embodies a form of crypto boosterism. Namely, it appears to tout an industry that President Trump came to embrace during the later phases of his political campaign, famously including the launch of his own meme coin just days before inauguration. To be fair, the White House revised the president’s earlier announcement that the reserve would include proactive purchases of select “altcoins,” which industry insiders worried “could be a vehicle for corruption and self-dealing.” That was a prudent move. But to many on Wall Street and main street, the order may still seem more like political maneuvering than sober monetary policy.

In a parallel universe, there could have been a thoughtful way for the Federal Reserve and Treasury to gradually study the possibility of holding digital assets on the balance sheet. They could have scrutinized the economic implications and prepared for security contingencies that might have included a bipartisan compromise around stablecoin legislation to specifically promote the strength of the dollar. But in today’s world, this executive order looks more slapdash than strategic. That may have been intended to bolster digital asset markets, but it has fallen flat on most fronts.

JP Schnapper-Casteras is a nonresident senior fellow at the Atlantic Council’s GeoEconomics Center and the founder and managing partner at Schnapper-Casteras, PLLC.

At the intersection of economics, finance, and foreign policy, the GeoEconomics Center is a translation hub with the goal of helping shape a better global economic future.

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Thank you Chairman Hill, Ranking Member Waters, and distinguished members of the committee, for holding this hearing and the honor of the invitation to testify on the digital payments ecosystem. I applaud your leadership in convening the committee on this important issue and continuing the years-long efforts of this committee across several Congresses to evaluate and build legislation for a stablecoin regulatory framework. I hope my testimony will be helpful in considering some of the most important aspects of frameworks needed to drive innovation in a secure, competitive, safe, and sound digital payments ecosystem that reinforces national security interests, defends consumers, and preserves personal liberty.

I have spent my career working at the intersection of national, economic, and technological security. I have had the honor of serving three tours in the White House, including recently departing from my second stint at the National Security Council leading various policy efforts on cybersecurity, emerging technology, and digital assets, to include the US Counter-Ransomware Strategy and the previous administration’s Executive Order on Ensuring Responsible Development of Digital Assets. I previously led digital asset policy initiatives at the US anti-money laundering and countering financing of terrorism (AML/CFT) regulator, the Financial Crimes Enforcement Network (FinCEN) and have served on advisory boards for the US Commodity Futures Trading Commission, the Idaho Department of Finance, and the New York Department of Financial Services (NYDFS). Through my ongoing work as a senior fellow at the Atlantic Council GeoEconomics Center and previous work as a consultant and executive at a venture capital firm, I have advised companies, academia, and policymakers in support of strategy, policy, standards, and product development ranging across areas like cybersecurity, AML/CFT, digital assets, and artificial intelligence and machine learning. The views I share are my own and do not reflect the views of the Atlantic Council.

The most important message I can underscore to this committee is the criticality of ensuring our regulatory frameworks create a foundation for providing trustworthy and affordable access to financial services for consumers while also reinforcing the centrality of the United States in the financial system and as the home for responsible, cutting-edge innovation in emerging technologies and payments. That includes the critical need for timely progress on a comprehensive stablecoin framework that supports these objectives, as well as driving broader experimentation and competitiveness in digital payments. Just as important, any framework demands more than just policy that is clear, strong, and comprehensive, but also that is implemented and enforced timely and scoped to shape the sector.

While timely progress is critical, these frameworks must be deliberate, thoughtful, and comprehensive of the real and present risks, as well as opportunities, that we have observed in the digital asset ecosystem and broader financial system. In the wake of serious national security threats like billion-dollar hacks by rogue nations, growing integration of cryptocurrency as a tool for transnational organized crime, market manipulation and fraud that can threaten system integrity and stability, as well as pressure from adversarial nations seeking to develop and leverage alternative payment systems to weaken and circumvent the dollar, it is clear that strong safeguards, including for US competitiveness, are needed. This framework also demands we ensure policy and enforcement approaches both domestically and internationally create a level playing field for US firms—often the most compliant firms in the world—to be able to compete fairly. Otherwise, the foundation we build these systems on risks faltering, with the potential to not only reap significant harms but also prevent us from harnessing the greatest positive potential that is possible from a secure and innovative digital payments ecosystem.

Background: Exigency for competition, security, and liberty

Stablecoin features, uses, benefits, and risks

Stablecoins, a class of cryptoassets that maintain a stable value in relation to another asset, most predominantly fiat currencies, hold potential to help drive needed innovations in our digital payments ecosystem. Stablecoins with proper protections can help improve efficiency in delivery of financial products and services, promoting greater transparency for monitoring of various risks in financial services, enhancing resiliency within the financial system, dismantling barriers to financial access and inclusion, and promoting innovation and competition that can strengthen US markets and leadership. With the current stablecoin market cap sitting at over $227 billion, use cases are growing across areas like dollar settlement for financial services firms, cross-border remittances, relief efforts like to Ukrainian refugees, and even for inflation hedges in places like Venezuela. However, stablecoins are largely still used as settlement in trading activity on cryptocurrency platforms—wide adoption in exchange for goods and services is not yet a reality, though it’s possible that a clear regulatory framework to enable greater trust and accountability may facilitate higher adoption.

Most of the core features for any cryptocurrencies apply to stablecoins—including their ability to transfer significant value peer-to-peer (i.e., from user to user without the need for a typical custodial role of a third-party financial intermediary), pseudonymously, immutably (or irreversibly), with global reach, with increased speed and cost efficiencies—though we must note that these are all features that are attractive to both licit and illicit actors. Challenges in mitigating risks in cryptocurrency are especially driven by by lagging AML/CFT compliance as well as broader prudential standards across the sector internationally, reinforced by the absence or reduction of financial institution intermediaries and central points of control in more highly decentralized cryptocurrency systems that can obscure clear lines of responsibility and accountability within cryptocurrency ecosystems. While stablecoins are used across more decentralized networks, in most cases stablecoins generally at least central administrators and issuers that can ease establishing lines of responsibility.

Where there is an absence of clear responsible parties, compounded by the immutability or unchangeability of cryptocurrency ledgers, it can be extremely challenging to provide mechanisms for victim recourse as well as timely adaptation to take measures to stop movement of illicit funds or patch security vulnerabilities in networks and smart contracts. However, in contrast to SWIFT, FedWIRE, and cash movements that do not publish transactions to public ledgers, on-chain stablecoin transactions include a lot of public transparency that can be beneficial to market surveillance and crypto investigations. Though ultimately the benefits presented by this transparency can be difficult to leverage with earlier-mentioned challenges with compliance, acceptance of accountability, and expertise across both public and private stakeholders.

Risks that can be presented by stablecoins without proper controls in place generally reflect the same kinds of risks that can exist in traditional finance (or “tradfi”). For example, fraud, market manipulations, and conflicts of interest across stablecoin leaders or public officials can present risks to investors and consumers. Pump-and-dump schemes and front-running capabilities enabled through maximal extractable value (MEV) schemes can endanger market integrity, and complex interconnections, concentration risks, and hardwired procyclicality in stablecoin or any other decentralized finance (“defi”) systems can present risks to financial system stability. Failures like that of Synapse Financial Technologies and of stablecoin Terra underscored the consequences of insufficient oversight of regtech and stablecoin platforms, and the devastating consequences to consumers without access or ability to recover some or all of their funds.

The risks to national security on getting the stablecoin framework wrong—either by being too lax on controls or by overly restricting companies and driving innovation offshore—are also important to evaluate. If stablecoins present the greatest potential for at-scale adoption for cross-border payments in cryptocurrency, then national security concerns of losing sanctions and AML/CFT tool efficacy can present in several ways: either from failing to drive US stablecoin competitiveness compared to other national currency denominated stablecoins or payment systems; or risks that could present from stablecoins and other defi diminishing reliance or need for US correspondent banking relationships in foreign exchange (FX) transactions or other cross-border funds flows.

The need for a framework

The United States does not yet have a comprehensive framework for regulation of stablecoins. Instead, existing authorities are fragmented at the federal level largely only via AML/CFT regulation and then across certain states like New York that cover stablecoins. In the absence of leveraging existing bank and trust charter authorities; using Dodd-Frank payment, clearing, and settlement activity designation authorities; setting up a Federal payments charter; or taking any other action to create a framework, the United States lags behind many other jurisdictions like the European Union, Singapore, Japan, and the United Arab Emirates that have established requirements and most importantly clear pathways to registration and supervision for stablecoins operating within their jurisdictions.

The United States must prioritize establishing a stablecoin framework during this Congress. Similar in many functions and operations to more traditional financial assets, stablecoins and associated deposit and payments activities are things that we understand how to regulate and protect. This framework is achievable, able to build on years of bipartisan efforts working across the aisle to construct a truly comprehensive approach. With Congress and the administration positioned to prioritize this legislation, we are at a critical juncture to get a law passed in 2025.

We need strong prudential and consumer protection regulations to ensure that stablecoins are truly “stable,” allowing any user to trust in its value and avoid losses from the issuer’s default or illiquidity. In this way, a clear regulatory framework that fosters trust can actually help set conditions that could help drive broader adoption and competition. We also need to have strong AML/CFT protections in place for stablecoin ecosystems. These different regimes do not operate in silos, but instead mutually reinforce each other and address vulnerabilities that are being exploited by illicit actors targeting the cryptocurrency sector. For example, in the case of Democratic People’s Republic of Korea (DPRK) hacks of cryptocurrency platforms, like the recent $1.5 billion Bybit hack, are exploiting both cybersecurity weaknesses and vulnerabilities as well as AML/CFT deficiencies in their crypto heists and subsequent laundering activities. In crypto heists, stablecoins have been targets as well as laundering tools exploited by hackers. Only through a comprehensive framework can we ensure that measures across the spectrum of areas like cybersecurity and AML/CFT are holistically addressed in these important ecosystems.

Though also important to note, especially in light of recent changes in enforcement posture—beyond just creating the policy framework, the government and industry must work to apply and enforce the framework. A policy that is not enforced or implemented does nothing to benefit consumers nor US firms with stronger compliance programs that have been operating at higher costs and less competitive advantages than many foreign operating firms.

Proposed stablecoin legislation:Ensuring sufficient protections

There has been a great amount of attention paid to stablecoin legislation in recent years with various stablecoin bills introduced, including the McHenry-Waters bill and Lummis-Gillibrand Payment Stablecoin Act developed last Congress, as well as the STABLE Act and GENIUS Act introduced so far this Congress.

I am very glad to see the level of support within Congress for elevating stablecoin legislation to a priority this year, something I spoke to as essential in my testimony to the Subcommittee on Digital Assets, Financial Technology, and Inclusion last year. I am also pleased to see many elements included in the STABLE Act referenced for this hearing that I support, such as high-quality reserves on at least a 1:1 basis, envisioned roles for both state and Federal regulators, and restrictions on rehypothecating reserve assets as well as stablecoin issuer activities. However, the STABLE Act appears to walk back a lot of the hard work done for years across the aisle to develop the negotiated text between then Chair McHenry and Ranking Member Waters in 2024. It is unclear why some of those critical protections, especially the prudential framework and clear AML/CFT and sanctions applicability to US dollar-denominated stablecoin activity, are absent in the STABLE Act and the GENIUS Act or if the associated risks are otherwise being addressed.

Here I outline some areas for the Committee’s consideration in hopes that the legislation for stablecoins issued this year can be truly comprehensive:

• Ensuring federal line-of-sight for supervision on issues of systemic importance: The STABLE Act, in some ways similar to the existing banking regime, provides for both federal and state authorities to charter stablecoin issuers. However, the STABLE Act does not include any coordination between the federal and state regulators. Rather, the current draft permits a system where a trillion-dollar nonbank stablecoin issuer, engaging in globally reaching payments activity that would typically place an institution under the oversight of federal authorities, without any sufficient line of sight by the Federal Reserve of activities and risks that rise to systemic importance. Unclearly defined “exigent” circumstances, especially in the way of Loper-Bright, as the only context for certain additional regulatory authorities severely restrict a regulator’s ability to monitor for and intervene to mitigate risks for assets that operate 24/7 around the world and with no concerns for borders.

I agree with many others who have testified before you all that state authorities provide an important chartering and oversight capability, including agility and expertise that can help scale appropriate supervision. State regulators with strong prudential, AML/CFT, and consumer protection frameworks are critical partners on the front lines of regulating the cryptocurrency industry, and I am sympathetic to the desire to preserve the states’ regulatory authorities. Though, it stands to reason that when these issuers are operating systems, especially large platforms, that are administering a substitute for the US dollar in international payments, some federal regulator—like the Federal Reserve Board, with its responsibility for monetary policy and financial stability, or the Office of the Comptroller of the Currency (OCC) with its chartering and supervision authority—should have the ability to monitor for their critical risks and have a say in the standards that stablecoin issuers need to meet, at a minimum when they are of a large enough size. The STABLE Act, as it currently stands, raises serious questions around the ability of federal authorities to have visibility of and ability to respond timely to moments of financial crisis and address systemic risks that may arise.

• Scope of risk coverage and enforcement regime: The STABLE Act references risks to mitigate around operational and cybersecurity risks, but otherwise is severely lacking in reference to credit risk, market risk, concentration risk, and even limitations on additional management of capital and liquidity risk beyond the 1:1 reserve collateralization requirement. There is no clear articulation of responsibility for rules or implementation of requirements under privacy regimes like Gramm-Leach-Bliley Act or the AML/CFT framework of the Bank Secrecy Act (e.g., if Treasury/FinCEN would have sole AML/CFT rulemaking authority for payment stablecoin issuers or if they would be issued jointly). Additionally, the enforcement framework is unclear, with no references to specific penalties or enforcement provisions, including no clarity on extraterritorial operations of US dollar-denominated stablecoins.
  
• Affiliate controls and application of the Bank Holding Company Act and Bank Services Company Act: The STABLE Act does not address affiliate relationships and restrictions for nonbank payment stablecoin issuers to preserve separation of activities like banking and commerce. In this new bill, it is unclear to what extent controls like from the Bank Holding Company Act as well as authorities for oversight and delegation of functions as delineated under the Bank Services Company Act apply to payment stablecoin issuers.
  
• AML/CFT and sanctions: While the STABLE Act and GENIUS Act delineate that payment stablecoin issuers are financial institutions under the Bank Secrecy Act, it is not clear (especially to the degree needed in the wake of Loper-Bright) to what degree rulemaking can cover different parts of stablecoin ecosystems and which agency would be responsible for the rulemaking and oversight. Stablecoins have been exploited by illicit actors ranging from cartels to sanctions evaders to terrorism financiers, especially leveraging the absence of sufficient compliance across international operations and defi platforms. The United States Treasury has underscored the benefit for Congress to clarify that any US-dollar denominated stablecoin must comply with US sanctions policy, including extraterritorial applicability, and also make clear the expectation to maintain and assert freeze and recovery capability for illicit proceeds across the stablecoin. We should not find it acceptable for a US dollar stablecoin to be leveraged in transactions to designated actors and jurisdictions that present threats to US national security.

While unlikely in this round of legislation, Congress should start solidifying its views and drafting legislation to expand the regulatory perimeter to help mitigate risks across more decentralized applications of the assets. Expanding such a perimeter would generally involve considering what other entities would be of greatest utility to cover due to visibility and control of the assets, and ensuring that a risk-based approach properly scopes the obligations and does so in full understanding of what is technologically and operationally possible. While there are many differing views on how to approach defi controls, it is encouraging to see that within the defi community there are actors who are trying to implement responsible innovative fixes, even if they are not yet successful, as we saw recently in the unsuccessful attempt by several THORChain developers to try to stop DPRK money laundering on their platform.

• Bankruptcy and resolution measures: Bankruptcy protections are one of the last lines of defense for fostering consumer trust in a product—building comfort for the customer that they will be able to get access to or redeem their assets held by the platform or issuer at any time on demand. The US Bankruptcy code, if applied to stablecoins in the wake of a failure, could be disastrous for token holders who would be treated equivalently to all other unsecured creditors. The McHenry-Waters bill outlined a potential alternative resolution process to help expedite recovery of assets for token holders that could work across federal and state levels and provide critical recourse for consumers.
  
• Fed master accounts and broader payments framework: There is no reference in the STABLE Act or GENIUS Act to the authority of the Federal Reserve to grant access for stablecoin issuers to a master account, something that likely will continue to be sought especially as stablecoins get more regulated and attain higher assurance of their safety and soundness. With this legislation aiming to serve as the comprehensive construct of guardrails and authorities to enable innovation and protect payments, it should include provisions like this to ensure the capability exists with the Federal Reserve for any issuer it deems to be appropriate to grant access.
  

More broadly, stablecoin legislation would optimally be pursued as part of a holistic approach to regulation and supervision of all payments platforms, which are growing enough in complexity and adoption. Many of the risks for stablecoins are similar to those for broader payments, and given the desire to ensure critical protections for consumers regardless of the denomination of their asset or which app they happen to be using, Congress should keep an eye toward how to evolve regulatory frameworks to capture any of these activities regardless on if it is blockchain-based or not.

Again, I applaud the committee’s work on this issue and the continued leadership on these issues by key leaders like Chair Hill and Ranking Member Waster. I encourage the Committee to consider working from the previously negotiated McHenry-Waters bill, which includes bipartisan-vetted provisions that address many of the outstanding issues for the desired comprehensive stablecoin framework. I hope that my views on key missing elements will be helpful to the Committee in its thoughtful efforts to build out and implement a competitive, comprehensive stablecoin framework that addresses risks while promoting responsible innovation.

Proposed CBDC legislation: Privacy as paramount in retail CBDC

The new proposed CBDC Anti-Surveillance State Act bans CBDC experimentation. Innovations in digital payments and across digital forms of both public and private money can also take many forms—whether wholesale or retail CBDCs, stablecoins, tokenized deposits, digital payment applications, etc.—each of which carry a spectrum of diverse implementations and associated risks. Ultimately, it is likely that a mix of modernizations of public and privately-administered rails, such as with the current financial system, will be needed to achieve a future of vision like global instantaneous reach and accessibility of the dollar.

This legislation is pointed specifically at addressing concerns around privacy specific to CBDCs, which is a greater point of concern around retail CBDC implementations rather than wholesale payments that are not associated with specific consumers and related sensitive personal data. The bill proposes to address the privacy concerns by banning even experimentation to even assess if there are technological and governance implementations that could achieve desired privacy outcomes, whether in the US or even just for templates that partner nations could implement. The bill also does not address privacy issues presented by private cryptocurrencies, such as privacy concerns exacerbated by public unobscured records of financial transactions and challenged cybersecurity practices across the sector.

An apparent improvement on this bill from earlier versions appears to be amending the prohibition to only retail CBDCs. Concerns around privacy for a retail CBDC are understandable and very important, especially in the United States given sentiments of Americans around making information available to the government and even challenges that have existed in trying to adopt digital identity infrastructure. Many feel that given such concerns in the United States, focus on wholesale CBDCs as an initial area for innovation in cross-border settlement could be ripe for nearer-term exploration.

The kinds of building blocks that could enable privacy preservation and security in technologies like CBDCs—innovative technologies like digital identity infrastructure and privacy enhancing technologies like homomorphic encryption, multiparty computation, and zero-knowledge proofs—are also building blocks that can enable privacy and security in private cryptocurrency implementations as well. Even if specific development of a US retail CBDC is not likely, broader research and development and experimentation across the more nascent and underlying technologies and components can be helpful to identify mechanisms to achieve desired objectives across a variety of future forms of public and private money innovations.

This bill could further exacerbate a growing gap for the United States in digital payments innovation, as over one hundred countries representing 98 percent of global GDP continue to explore CBDCs and conduct cross-border pilots. The United States remains the only member of the G20 to not be in advanced stages of CBDC exploration. CBDC experimentation is at the heart of significant research and development across the international community trying to shape what the future of the financial system looks like, experimentation that without a major US leadership presence is in some ways both a symptom and a driver towards interest of potential rails less reliant on the dollar, and something in which we cannot idly forsake leadership.

In the interests of safeguarding capabilities for experimentation and ensuring that the United States remains at the forefront of digital payments innovation, I outline here some areas for consideration for this proposed anti-CBDC legislation:

• Narrowing the prohibition to retail CBDCs: Recent updates to the proposed CBDC Anti-Surveillance State Act appears to narrow the prohibition of research and development, testing, or issuance to retail CBDCs only with the addition of the feature “widely available to the general public” into the definition of CBDC. If that is the intent, this avoids several significant challenges presented by the previous House-passed version of the bill, as well as that referenced in the recent executive order prohibition, that even the Congressional Budget Office (CBO) noted included such broad definitions that it was unclear if they could be interpreted to ban existing digital forms of central bank reserves and impact the ability to conduct monetary policy. However, if this bill is aimed at prohibiting wholesale digital payments innovation, or other forms of digital payments innovations like tiered or intermediated innovations like in certain implementations of stablecoins or tokenized deposits, additional concerns would remain related to stifling the ability to modernize the US financial system.
  
• Legal necessity unclear: The necessity of this legislation to prohibit any experimentation and research and development in CBDCs appears unnecessary if the ultimate concern is to ensure against the issuance of a retail CBDC without Congressional approval. The Federal Reserve already published its own analysis highlighting that the Federal Reserve Act does not authorize direct Federal Reserve accounts for individuals. Both the Fed and Treasury have also voiced that they would only move forward with issuance of a CBDC with clear support from both Congress and the executive branch. With Congressional approval already assessed as a precondition to issuance of at least retail CBDCs, and supported as necessary by the lead executive authorities, this prohibition appears unnecessary to achieve the policy outcome when Congress could just withhold authorization. If the refocus of this updated proposed legislation is only prohibiting retail CBDCs, research and development as well as operations to optimize and conduct of digital wholesale payments and settlement activities by central banks would hopefully not affected by this legislation as the Congressional Budget Office assessed could have been impacted by previously proposed versions.
  
• Adjusting framing: The US government fully supports privacy in any democratic CBDC: This bill’s title and corresponding messaging unfortunately present an inaccurate picture that CBDCs must inherently intimate an authoritarian “surveillance state.” CBDCs do not have to mean “Big Brother” just as cryptocurrencies do not have to mean anarchy. The implications for privacy are vastly different for wholesale versus retail CBDCs. Just as with privately administered cryptocurrencies, inherent features like privacy and discoverability are completely dependent upon the specific design of the systems. The Federal Reserve, the US Treasury and prior Administrations have been extremely consistent in messaging, including alongside the G7, that “rigorous standards of privacy” and accountability for that privacy are critical for any retail CBDC implementation. The CBDC discussion warrants nuance, just as the cryptocurrency discussion does.
  
• Refocusing on impactful privacy measures: Rather than this legislation barring pilots and experimentation of implementations and building blocks to preserve privacy for some future possible CBDCs likely at least a decade away (research that could also help provide building blocks for other digital assets like stablecoins), Congressional action could instead pivot to focus on long-existing challenges presented by the absence of comprehensive consumer data privacy legislation. Especially given the low likelihood and far-off reality of cross-US government and public interest in a US retail CBDC (which the Federal Reserve, US Treasury, and potentially Congress have all agreed would require Congressional approval to issue if there ever were such an interest), Congressional focus on privacy legislation would be a more impactful area for focus.
  
• Needed clarity on the protections meant for private stablecoins: It is unclear exactly what protections are being offered under section 4, which defends from prohibition only “any dollar-denominated currency that is open, permissionless, and private, and fully preserves the privacy protections of United States coins and physical currency.” This is oddly framed and could place significant prohibitions on industry cryptocurrency implementations, if this intimates that there are intended to be restrictions here placed on certain industry cryptocurrency implementation, such as private stablecoins that aim to get a master account with the Federal Reserve. It is unclear if this intimates that permissioned stablecoin implementations may be barred from direct or indirect relationship with the Fed. It is also unclear what fully preserved privacy protections means in this context, given that the privacy features of cash (e.g., can move value without a third party, is not posted to any ledgers) do not exactly equate to the privacy features of any existent cryptocurrency (e.g., value movements generally require certain types of third parties—even if unregulated intermediaries—such as miners and validators, and transactions post on public ledgers). It would be important to clarify which privacy features of cash they desire, or what the specific balance of discoverability versus obfuscation is desired in the cryptocurrency system, as part of broader clarity on what this section is intended to achieve.

In closing, I would like to again underscore my gratitude for the honor of the opportunity to speak with you all today. It is critical that the United States make timely progress on establishing and implementing a comprehensive stablecoin regulatory framework that leverages years of effort on defining critical holistic protections that also reinforce the central role in the financial system and as a leader in technological innovation.

Thank you.

Fellow

Carole House

Nonresident Senior Fellow

GeoEconomics Center

Cybersecurity Digital Currencies

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Few were surprised, therefore, when President Trump began his second term with an executive order that prioritizes stablecoins as the preferred mechanism for safeguarding both the global role of the US dollar and financial stability. The executive order also stated that CBDCs create financial stability threats. In contrast, the monetary policy minutes from the December 2024 European Central Bank rate-setting meeting took the opposite position and proposed that crypto assets could create financial stability threats for the eurozone.

The 2025 reserve currency policy landscape: Four key issues to watch

Legislation: Despite their policy differences, European Union (EU) and US policymakers all face the same hurdle. CBDCs can not be issued without legislation.  Lawmakers in Brussels, London, and Washington are each declining to move forward quickly.  The European Parliament to date has declined to schedule a vote on the digital euro package submitted by the European Commission—despite urging by the ECB.  Nor has the UK Parliament moved forward with a digital pound initiative. 

The Republican-led Congress and the White House oppose CBDCs, ensuring that no CBDC legislation will move forward in the United States in the foreseeable future.  The Federal Reserve agrees. Chairman Jerome Powell yesterday testified to Congress  that he will not propose or pursue a digital dollar during the balance of his tenure at the central bank.  Chairman Powell’s term expires in spring 2026.  All relevant policymakers in the United States (the White House, Congressional leaders, regulatory agencies, the central bank) are now united in their opposition to a domestic CBDC. Their focus now turns towards articulating a legislative and regulatory framework supporting stablecoins.

House Financial Services Committee Chairman Hill’s 2025 interview with CNBC confirms that leading US lawmakers believe expanded stablecoin adoption would help “extend the reserve currency status” of the US dollar globally. In addition, Federal Reserve Governor Christopher Waller now publicly supports stablecoins “because they are likely to propagate the dollar’s status as a reserve currency, though they need a clear set of rules and regulations.” Senate Banking Committee Chairman Tim Scott weighed in during January, pledging to craft a stablecoin “regulatory framework that…will promote consumer choice, education, and protection and ensure compliance with any appropriate Bank Secrecy Act requirements.” It remains to be seen if dollar-backed stablecoins could strengthen the dollar’s role in the global payment system.

The structure of legislation will materially impact growth trajectories for stablecoin markets domestically and internationally, with implications for US sovereign bond markets. For example, a regulatory framework could require stablecoin issuers to hold US Treasury securities to back their stablecoins, thus guaranteeing liquidity and demand for US dollar-denominated sovereign paper. Additional proposals to create a crypto asset reserve at the federal level could provide additional liquidity support to crypto markets. 

Geopolitics: President Trump campaigned on promises to safeguard the global role of the dollar. His promises included wielding tariffs as a mechanism to discipline foreign countries that undermine the global role of the dollar, presumably in addition to aggressive sanctions enforcement. The Trump administration is not alone in raising red flags regarding certain CBDC use cases. Growing concern exists internationally that non-US dollar CBDC networks could be used to evade Western sanctions. Against this backdrop, in October 2024, the Bank for International Settlements withdrew from the wholesale CBDC mBridge project, whose members include central banks from China, Hong Kong, Thailand, the United Arab Emirates, and Saudi Arabia. The BIS General Manager reiterated the policy that “…the BIS does not operate with any countries, nor can its products be used by any countries that are subject to sanctions…we need to be observant of sanctions and whatever products we put together should not be a conduit to violate sanctions.” In addition, Russia has called for a multipolar global financial system with a separate non-dollar clearing and settlement system.

Distributed free markets: Stablecoins currently occupy a tiny fraction of financial market activity. Crypto itself remains minor relative to US capital markets. Globally, the estimated stablecoin market size is $227 billion in market capitalization, as compared to $6.22 trillion for US capital markets and $3.39 trillion for global cryptocurrency markets. If current double-digit growth rates for stablecoins continue, they could constitute a considerable proportion of overall crypto market capitalization, if not capital markets themselves. More importantly, the vast majority of stablecoins are pegged to the US dollar.

Rapid adoption rates paired with speedy transaction volumes and velocity in stablecoin markets mean that today’s stablecoin and CBDC decisions may amplify ongoing shifts in reserve currency markets. Dramatic shifts in reserve currency status historically have been rare events. The more likely scenario for threats to dollar dominance involve a range of alternative currencies nibbling at the dollar’s role at the margins. While the US dollar is comfortably in the lead, accounting for 49.2 percent of international payment messaging through SWIFT, its share of global FX reserves has fallen from 71 percent in 2001 to 54.8 percent at present. Decreased demand for dollars has increased demand for non-traditional currencies, gold, and several pairs of local currencies, rather than traditional reserve currencies.

In this context, choices made by individual users can materially impact global reserve currency status. The broad adoption of US dollar-backed stablecoins could even reverse the de-dollarization trend.  Decisions made by policymakers during 2025 will thus materially impact how the stablecoin and dollar markets evolve. 

European crypto rules: EU officials promote the digital euro as a mechanism for delivering strategic and economic autonomy relative to the US dollar. At the retail level, they compete with local payments processes currently dominated by US credit card companies. Globally, they facilitate increased usage of the euro as an international transaction currency. Secondary use cases include using blockchain technology to create “ tokenized” (euro-denominated) deposits that would cement the role of commercial banks within the payment system. European policymakers have also begun experimenting with tokenized securities. Slovenia became the first eurozone sovereign country to issue a tokenized euro area sovereign bond. In December, the Bank of France became the first eurozone central bank to complete transactions in the secondary market for both sovereign fixed income and equity using an unnamed digital currency on a blockchain.

However, if a critical mass of individuals in a country holds wealth in a foreign currency stablecoin, the competitive landscape, if not the survival of other reserve currencies, requires that they provide a digital alternative. The scenario also creates incentives for other jurisdictions to make it difficult to achieve  interoperability with non-euro stablecoins, while creating economic hurdles for local users to choose US dollar-backed stablecoins—essentially preserving their economic and monetary sovereignty.

Some see the newly issued EU crypto regulatory framework—the Markets in Crypto Assets (MiCA); and specifically the 1:1 ratio of required liquid reserves for stablecoins —as a strategic tool to raise barriers to non-EU issuers of US dollar-denominated stablecoins. MiCA extends bank-like regulatory requirements to crypto asset issuers and intermediaries. We discussed that framework and its relationship to the US crypto asset policy landscape in our January 28, 2025 Econographics essay. The framework potentially provides European regulators with the time and tools to play defense by regulating local stablecoin markets to permit either a digital euro or euro-denominated stablecoins to gain market traction. Market data will provide the metric for policy effectiveness.

Barbara Matthews is a nonresident senior fellow at the Atlantic Council’s Geoeconomics Center. She is also Founder and CEO of BCMstrategy, inc., a company that generates AI training data and signals regarding public policy.

Hung Tran is a nonresident senior fellow at the Atlantic Council’s Geoeconomics Center and senior fellow at the Policy Center for the New South; a former senior official at the Institute of International Finance and International Monetary Fund.

At the intersection of economics, finance, and foreign policy, the GeoEconomics Center is a translation hub with the goal of helping shape a better global economic future.

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Consistent EU policy posture

When the European Union’s (EU) digital currency regulation (MiCAR) went into effect on December 30, 2024, the EU’s regulatory pillars for crypto asset oversight were completed. Together with the Transfer of Funds Regulation and the Digital Operational Resilience Act, MiCAR extends bank-like rules to stablecoins and cryptocurrencies. The policy addresses financial stability and consumer protection risks arising from cryptocurrencies, most of which are mined outside of the EU. Indeed, the European Central Bank’s (ECB) December 2024 monetary policy minutes indicated that US crypto markets create elevated financial stability risks in the EU. ECB policymakers consistently prefer Central Bank Digital Currencies (CBDC), in the form of a digital euro, over cryptocurrencies to safeguard strategic autonomy and monetary sovereignty for EU businesses and individuals. 

MiCAR applies to the issuance, marketing, and trading of crypto assets and related services. Companies seeking to engage in these activities must comply with bank-like regulatory requirements, including having adequate internal risk management and minimum capital requirements. The regulation applies to three types of coin (e-money) issuers, two of which are stablecoins. All e-money issuers must be licensed as an electronic money institution or a credit institution (i.e. a bank) under the Second Electronic Money Directive. The nascent EU crypto industry supported the new framework because it provides legal certainty.

Conflicting US policy posture

The digital currency policy path from 2021 to 2024 in the United States has not been linear. Dramatic market growth, partisan bickering, and significant fraud-based losses could trigger financial stability issues in the mainstream financial sector and concerns about illicit activity in the crypto sector in the United States. These trends saw the United States careen from supporting both crypto and CBDC in 2022, to a controversial regulation-by-enforcement policy stance in 2023 that the courts consistently invalidated, to multiple bills in Congress during 2024. Bipartisan legislation covering stablecoins passed the House of Representatives in 2024, only to languish in the Senate.

The new Trump administration has spoken decisively. A new executive order states a clear policy directly in conflict with the EU stance. The United States now charts a pro-blockchain, anti-CBDC  policy trajectory on the grounds that CBDCs “threaten the stability of the financial system individual privacy, and the sovereignty of the United States.” It also asserts that “lawful and legitimate” stablecoins support the “sovereignty of the United States dollar.” Digital finance policy formation has been elevated to the White House level through the president’s Working Group on Digital Asset Markets. The policy shift will be bolstered by parallel pro-crypto policy initiatives in Congress and among financial regulators since the November 2024 election: 

• Senate Banking Committee: 2025 legislative priorities include crypto and stablecoin legislation to ensure “compliance with any appropriate Bank Secrecy Act requirements.” 
• House Financial Services Committee: Chairman Travis Hill’s first public statement promised to “create a regulatory framework for digital assets that will protect investors and consumers while keeping innovation in America.”
• Both the House and the Senate have announced investigations and hearings into the “Choke Point 2.0” regulatory policy initiatives that constrained crypto sector access to traditional financial sector liquidity.
• Commodity Futures Trading Commission (CFTC): In November 2024, the CFTC accelerated the ability to use assets besides cash as collateral by increasing reliance on distributed ledger technology.
• Securities and Exchange Commission (SEC): Acting SEC Chairman Mark T. Uyeda formed a new task force to accelerate work on a crypto regulatory framework. The task force will be led by Commissioner Hester Peirce, who has been a leader at the SEC regarding distributed finance and crypto issues.
  

Potential tension and opportunities for alignment

Before the 2024 presidential election, many viewed the legal certainty provided by MiCAR as creating competitive advantages for nascent EU crypto asset markets. Some promoted MiCAR for crypto assets, encouraging US, UK, and other jurisdictions to converge with the EU standard.

The Trump administration’s newly issued executive order makes clear that MiCAR will not provide a template for US policymakers. Both the crypto industry and traditional banking executives support the initiative to create the first blockchain-native policy framework. attending the World Economic Forum in Switzerland underscored that legal clarity will accelerate crypto use within the traditional banking system.

Transatlantic regulatory alignment is not impossible. In particular, US initiatives that expand the regulatory perimeter to cover cryptocurrencies and require compliance with the Bank Secrecy Act could trigger transatlantic alignment merely because no such comparable financial regulatory requirements exist in the United States today. EU alignment with the new US policy is also possible. Indeed, the European Parliament has observed that the EU Commission’s digital euro CBDC initiative is now a long-term aspiration rather than a near-term priority. Differences between the EU Commission and the European Securities Markets Authority (ESMA) regarding next steps for MiCAR also suggest that more market-friendly regulation could emerge. These kinds of alignment should not be confused with transatlantic regulatory harmonization or convergence, which has been an elusive target for decades in the financial services sector.

1. Market dynamics: US crypto issuers and intermediaries currently dominate EU markets. The 2025 European Banking Authority’s and ESMA’s joint report on recent developments in crypto-assets indicates that USD-based stablecoins constitute 90 percent of market capitalization and over 70 percent of trading volume in Europe. The volume of crypto transactions in Europe, instead, has remained at 8 percent since 2022 even as digital payment volumes increase. Policy clarity could propel US crypto firms to a more dominant position globally, to the detriment of nascent crypto asset markets in Europe. EU businesses may pressure policymakers to seek harmonization with the United States as a consequence.
   
2. Market access: Many MiCAR components run counter to how crypto markets operate. For example, the distributed nature of connected computers defies traditional regulatory requirements for a local physical subsidiary. MiCAR’s local subsidiary requirements could be vulnerable to trade policy challenges as non-tariff barriers, particularly in the context of a new US government that favors using trade policy to achieve non-trade policy goals. In addition, blockchain-based counterparty anonymity does not align neatly with either MiCAR or the US Bank Secrecy Act.
   
3. Financial stability: The rapid twin insolvencies in 2023 at Silicon Valley Bank and Silvergate created liquidity pressures both for stablecoins and the traditional banking system. Addressing financial stability risks often involves official sector liquidity support in addition to precautionary regulatory oversight. Initial press reports indicate that the United States may create a strategic bitcoin reserve. TheBITCOIN Act of 2024 (S.4912) introduced by Senator Cynthia Lummis proposed a strategic bitcoin reserve to serve the same role as gold reserves. The legislation was silent on whether, or how, the reserves could be used to provide liquidity support to markets under stress. Any such reserve could create controversy and pressure for comparable strategic reserves globally.
   

The EU’s preferred crypto policy framework extends the perimeter of banking regulation designed to constrain financial stability risks arising from non-local entities while promoting a regional CBDC.  No details have yet emerged from the US regarding specific regulatory policy choices. However, US policymakers have articulated a clear set of priorities which are dramatically different from the EU. US policymakers seek to support private sector blockchain-based intermediation while declaring instead that CBDC initiatives create financial stability risks.  High level policy alignment is possible. Divergences, heated rhetoric, and drama are inevitable.

Hung Tran is a nonresident senior fellow at the Atlantic Council’s Geoeconomics Center and senior fellow at the Policy Center for the New South; a former senior official at the Institute of International Finance and International Monetary Fund.

Barbara Matthews is a nonresident senior fellow at the Atlantic Council’s Geoeconomics Center. She is also Founder and CEO of BCMstrategy, inc., a company that generates AI training data and signals regarding public policy.

At the intersection of economics, finance, and foreign policy, the GeoEconomics Center is a translation hub with the goal of helping shape a better global economic future.

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With legislators favorable to the industry—including Representative French Hill as the chair of the House Financial Services Committee (watch his Atlantic Council event on stablecoins here), Senator Cynthia Lummis as the newly formed chair of the Senate Banking Committee’s subcommittee on digital assets, SEC chair pick Paul Atkins, and advisors like Elon Musk and commerce secretary nominee Howard Lutnick—confidence is growing that crypto-forward agenda is on its way. But what does success on the regulatory front actually look like? What does it mean for the rest of the world? We dive into the dozen bills under consideration in Congress and zoom in on the three big themes for crypto regulation in 2025.

The SEC vs CFTC: Finally, a truce?

One of the major disagreements between the industry and legislators has been whether the SEC or the Commodity Futures Trading Commission (CFTC) is the right regulator for crypto. As is often debated in Washington, is crypto a security or a commodity? Under the former SEC chair, Gary Gensler, the agency regularly fined crypto companies when it found them in breach of securities laws. This led to some legislators and industry favoring the CFTC as the regulator. Several bills under consideration, including the Financial Innovation and Technology for the 21st Century Act, the Digital Asset Market Structure and Investor Protection Act, the Responsible Financial Innovation Act, and the BRIDGE Digital Assets Act, address the jurisdiction of SEC and the CFTC regarding crypto.

One of the Trump campaign’s biggest promises to the industry is an end to this era of regulation by enforcement. Paul Atkins, Trump’s pick to replace Gary Gensler as SEC chair, is seen as friendly to the crypto industry. His appointment follows a wave of legal decisions over the past two years that have ruled in favor of the companies against the SEC. Atkins’ job, once he’s sworn in, will be two-fold: He will need to clarify the SEC’s jurisdiction over the crypto market and then actually enforce regulations on crypto-assets—their issuance, use, and role in the US economy. Congress will augment these efforts, and you can expect several bills rebalancing the SEC and CFTC’s jurisdiction and enforcement powers. See below for the full breakdown.

Stablecoins, ahoy! 

Stablecoins have now passed $190 billion in global circulation. They can provide much needed liquidity for the crypto market and act as conduits between crypto and non-crypto-assets. Stablecoins increasingly aim to address humanitarian aid and cross-border payments such as remittances, including in Ukraine.

While 98 percent of stablecoins are pegged to the dollar, over 80 percent of stablecoin transactions happen abroad. This makes these “digital dollars” subject to regulatory frameworks set in Europe, Asia, and Africa. Europe’s stablecoin framework, known as Markets in Crypto-Assets, came into full effect in January 2025. Implementing the framework should result in some introspection across the Atlantic over the pending stablecoin legislation in Congress. The Clarity for Payment Stablecoins Act and the Lummis-Gillibrand Payment Stablecoins Act are the two bills under consideration. The Clarity Act has been under consideration by the House Financial Services Committee for the last year, coming close to bipartisan consensus a few times. It has evolved into a discussion draft proposed by Senator Bill Hagerty. The Lummis-Gillibrand Act was introduced to the Senate in May 2024. 

The bottom line, as our cryptocurrency regulatory tracker shows, is that regulations in the United States play a key role in the future of crypto around the world. While other countries have been developing their own regulatory frameworks, the United States has lagged behind—that may finally change in the months to come. 

A trailblazing national bitcoin reserve  

With the appointment of Lummis as the chair of the digital assets subcommittee at the Senate Banking Committee, it’s likely that talks of a bitcoin reserve will continue on the Hill. The logic behind the bill is to purchase bitcoin to be able to pay back the national debt. There are some open questions about the Lummis bitcoin reserve proposal—including the convoluted funding model, which revalues gold certificates from their 1993 price to their current value. 

There are also proposals for a US Central Bank Digital Currency (CBDC). The Trump administration and Republican lawmakers have made it clear that a retail CBDC, or the digital dollar, is not going to happen in the United States. This puts the United States at odds with its peers like Europe, which is rolling out a pilot of the digital euro in 2025, and the United Kingdom, which set up a CBDC lab just last week. The executive order directs all agencies to stop any ongoing work on a CBDC.

The breakdown of all the major pieces of legislation currently being considered is below.

Ananya Kumar is the deputy director, future of money at the Atlantic Council’s GeoEconomics Center.

At the intersection of economics, finance, and foreign policy, the GeoEconomics Center is a translation hub with the goal of helping shape a better global economic future.

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The successes of the past twenty-five years are undeniable—since 2000, poverty has been cut in half and global gross domestic product (GDP) growth has more than tripled. However, the failures are real as well. The internet, for all the incredible ways it has reshaped trade and innovation, has also fueled long-simmering divisions within countries.

The world is searching for a new “Wright Brothers moment”—a transformational invention that not only enhances productivity but simultaneously inspires people to imagine what comes next. The internet made us look down at our phones; the Wright Brothers made us look up to the sky.

The question is, will the United States and its allies be able to reap the benefits of this century’s Wright Brothers moment? It will likely depend on the economics. From 1900 to 1925, the pound sterling lost its global reserve currency status, industrialization fueled the greatest period of globalization the world had known, and the United States emerged as an economic superpower.

Fast forward to 2025 and the United States has the strongest gross domestic product (GDP) growth of any advanced economy, its startups set the standards across the world, and its geopolitical rivals, including China, have shown since the COVID-19 pandemic that they are not, in fact, ten feet tall.

But the difference between success and failure will be decided in unexpected places. Below are five pressing questions about the global economy in the year ahead. The answers to each of these questions will help determine whether the next twenty-five years mark a supercharged quarter century or push the United States off its economic flight path. 

1. Will Trump try to fire the Federal Reserve chair?

For all the concerns about the future of the US dollar, one of the only real near-term threats would come from a lack of confidence in the Federal Reserve’s independence. What could trigger such a crisis? Check out our breakdown of how Group of Twenty (G20) countries handle the dismissal of their central bank chiefs: 

The good news is that President-elect Donald Trump has said he isn’t going to try to fire Federal Reserve Chair Jerome Powell before his term is up in 2026. The bad news is that he might be able to do it if he changes his mind. The closest the United States has come to testing the idea is probably President Lyndon Johnson asking his Justice Department if he could fire then Federal Reserve Chair William McChesney Martin in 1965.

If the US president proposes this idea, then expect markets to send a ferocious signal not to cross that line. A more likely outcome is that Trump will appoint a new Federal Reserve chair very early in his term, which will cause some confusion but not an outright crisis. 

2. What effects will new US tariffs on China have?

New year, new tariffs? New US tariffs on China are coming—that much is already clear. But to understand how they will impact the US economy, take a deeper look at the tariffs that Trump put on Chinese goods during his first administration. The chart shows how Mexico and Canada have now overtaken China as the top sources of goods covered under the previous Section 301 China tariffs (which included a range of agricultural and manufacturing products). 

If the goal of higher tariffs is friendshoring, or diversifying import sources to trusted partners, the data show that maybe there’s something to this whole strategy—even if it takes time. And it’s not just Mexico and Canada stepping up to replace Chinese exports—the next twenty top US trade partners have nearly all increased their exports to the United States regardless of geography, from South Korea to Germany, and from Vietnam to Brazil.

While the first wave of tariffs had to wait out a pandemic, the next wave may hit China faster and harder, and the rest of the world is ready to take advantage. 

3. Is China’s Belt and Road Initiative back in business?

It certainly looks that way. New data from 2023 show that it was the first year since 2016 that China’s loans to Africa increased compared to the year before. The analysis below shows how China’s economic slowdown, and the COVID-19 pandemic, conspired to curb spending over the past few years.

But now it appears that Chinese leader Xi Jinping is ramping the Belt and Road Initiative back up. And this time, the money that is being spent is in yuan, not US dollars. The focus has shifted to smaller projects and lower financing levels to avoid some of the defaults seen in earlier projects.

The question now is whether Trump tries to counter the Belt and Road Initiative with bilateral US spending or by organizing a Group of Seven (G7) alternative to Beijing. 

4. Will the Global South get more voting power in the IMF?

When the Atlantic Council hosted India’s finance minister, Nirmala Sitharaman, in Marrakesh in 2023, she said that India and the Global South would not accept another unfair arrangement at the Bretton Woods institutions on voting power. This year, her ultimatum will be put to the test. How would the distribution of power change if votes were finally reallocated in the International Monetary Fund? It’s not as clear as you might think: 

The United States would gain votes, as would China, if votes were distributed simply based on a country’s share of global GDP. The real formula is more complicated, but the chart above does help show how things could shift. India would gain a little, and most of the G7 would lose. Of course, Europe losing also costs the United States, as it would have fewer friends at the board.

There is, however, no clear path forward, and it’s hard to see Trump agreeing to anything that benefits China. But don’t expect Indian Prime Minister Narendra Modi or Xi to capitulate either. A new battle of Bretton Woods may be brewing.

5. What’s next for US dollar–backed stablecoins?

In 1971, US Treasury Secretary John Connally famously told a group of European finance ministers that the dollar was “our currency, but your problem.” Europe in particular is going to be thinking about that notion quite a bit in 2025. To understand why, see how dollar stablecoins are increasingly popular around the world: 

Last year was a big year for cryptocurrency; Bitcoin’s price reached one hundred thousand dollars in December, and the industry played a significant role in the US elections. But the focus in 2025 will shift to stablecoins. Today, $170 billion worth of stablecoins are in circulation worldwide, with 98 percent of those pegged to the dollar. 

But as the chart shows, about 80 percent of the flow of US dollar-backed stablecoins happens outside the United States. This is driven mainly by adoption in Europe (with Russia in the lead), in India, and in Southeast Asian countries, such as Vietnam, Singapore, and Indonesia, which are using stablecoins for remittance payments and as a way to access dollars. 

The result is that while the United States finally created a regulatory framework for these assets, other central banks and finance ministers are going to ask the incoming Trump Treasury department exactly what the plan is for all these new dollars floating around in their economies. 

Josh Lipsky is the senior director of the Atlantic Council’s GeoEconomics Center and a former adviser to the International Monetary Fund.

Sophia Busch is an assistant director at the Atlantic Council’s GeoEconomics Center.

Research and data visualizations provided by Jessie Yin, Mrugank Bhusari, and Alisha Chhanganni.

This article is adapted from the GeoEconomics Center’s weekly Guide to the Global Economy newsletter. If you are interested in receiving this newsletter, email
SBusch@atlanticcouncil.org

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In May, US President Joe Biden announced a 100 percent tariff on all electric vehicles (EVs) imported from China. The administration had two main objectives: 1) Protect and stimulate US clean energy industries and supply chains, and 2) counter a flood of Chinese goods as Beijing turns to exports to compensate for its weak internal demand. For the United States, these tariffs are largely preventative and symbolic, as Chinese EVs make up only around 2 percent of total EV imports. For other Group of Seven (G7) countries, it’s too late for prevention, as Chinese EVs already dominate.

The Biden administration coordinated with concerned allies and, in August, Canada also announced it would levy a 100 percent tariff on EV imports from China. The European Union (EU) later imposed up to 45.3 percent tariffs on Chinese EVs. Economic stress due to Chinese dumping increasingly reaches beyond the United States––and even beyond the G7. Since 2023, Argentina, Brazil, India, and Vietnam have all begun anti-dumping or anti-subsidy investigations into Beijing’s practices. 

The incoming Trump administration will now have a choice. It can revert to President-elect Donald Trump’s previous preference for bilateral negotiations, or it can continue to restrict China’s access in step with allies and partners, possibly by creating a “buyers club” to regulate standards and open markets to a select few.

—Sophia Busch is an assistant director at the Atlantic Council’s GeoEconomics Center. 

In October 2024, the US Department of the Treasury issued final regulations implementing the Executive Order on Addressing United States Investments in Certain National Security Technologies and Products in Countries of Concern. Once it comes into effect on January 2, 2025, the Outbound Investment Security Program (OISP) regulations will prohibit or subject to notification requirements certain transactions involving Americans and persons affiliated with designated countries of concern (presently, China, including Hong Kong and Macau) operating in the semiconductor and microelectronics, quantum information technology, or artificial intelligence (AI) sectors (“covered foreign persons”). 

With respect to AI, the OISP will generally prohibit US persons from investing in a covered foreign person that develops any AI system trained using a quantity of computing power greater than ten septillion (10^25) computational operations (integer or floating-point operations). In addition, the OISP sets forth other computational thresholds implicating investment prohibitions (i.e., greater than 10^24 computational operations using primarily biological sequence data) or notification requirements (i.e., greater than 10^23 computational operations). Notably, regardless of computing power, covered transactions involving AI systems designed or intended for military, government intelligence, mass surveillance, cybersecurity, digital forensics, penetration testing tools, or the control of robotic systems end uses are also subject to prohibitions or notification requirements.

Absent practical guidance or enforcement history, exactly what these computing power thresholds mean in practice, as well as how they reasonably can be determined, remain to be seen. However, given its breadth, complexity, and enforceability, the OISP seems likely to have a significant effect—most notably with respect to US persons, but also in connection with the activities of certain foreign persons controlled by US persons or for which US persons serve in key roles. Such persons have until the new year to start making sense of what may be about 10^25 questions regarding their exposure under the OISP.

—Annie Froehlich is a nonresident senior fellow at the GeoEconomics Center and partner at Cooley LLP.

The 2024 meeting of the BRICS+ gathered the representatives of forty countries on October 22-24 in Kazan, Russia. This number is about four times the size of the BRICS+ (named for members Brazil, Russia, India, China, and South Africa), which expanded in 2023 to include Argentina, Egypt, Ethiopia, Iran, the United Arab Emirates, and Saudi Arabia.

While the creation of a BRICS currency still appears unlikely, the bloc announced a substitute for Western payment systems called BRICS Clear. Circumventing sanctions or the extraterritoriality of US banks and, more generally, becoming less dependent on the US dollar are clear motivations behind such endeavors, as well as a growing interest in making bilateral arrangements to use China’s e-yuan.

Some notable leaders, such as Argentine President Javier Milei and Brazilian President Luiz Inácio Lula da Silva, were absent. But the attendees were a large and heterogeneous group, including both Turkey and North Korea. But without being officially opposed to the United States, the US dollar, or even the G7, the summit in Kazan visibly illustrated increasing global fragmentation. True, it took two world wars for the British pound to be dethroned by the dollar, and the latter remains dominant, representing about 60 percent of central banks’ official reserves, international debt, and credit. But in a multipolar world, could too much hegemony be its own undoing?

—Marc-Olivier Strauss Kahn is a nonresident senior fellow at the Atlantic Council and honorary director general at Banque de France.

Russia’s invasion of Ukraine laid bare a vulnerability in Europe’s energy strategy: an overreliance on a single supplier for critical resources. The EU is determined to avoid repeating the same mistake with lithium, a critical mineral often referred to as “white gold” for its indispensable role in the decarbonization race. However, the EU faces an uphill battle to reduce its near-total dependence on China, which currently supplies 97 percent of the bloc’s raw lithium.

With its ability to produce lithium at low cost thanks to cheaper labor, state-controlled financing, and energy subsidies, Beijing has flooded global markets and produced much more lithium “than the world needs today, by far,” according to Jose Fernandez, under secretary for economic growth, energy, and the environment at the US Treasury Department. To mitigate this monopoly, the EU has set ambitious targets, including producing at least 10 percent of its annual lithium consumption within the bloc by 2030. However, the region’s lithium mining projects are not expected to begin production until the end of 2026, leaving a significant gap in the interim.

As the world transitions to green technologies, lithium will remain a cornerstone of the global energy transition. For the EU, building a resilient, diversified supply chain is a strategic necessity.

—Grace Kim is a young global professional with the GeoEconomics Center.

Almost half of the world held elections in 2024. In Western democracies, opposition parties have won six out of fifteen decisive elections. Globally, more than half of incumbents or ruling coalitions managed to stay in power. However, unstable coalitions prompted multiple collapsed governments in Europe, including Germany and France.

Meanwhile, Russia’s efforts to interfere in Eastern European and Eurasian countries’ elections were a prominent but not unexpected problem. Russia’s direct and indirect interference in the Georgian parliamentary elections has been thoroughly researched and documented. Like in Georgia, the Moldovan elections were fraught with Russian disinformation and meddling, although pro-Western incumbent President Maia Sandu emerged victorious. Meanwhile, Romanian intelligence services declassified documents showing that the country’s elections have become the target of “aggressive hybrid Russian action,” including 85,000 cyberattacks on Romanian election websites. 

These instances of interference throughout 2024 demonstrated that Russia and other adversaries are invested in undermining elections as a fundamental principle of democracy. This is an opportunity for the United States and the EU to leverage positive economic statecraft tools to equip countries in Eastern Europe and Eurasia with secure election technologies and provide financial assistance to educate populations in identifying and thwarting Russian propaganda and disinformation. 

—Kimberly Donovan is the director of the Economic Statecraft Initiative within the Atlantic Council’s GeoEconomics Center. Follow her at @KDonovan_AC.

—Maia Nikoladze is the associate director at the Economic Statecraft Initiative within the Atlantic Council’s GeoEconomics Center. Follow her at @Mai_Nikoladze.

—Mikael Pir-Budagyan is a young global professional at the Economic Statecraft Initiative within the Atlantic Council’s GeoEconomics Center.

Since the start of the year, the cryptocurrency market capitalization nearly doubled from $1.65 trillion to $3.65 trillion. This year, the digital asset industry made significant inroads into the global economy, especially bitcoin and stablecoins. 

Bitcoin continues to dominate the digital asset market, accounting for more than 50 percent of the total market capitalization as the asset crossed $100,000 on December 4. On January 10, the US Securities and Exchange Commission approved the bitcoin spot exchange-traded funds, giving retail and institutional investors greater access to the asset—in November, a group of US bitcoin exchange-traded funds recorded $6.2 billion of inflow. Stablecoins also saw significant, use accounting for trillions of dollars of transaction volume every month. In October, Stripe acquired stablecoin platform Bridge for $1.1 billion, demonstrating what may be fintech firms’ bigger push into digital assets. 

Digital assets should be expected to see more mainstream adoption under the Trump administration and a Republican-led House and Senate, which have expressed a pro-crypto stance. This will likely result in more open-source developers in the United States and greater exploration by financial institutions. 

—Nikhil Raghuveera is a nonresident senior fellow at the GeoEconomics Center and co-founder of Predicate.

As interest rates hit twenty-year highs, developing countries paid out a staggering sum of $1.4 trillion to service their foreign debts. The details behind that headline are equally stark and troublesome. Interest payments alone amounted to more than $400 billion as rates surged. And, as with most shocks, the poorest countries and most economically insecure people have been hit the hardest as governments are forced to make tradeoffs between development and growth, and as spending is diverted from critical health, education, and infrastructure investments. Low-income economies eligible for the International Development Association (IDA) paid $96 billion in debt service; and their interest payments now amount to nearly 6 percent of the export earnings of IDA-eligible countries—a level that hasn’t been seen in more than twenty-five years. For some countries, the payments run as high as 38 percent of export earnings. And more money is flowing out than in. Since 2022, foreign private creditors took in almost $13 billion more in debt-service payments from public sector borrowers in IDA-eligible economies than they doled out in new financing. Multilateral banks have been playing a larger role, even as service payments, interest rates, fees, charges, and surcharges have come under scrutiny. 

For its part, the World Bank announced in advance of the Annual Meetings in October that it was lowering the minimum equity-to-loan ratio from 19 percent to 18 percent, freeing up $30 billion more in financing, removing certain fees, and lowering the price of loans for smaller economies. Meanwhile, the International Monetary Fund (IMF) announced a package of reforms to its General Resources Account lending that will significantly reduce the cost of IMF borrowing, which has compounded the crisis for many countries. The principal changes include a reduction of the margin over the Special Drawing Rights interest rate, an increase in the threshold at which surcharges apply, a lower rate for time-based surcharges, and a higher threshold for commitment fees. More than a third of General Resources Account (GRA) borrowers are currently subject to surcharges. By fiscal year 2026, the number of nations subject to surcharges is projected to drop from twenty to thirteen. Hefty savings for GRA borrowers are expected––$1.2 billion annually, or 36 percent.

––Nicole Goldin, PhD, is a nonresident senior fellow at the Atlantic Council’s Geoeconomics Center.

Nothing encapsulates China’s economic crisis better than the steep fall in government revenue from “land use” sales. Since peaking in 2021, the country’s booming real estate sector has fallen into a deep depression, with construction grinding to a halt in many cities and falling prices adding to deflationary pressures in the Chinese economy. That has proven devastating to China’s heavily indebted local governments, which have relied on the sale of “land use” rights for much of their operating income. The IMF estimated in 2023 that the debt of local governments and financing vehicles they’ve set up over the years to raise (and spend) money totaled more than 100 trillion yuan ($13.7 trillion). With an estimated fifty million residences sitting empty nationwide, many property developers having defaulted on debts, and local governments unable to pay their bills, Beijing is struggling to sustain economic growth.

—Jeremy Mark is a nonresident senior fellow at the Atlantic Council’s GeoEconomics Center.

In 2024, the US Department of the Treasury took the final steps to implement Biden’s Executive Order 14105 to create a targeted Outbound Investment Security Program. During the rulemaking process, Treasury initially estimated that 212 transactions per year could fall within the program’s jurisdiction. The public comment period apparently caused Treasury to raise their estimates to 318 to “account for the likely underrepresentation of potentially relevant transactions,” but the private markets are famously opaque and Treasury went on to concede that “precise data that matches the scope of potential covered transactions is not available.” Treasury’s revised estimate should still only implicate less than 1 percent of deal activity (by deal count, vice value). The question for 2025 is whether this small percentage is an accurate reflection of the program’s impact on US outbound investments and the costs of compliance.

—Jesse Sucher is a nonresident senior fellow at the Atlantic Council’s Economic Statecraft Initiative in the GeoEconomics Center. 

There is nothing like large, unilateral, and across-the-board tariff proposals from the United States to get tongues wagging and economic models churning. The latest tariff proposals from the president-elect are no exception. But maybe more important than the impact of such tariffs is the question of whether the EU should view these tariff proposals as weapons and threats directed against trading partners, or as tools of US domestic policy that result in collateral damage to the EU. Each characterization is credible, but the difference is huge in terms of the direction of transatlantic relations.  And once EU policymakers start to publicly own one narrative or the other, it is hard to go back. 

If the tariff proposals are viewed as weapons and threats, a reasonable EU response—and maybe the only one—is retaliatory tariffs, and to refuse to negotiate “with a gun to our heads” (in well-worn EU parlance). This would likely lead to tit-for-tat retaliation or even a trade war. If, by contrast, the EU views the tariff proposals as tools of US domestic policy that inflict collateral damage on the EU, then a reasonable response is an early bilateral discussion on other ways to achieve US domestic policy objectives, but with less or no collateral damage to the EU. 

Among the policy objectives for these and previous proposed tariffs are: addressing persistent goods trade imbalances, encouraging domestic manufacturing, raising revenue, and protecting against and disincentivizing nonmarket excess capacity. These are policy goals that the EU and other trading partners can understand (and even arguably share), even if they disagree that tariffs are always a good way to achieve them. Indeed, some of these goals—like addressing the challenges posed by nonmarket economies—are better achieved in coordination with like-minded allies, which provides a clear opening and opportunity for collaboration.  

The current moment is ripe for early US-EU engagement on achieving the United States’ policy objectives while minimizing collateral tariff damage (including to the US economy itself). Engagement could, indeed, drive the percentage numbers in the header above closer to zero, at least for the EU.

––L. Dan Mullaney is a nonresident senior fellow with the Atlantic Council’s Europe Center and GeoEconomics Center.

That’s the amount of money generated by pulling forward future interest earnings on Russia’s blocked sovereign assets. For nearly three years, the G7 debated how to handle the $300 billion in Russian foreign exchange reserves being held in Western central banks. While some advocated for a total seizure of the full amount, others worried about the legality of such a move and the backlash it would create across the Global South. 

So the G7 reached a game-changing compromise. Creatively, and drawing in part on Atlantic Council GeoEconomics Center research (see our simple annuity formula below), the G7 calculated the interest these assets would earn over the next twenty years and deliver that total—$50 billion—to Ukraine in this calendar year. When you consider that Ukraine’s total budget in 2023 was around $80 billion, you understand that this solution is more than just a temporary fix—it’s a surge of resources delivered at a critical moment. And the number also represents what can happen when allies work together and think outside the box during an unprecedented situation.

––Josh Lipsky is the senior director of the Atlantic Council’s GeoEconomics Center.

Digital ID presents massive opportunities for governments and the private sector to interact with people more efficiently; well-known examples include India’s Aadhar system and Estonia’s e-ID. As governments digitize services and interfaces with constituents, digital ID is expected to play a significant role in resource allocation, access control, and data collection. At the same time, digital ID poses a number of challenges. Prior research (including from me and my colleagues at Carnegie Mellon University) has shown that ID requirements can pose significant barriers—particularly to marginalized populations—due to procedural challenges and/or limited resources for onboarding, identity-proofing, and authenticating individuals. Another prominent challenge is privacy and security. Digital ID systems typically collect and process sensitive data such as biometrics; ensuring proper privacy and security protections for this data is far from trivial. Moreover, not all countries with digital ID systems even have data protection laws in place—or the means to enforce them. 

As governments around the world increasingly embrace digitization and adopt digital ID, they will face a challenging balancing act between providing useful, usable services while also providing safeguards against many potential pitfalls that can have disastrous outcomes for constituents.

—Giulia Fanti is a nonresident senior fellow at the Atlantic Council’s GeoEconomics Center and an Angel Jordan associate professor of electrical and computer engineering at Carnegie Mellon University.

Through May of 2024, Russia supplied approximately 35 percent of US imports for nuclear fuel. Biden imposed a ban on the importation of uranium products from Russia, which went into effect in August. This was a significant move for the US energy sector transitioning away from resources that had been a critical part of the US nuclear energy regime. It’s important to note that a waiver process exists to allow some importation of enriched uranium to continue for a limited time. 

This very narrow resource that continued to be purchased from Russia by a country that had imposed crippling sanctions on the Russian economy is an important reminder that Russia was still very much part of global supply chains this year. 

—Daniel Tannebaum is a partner at Oliver Wyman, where he leads the Global Anti-Financial Crime Practice, and a nonresident senior fellow within the Atlantic Council’s GeoEconomics Center.

In October, the Associated Press reported that Microsoft and Google would invest in small nuclear reactors to support “surging demand [for carbon-free electricity] from data centers and artificial intelligence.” Amazon also announced plans to invest in small nuclear reactors as dedicated sources of zero-carbon energy to support its data centers and server infrastructure.

These investments occur as technological innovation sparks sharp increases in demand for electricity, as seen in data released by the US Energy Information Administration.

Goldman Sachs research this year estimates that AI alone will generate a more than 160 percent surge in demand by 2030 for electric power to cool data centers and maintain operational integrity for the physical servers that support cloud-based AI computing.  

The share of demand for electricity by US data centers is expected to double by 2030, although it will still remain in the single digits relative to other sources of demand.

For decades, energy and national security have had a high degree of overlap with geopolitics due to the unique role that fossil fuels play in the global economy. One consequence of Russia’s aggression in Ukraine since 2014 has been to incentivize the rapid adoption of clean energy in order to minimize geoeconomic vulnerabilities associated with imported fossil fuel energy. 

Many will celebrate the proactive shift toward renewable and nuclear energy by the three largest technology companies on Earth. But the shift will also create national security issues among three critical infrastructures: the electricity grid, nuclear energy, and AI/data centers. Local, renewable, zero-emission energy will transform and potentially complicate the interplay between national security policy, energy policy, and AI policy.

—Barbara C. Matthews is the CEO of BCMstrategy, Inc., a company that generates AI training data from the language of public policy. When in government, she was the first US Treasury Department attaché to the EU and, prior to that, senior counsel to the House Financial Services Committee. She is a nonresident senior fellow with the Atlantic Council’s GeoEconomics Center.

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It is a mistake for the West to dismiss the power of symbolism and narratives in the geopolitical competition for global influence. The BRICS summit has also produced noteworthy results that the international community should be aware of.

First, Vladimir Putin chaired a successful summit involving thirty-six countries, most of which were represented by heads of state. In doing so, the Russian president showed that he has not been isolated in the international arena by the West following his invasion of Ukraine. Instead, he has deepened relationships with Global South countries through BRICS and other initiatives such as riding the anti-colonial wave to make headways in western Africa. Equally importantly, President Xi Jinping and Prime Minister Narendra Modi met on the sidelines of the summit. They did so mere days after announcing a pact to resolve their border conflicts, which have been a major irritant in their bilateral relationship. Their meeting helped raise the stature of the BRICS summit as a venue where important political discourse can take place.

Last but not least, with many countries reportedly wanting to join, BRICS has invited 13 thirteen nations to be partner countries-they will continue discussions with a view to formal membership. The list of partner countries—confirmed by several senior officials, but not officially specified in the Kazan Declaration—includes Algeria, Belarus, Bolivia, Cuba, Indonesia, Kazakhstan, Malaysia, Nigeria, Thailand, Turkey, Vietnam, Uganda, and Uzbekistan. It is unclear which of these countries will eventually decide to become formal members. Saudi Arabia, for example, was invited to join last year but has not yet decided, though its officials have attended BRICS meetings since then. The inclusion of priority countries for the West, such as Turkey (a NATO member) and four important ASEAN countries, should concern policymakers. Many developing countries have found BRICS a useful forum for a variety of reasons, including diversifying international relationships and expanding trade opportunities.

The Kazan Declaration, released at the end of the summit, covers a wide range of issues. The Declaration avoids any direct mention of the United States, hostile or otherwise. Some Western analysts had raised that doing so could make moderate members like India and Brazil uncomfortable, especially given the anti-Western tilt of the group’s expanded membership. The Declaration focuses on promoting multipolarity and a more representative and fairer international system. These goals remain the common denominator attracting many countries to BRICS.

The Declaration supports initiatives and groups developed to coordinate and promote the views of BRICS members and countries in the Global South in international fora, including the United Nations (UN) and the Group of Twenty. These groupings cover issues from sustainable development to climate finance, and call for settling the conflicts in Gaza and Ukraine.

In particular, BRICS will intensify ongoing efforts to promote settlements of cross-border trade and investment transactions in local currencies by establishing BRICS Clear as an independent cross-border settlement and depository infrastructure. Doing so would help facilitate the use of local currencies. It will also launch the BRICS Interbank Cooperation Mechanism to promote innovative financial practices, including financing in local currencies. Many developing countries are interested in using local currencies more frequently given their limited access to US dollar funding.

The group’s decision to form an informal consultative framework on World Trade Organization (WTO) issues to engage more actively in the debates about reforming the WTO is also noteworthy. This section of the Declaration includes opposition to the use of unilateral economic sanctions and discriminatory carbon border adjustment mechanisms. Taking advantage of the fact that BRICS members constitute the largest producers of natural resources in the world, the group also pledges to jointly promote its interests throughout the value chains of mineral production against the backdrop of increased demand for critical minerals for the energy transition. The geopolitics of the energy transition could open an opportunity for mineral-rich developing countries to coordinate their mineral policies and join the superpowers in their search for reliable supply chains of critical minerals.

Overall, BRICS has attracted interest from many developing countries—now boasting nine members and thirteen partner countries. The collective share of its members’ population and gross domestic product has surpassed that of the Group of Seven (G7). However, expansion comes at a cost. Building consensus among more diverse members is increasingly complex, and expansion plans could remain a point of contention within the group. For example, Venezuela had reportedly been kept out of the list of partner countries due to Brazil’s objection.

Despite this challenge, key members of BRICS have successfully developed common positions among Global South countries in international fora in recent years. Their joint effort to demand a loss and damages fund at COP28 in Dubai in 2023 is one example. Additionally, BRICS members have collaborated with Global South countries to work for the adoption of the UN mandate in August 2024 to negotiate a UN tax convention, which covers taxation of multinational corporations and wealthy individuals. BRICS countries also consistently promote governance reform of the Bretton Woods Institutions. The more BRICS can develop and articulate common views among Global South countries, the more it can be regarded as the counterpart of the G7 (representing developed countries) at international fora and in the public domain.

Importantly, BRICS’ flagship project—promoting the use of local currencies to settle cross-border trade and investment transactions—is gradually gathering momentum. China, for example, has increased the share of the renminbi when settling its cross-border transactions from 48 percent (surpassing the US dollar) in mid-2023 to more than 50 percent in mid-2024.

In short, BRICS—or BRICS-plus as some observers and officials have referred to the expanded group—is here to stay. Other countries, including Western ones, need to figure out how to deal with it.

Hung Tran is a nonresident senior fellow at the Atlantic Council’s GeoEconomics Center, a former executive managing director at the Institute of International Finance and a former deputy director at the International Monetary Fund.

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In contrast, low- and middle-income countries of the Global South have built novel indigenous systems with new technologies and best practices, leapfrogging the Global North’s digital government systems. Models such as India’s highlight DPI’s potential as a tool for financial inclusion and economic development. Because of its initial success, DPI has gained traction as other Global South countries embark on their own DPI projects or adopt technology from counterparts such as India and Brazil, which offer open-architecture access. In contrast to some legacy systems, these new digital goods aim to employ open standards and protocols, be interoperable and non-excludable, use federated architecture, engage privacy by design, and offer the digital equivalent of physical infrastructure in providing access to each country’s overall digital economy. In building these sui generis digital systems, Global South countries are rethinking how to balance public and private-sector involvement, regulations for interoperability, the appropriate role and limits of markets, how to create trust in institutions, and how to build consequentially inclusive digital government goods and services.

Two key recent events have accelerated the interest in digital public infrastructure: the COVID-19 pandemic and India’s presidency of the Group of Twenty (G20) Summit. The COVID-19 pandemic exposed vulnerabilities and the urgent need for scalable, digital services, accelerating countries’ investments in offering goods and services digitally.
¹ India’s leadership at the G20 further galvanized this movement, positioning DPI as a crucial global conversation. International and multilateral groups from the Group of Seven (G7), the Quad, and now the United Nations (UN) Global Digital Compact have all been working to address and define DPI.
² The European Parliament is now holding conferences on a “Euro Stack” as it explores new ways to assert digital sovereignty and create equitable access to the digital economy.³

In the context of these developments, the Atlantic Council’s South Asia Center assembled working groups to research and discuss the definition of digital public infrastructure, what makes it “new,” learnings from historical examples, and key questions going forward. These working groups comprised digital government, trade, innovation, payments, foreign policy, industrial policy, and internet experts. They kindly shared their time and insights in a series of meetings and panels. The working groups also conducted structured interviews with DPI experts around the world. We graciously thank all participants and commentators for their openness and time given to the project. 

This issue brief establishes the background of DPI development, discusses existing examples of DPI, and provides the policy recommendations essential for the next stage of DPI exploration, implementation and deployment. This brief is followed by two papers on cybersecurity and financial inclusion, addressing the fundamental issues affecting the development of DPI.

DPI: Scope and definition    

The nomenclature “digital public infrastructure” is a new entrant in the government technology literature, but projects bearing elements of what we now consider DPI have existed for decades.⁴ As technologies have changed, so have the definitions of what is public and what is infrastructure.⁵ Although often credited to the Nobel Prize-winning economist Paul Samuelson, the concept of public goods extends back to John Stuart Mill, Italian writer Ugo Mazzola, and Swedish economist Knut Wicksell.⁶ Samuelson extended this definition to include non-rivalry (i.e., one person’s use of a good does not diminish another person’s use) and non-excludability (i.e., everyone has equal access to that good, such as air).⁷ Digital public goods (DPGs) are open-source software packages meant for governments to build digital tools that broadly fit these two criteria. ⁸ Not all DPI projects use DPGs, and using open-source software is neither necessary nor sufficient for a government DPI project to be truly open protocol, transparent, interoperable, and reusable, as many definitions of DPI require. The definition of DPI remains a topic of a vibrant and ongoing debate. For the purposes of this paper, we use the Global DPI Repository definition: “interoperable, open, and inclusive systems supported by technology to provide essential, society-wide public and private services.”

What is new about DPI?

DPI assumes that citizens have a right to access basic features of a country’s digital economy. These features typically include identification, civil registration and vital statistics, payments, and data exchange. Proponents of DPI argue that markets have not, or have not properly, provided these products and services to all members of the digital economy. Therefore, they argue, the government should step in to provide these basic goods and services in ways that allow societal reach.

The DPI movement asks what the role of the state should be in the digital economy. Has the private sector failed in delivering goods and services to the world’s poorest and most underserved?

Government involvement in payments systems provides the clearest example of digital domains historically run by the private sector, but there are also emerging attempts to deploy DPI models for open commerce, ride hailing, and even decentralized compute.

India stack

India’s leadership of the 2023 G20 catapulted the conversation about these digital government offerings to the international stage. The New Delhi Leaders’ Declaration defined DPI as “a set of shared digital systems that are secure and interoperable, built on open technologies, to deliver equitable access to public and/or private services at a societal scale.”⁹ Over the past decade, India has digitally and financially included millions of people and built a system of digital goods around a core group of IDs, payments, and data exchange. This set of government-led digital products, known as India Stack, enables access to the Indian domestic digital economy.¹⁰

As a result, India is often seen as the model for DPI implementation due to the successful launches of its Aadhaar digital identity platform, Unified Payments Interface (UPI) instant payments system, and civil registration services. Its ability to scale DPI is attributed to its large population, technological expertise, low mobile data costs, and supportive political and economic conditions.

For New Delhi, the development of the stack has been a project for more than a decade. In 2010, the Indian government launched Aadhaar, a biometric digital identity system. Enrollment centers across the country collected face and retina scans, fingerprints, and demographic data. The government of India has tied a variety of government benefits and account setups to Aadhaar, such as setting up a bank account. Although legally optional, having an Aadhaar card remains imperative for access to the digital economy in India.¹¹ In less than a decade, more than 1.3 billion people, nearly 90 percent of the population, have joined Aadhaar.

Digital payments form the second layer in the stack. The Central Bank’s Pradhan Mantri Jan Dhan Yojana (PMJDY), a project to bring a bank account to all Indian households, opened accounts for 166 million people in its first year. This grew to 510 million by the end of 2023, according to India’s Ministry of Finance. This allowed the introduction of the UPI, a new layer of the retail payments systems that allowed banks to exchange messages with each other and with non-bank firms, capitalizing on the financial technology (fintech) innovators that had developed tools to cheaply and easily store and transfer funds.¹²

Anyone with access to the system—including consumers and small merchants who previously found it difficult to make and receive payments—could now send or receive payments for goods and services through a digital app. A crucial feature of this system was its intra-system interoperability; users were able to transact with all actors on the UPI rails. The government accomplished this interoperability by establishing a single application programming interface (API)-based rail along which all payments providers had to transact.

Data verification and consented exchange represent the third layer of the stack. The Data Empowerment and Protection Architecture, launched in 2020, aims to facilitate the seamless and consent-based exchange of personal data. An Account Aggregator framework aims to enable atomized control over one’s personal data, whereby each individual user can track and consent to different digital actors accessing said data.¹³

India Stack has experienced several challenges and controversies since its rollout. The growth of account ownership hit a lull with the pandemic, even declining slightly from 80 to 78 percent by 2021. Some doubts have also been raised regarding the universal utility of the accounts, as India has one of the world’s highest percentages of inactive accounts. Additionally, several high-profile data breaches have raised concerns about the security of the Aadhaar system.¹⁴ Experts have flagged the potential security risks of centralizing such large quantities of identity information and the possibility that saved fingerprints could be used improperly.¹⁵ Others have worried that governments could use such large databases as tools to track and surveil citizens.¹⁶

Brazil’s digital payments system

Brazil’s new payment system, Pix, is another example of a DPI. Launched in November 2020 by the Central Bank of Brazil (BCB), the Pix electronic payment system aimed to reduce reliance on cash, increase financial inclusion, strengthen competition, and reduce the cost and ease the acceptance for merchants. Several features have ensured the success of Pix. First, the BCB made participation by banks and payments providers mandatory, allowing peer-to-peer usage to increase over time. Second, Pix payments settle in three seconds on average, faster than credit or debit cards.¹⁷ Third, the BCB set zero-fee transaction costs for individuals, with a cost to the merchant of 0.33 percent of the transaction amount. These dynamics led the largest banks operating in Brazil to work together to develop the network in a way that mandated interoperability. The BCB also established a Pix Forum, in which users and stakeholders can have a dialogue through its implementation cycle.¹⁸

Pix has had impressive results since its rollout. In its first two years, 140 million Brazilians—nearly 80 percent of the adult population—used Pix. By the end of 2022, more than 3 billion transactions took place on Pix per month, five times more than credit and debit cards. The head of Brazil’s central bank, Roberto Campos Neto, famously declared that the Pix system would result in “credit cards ceasing to exist at some point soon.”¹⁹ Pix has led to the growth of non-bank payments fintechs and a decrease in the price of payments.²⁰

In terms of its governance, Pix is more centralized than India Stack. The BCB both owns and operates the payment scheme, as well as the user address database that contains user identification. The BCB is also the regulator for the overall payments system and, thus, the regulator for Pix. The central bank has added several features to Pix since its inception, including payment scheduling, access to third-party payment providers, and the ability to withdraw cash from automated teller machines. Pix has also been the subject of controversy. As volumes and online account ownership have increased, so have instances of cybercrime and fraud.²¹

Estonia’s digital highway: The X-Road

More than half of the Estonian population voted in the 2023 election from their home computers. Estonia’s digitized government system—which allows access to government services, e-health records, and secure digital identity—made this feat possible.

Estonia’s DPI project began in the 1990s with a decision to rebuild the country’s economy on a digital basis. Through the so-called “Tiigerhüpe,” or tiger leap program, the government used public-private partnerships to invest in network infrastructure to modernize Estonia’s post-Soviet infrastructure, including providing internet to all Estonian schools and government agencies. An electronic identification (e-ID) program followed suit. The electronic governance platform also includes digital voting, an e-file system for access to the judicial system, and the government cloud, which, through partnerships with private companies, has put 99 percent of public services online.

The X-Road system represents the key infrastructure behind Estonia’s digital government. A secure data-exchange platform that connects more than 450 public and private-sector organizations, X-Road enables more than three thousand digital services. The Nordic Institute for Interoperability Solutions—a nonprofit organization created by the governments of Estonia, Iceland, and Finland—now manages the X-Road platform and its international adoption projects. More than twenty countries have adapted or plan to adapt the X-Road program through open-source access. 

Working with the private sector proved essential for the success of the Estonian experiment. While the government ideated the digital ID card early in the 1990s, the first digital IDs were “only good for scratching the ice off the windshield of a car,” according to one of their developers.²² Working with banks to improve the user experience and creating incentives to use the cards proved essential to the system’s ultimate success.²³

In contrast to the payment systems in Brazil or India, X-Road has no single point of failure. X-Road’s peer-to-peer architecture is focused primarily on resiliency.²⁴ Because X-Road allows Estonia’s public agencies to share data securely with each other, every ministry manages access to its own database, which ensures data are not stored in a common pool that could become a single point of failure.

As with India and Brazil, Estonia has faced cyber threats to its DPI system. In 2007, the country faced a weeks-long attack by cyber criminals in which all government services were taken down. This led Estonia to develop a data embassy, which created a backup of critical data and services stored in a remote location.²⁵

The role of payment systems in DPI

India, Brazil, and Estonia offer distinct yet instructive models for implementing DPI. Their unique experiences reflect the different regulatory, technological, and governance choices that countries can make. India’s society-level approach, Brazil’s emphasis on speed and accessibility, and Estonia’s integration of security and privacy into digital services each provide lessons for how digital infrastructure can be developed to meet local needs. The recurring challenges of cybersecurity and privacy standards across these examples illustrate the need for secure and resilient digital architecture. These examples set the stage for a deeper exploration of a key component of DPI: payment systems.

Why study payments?

The term “payments” means moving value between actors across businesses, consumers, and governments. It is the process or service of exchanging units of value and was historically led by the private sector (e.g., by banks or merchants). Money is a discrete unit of value and governments historically play the role of enforcing that it has been spent only once at a time. Moving value digitally incurs transaction costs.²⁶ Someone must facilitate, clear, settle, and assume risk in the movement of that value from one account to another. Running a cash-based system also incurs costs to both the operator and the users of cash.²⁷ The advent of government-offered payment rails, such as India’s UPI and Brazil’s PIX, has raised new questions about the lines between the state and its citizens, the definition of “public” in public goods, and the long-term direction of financial exchange in the digital economy.²⁸

Types of DPI payments systems

For the purposes of this brief, we identified four major types of DPI payments systems. These different forms come from the different payment instruments they support and the participants among which they can transact payment instruments.

All the below DPI payments systems involve actors moving value between them and either charging to do so (via interchange) or being funded by some other mechanism (e.g., government funding/subsidies or value-add services such as telecommunications subscription services). Each of these methods is either:

• a low-cost system linking a handful of banks or other institutions to do account-to-account (A2A) payments;
• government-led facilitation like public rails (e.g., UPI or a central bank digital currency (CBDC)); or
• involving entities that do not directly monetize the payment flow itself because they monetize another aspect of customer interaction (e.g., M-PESA).

In each of these examples, either government funding plays a role in facilitating the transaction or retail banks cover the cost and the issuing bank charges for the service. In all, some alternate source of funding (whether government subsidy or cross-subsidy) maintains the rails.

Cross-domain payment systems

The first payments system is the interoperable, or cross-domain, system. Cross-domain systems allow all accredited financial actors to transact payment instruments in near real time and on equal or progressive cost footing. They ideally allow for all-to-all switching, clearing, and exchange of instruments within one system between banks, microfinance institutions (MFIs), mobile money operators (MMOs), savings and credit cooperatives, and a government’s central bank. Cross-domain payment systems represent the aspirational goal of many DPI programs because they allow the most payments interoperability in an economy.

Bank instant payment systems

A bank instant payment system (IPS) allows for the instant messaging and transaction of payments instruments between member banks. Thus, this system only allows for transactions involving instruments associated with bank accounts (e.g., debit or credit electronic funds transfers). To facilitate instant payments between other parties, those parties would need to partner with a bank that is a member of the bank IPS.

Interoperable mobile money payments systems

Interoperable mobile money operator (I-MMO) payment systems allow for the messaging and transaction of payments instruments between or within mobile operators. These systems typically work in e-money instruments and are often run by the private sector. In contrast to centralized DPI payment systems, these I-MMO payments rely on a series of multilateral and bilateral agreements between MMOs to facilitate the transfer of funds between them. Sometimes the MMOs act as indirect participants in the instant payments system via a bank that is a direct participant in the settlement infrastructure (e.g., PesaLink in Kenya). Note that this type of interoperable payment system contrasts with closed-loop payment systems such as Venmo, in which a customer can only transact with other in-network participants. The ability of MMOs to move these e-money instruments depends on the legal architecture of the country in which they operate and whether it facilitates such private-to-private exchanges between non-banks.²⁹

Central bank digital currencies

Retail CBDCs are a way for governments to issue fiat as digital legal tender. The advent of blockchain and cryptocurrencies has increased interest in CBDCs as this kind of ledgered cryptography can increase the security of storing fiat digitally. CBDCs can be seen as a type of instant payments DPI. Both retail CBDCs and traditional DPI payments software systems can use cryptography and APIs to ensure security and accessibility. Because they both reduce transaction costs, they can enable the creation of private-sector entrants and increased competition. In contrast to other digital payments systems, CBDCs represent a claim on the central bank, not on the intermediaries.

Cross-border DPI systems

In a regional DPI system, various countries group together to allow for instant payments transactions across borders and, sometimes, between different currencies. In the case of regional DPI payments, clearing either occurs through an agreed-upon central bank or through a third-party hub. Each participant (MMOs, MFIs, commercial banks) connects to the hub either directly or through a national switch.

For example, two of the three regional IPS in Africa—Pan-African Payment and Settlement System (PAPSS) and Groupement Interbancaire Monétique de l’Afrique Centrale (GIMACPAY)—use hub arrangements, while Transactions Cleared on an Immediate Basis (TCIB) follows a hub-switch arrangement.

The public-private divide

As some countries look to use open-source software to build indigenous payments systems, they must make sure to use the correct tools to scale, meet their goals, and continue to innovate as consumer needs change. However, the political systems and civil society underpinning software design and implementation arguably play a larger role in determining that DPI system’s success than the technology itself. This working group emphasizes that a diversity of institutions and balanced trade-offs can create long-term sustainable payments systems that both include and serve their end customers.

Working group policy recommendations

Governance

While financial inclusion remains important, sound internal governance and oversight of DPI projects are paramount for their long-term success.³⁰ Governance will determine the success of DPI projects in serving all communities and replicating success globally. The working group members with experience studying industrial policy and trade protection raised questions about the role of the central bank and its mandate in a particular jurisdiction, and how to resolve potential conflicts of interest when governments act as both regulator and operator. The group felt that governance should be designed to enhance public-private collaboration to encourage competition and innovation, as well as to safeguard against government favoring specific technologies (that is, technology neutrality) and to prevent crowding out of private-sector solutions.

Cost

As excellent research from the World Bank’s Project FASTT group shows, cash-based systems also incur costs (on cash providers as well as users). It is, therefore, essential that governments and private-sector players are aware of the costs of upgrading and digitization, as well as the costs of opting out of these efforts. Research on pricing, interchange, and consumer elasticity in financial products can help illuminate the conversation on free or low-cost, instant, push-payments systems.

To ensure the success of DPI, particularly in the realm of financial inclusion, it is essential to enable digital readiness by investing in key infrastructure like internet access and cellular networks while also rigorously evaluating a country’s preparedness for digital transformation. This digital readiness should be complemented by strong privacy and cybersecurity frameworks that ensure user trust, safety, and resilience. By implementing internationally recognized standards for data privacy and cybersecurity (such as the National Institute of Standards and Technology or International Organization for Standardization frameworks), countries can safeguard user data, promote transparency, and ensure that financial inclusion efforts are secure, inclusive, and sustainable for the long term.

Design for users

DPI should be inclusive, affordable, and able to address digital divides. It should prioritize users and their needs like literacy, accessibility, and fraud protection.³¹ Consumer preferences and design should be at the center of DPI improvement, which will require continuous monitoring and evaluation even as these technologies are deployed.

Share data and learnings

Transparency, citizen involvement, and accountability are keys to a successful implementation. Sharing scheme rules and uptake data builds trust and establishes independent progress evaluation. Much of the leading research on DPI and instant payment systems comes from stakeholder interviews and not from public-access websites.³²

In conclusion, the exploration of digital public infrastructure (DPI) across various national models highlights the transformative potential of these systems in addressing key societal needs such as financial inclusion and service delivery. Countries from both the Global North and South are shaping DPI to suit their respective context, with developing nations often trying innovative indigenous systems. As India’s leadership at the G20 and Brazil’s Pix system show, DPI offers a critical tool for digital governance, enabling broad and public and private access to essential services. This working group’s findings underscore the need for continued international collaboration, robust governance, and strong privacy-oriented cybersecurity frameworks to ensure longevity and inclusivity in DPI. Policymakers and stakeholders ought to focus on building resilient, and interoperable systems to fully harness the benefits of DPI.

Authors & working group co-chairs  

• Barbara Kotschwar, Georgetown University  
• Colin Colter, Atlantic Council  

Working group members

• Rob Atkinson, ITIF
• Ravi Shankar Chaturvedi, Tufts University
• Dan Chenok, IBM Center for The Business of Government
• David Eaves, University College London
• Arya Goel, ASG
• Jeff Lande,  The Lande Group & Atlantic Council
• Mark Linscott, Atlantic Council
• Srujan Palkar, Atlantic Council
• Aparna Pande, Hudson Institute
• Anand Raghuraman, Mastercard
• Susan Ritchie
• Kati Suominen, Nextrade Group
• Atman M Trivedi, ASG & Atlantic Council
• Tiffany Wong, ASG

Issue Brief Oct 21, 2024

How digital public infrastructure can support financial inclusion

By Katherine Hadda and Anit Mukherjee

As digital transformation accelerates, Digital Public Infrastructure (DPI) is at the forefront of the global push for financial inclusion. This paper examines how DPI frameworks, particularly those pioneered in India, are bringing financial services to previously underserved populations.

Digital Policy Financial Regulation

Issue Brief Oct 21, 2024

Finding security in digital public infrastructure

By Justin Sherman

As governments worldwide adopt Digital Public Infrastructure (DPI), the need for robust cybersecurity and privacy protections has never been greater. This paper delves into the critical risks and opportunities associated with securing DPI systems. With examples from India, Ukraine, and other nations, it explores how governments are managing data privacy, addressing cyber threats, and building trust in digital services. The paper highlights key considerations for policymakers, including the balance between openness and security, the role of encryption, and the importance of resilience in digital systems. As more nations turn to DPI, ensuring the safety and privacy of citizens’ data is essential to creating sustainable, trustworthy digital infrastructures.

Cybersecurity India

The post Global DPI models: Lessons from India, Brazil, and beyond  appeared first on Atlantic Council.

The post Lipsky interviewed by DW News on BRICS trade and the US dollar appeared first on Atlantic Council.

The post Front Page event with President of the European Central Bank Christine Lagarde featured in Euronews on Europe’s economic outlook appeared first on Atlantic Council.

Online Event Wed, October 23, 2024 • 6:00 am ET

European Central Bank President Christine Lagarde on Europe’s economic outlook

AN #ACFRONTPAGE EVENT—European Central Bank President Christine Lagarde discusses Europe’s economic challenges and the path forward during IMF-World Bank Week at the Atlantic Council.

Digital Currencies Digital Policy Economy & Business European Union

Speaker

Christine Lagarde
President, European Central Bank

Moderator

Frederick Kempe
President and CEO, Atlantic Council

Introduction

Josh Lipsky
Senior Director, GeoEconomics Center, Atlantic Council

Event transcript

Uncorrected transcript: Check against delivery

JOSH LIPSKY: Good morning, and welcome to the Atlantic Council. I’m Josh Lipsky, senior director of the Atlantic Council’s GeoEconomics Center. And it is truly my honor to welcome you today to our AC Front Page conversation with the president of the European Central Bank, Christine Lagarde.

This morning’s event keynotes our series of interviews with leading financial policymakers during the IMF-World Bank annual meetings. Both here at the Council and live from our studios inside the IMF, we are hosting fifty conversations this week on a range of issues, from China’s economy to digital currencies to the future of the Bretton Woods system.

And I wanted to take a moment this morning to explain why we’re doing that. When we launched the GeoEconomics Center nearly four years ago, it was founded on a simple premise: Finance, economics, foreign policy and national security are deeply interconnected. The events of the intervening few years have proved the point. Think of the pandemic and the resulting supply-chain shocks. Think of Russia’s illegal invasion of Ukraine and the way the tools of economic statecraft have been deployed by the G7 to respond.

This center, through our research, our convenings, our fellowships with young economists, has sought to be the place that delivers new solutions for the challenges of our time. In fact, it was on this very stage two years ago that US Treasury Secretary Janet Yellen delivered her friendshoring speech, just before the IMF-World Bank annual meetings.

She called upon all of us to channel the spirit of Bretton Woods, to remember that 44 countries met in New Hampshire not after war but during war, six weeks after D-Day. She said at the time that they sought to build the future they hoped to win.

And so the IMF and the World Bank to us are the quintessential geoeconomic institutions. They are proof that even in crisis, international collaboration works and can deliver something better than what came before. And there is no one who more embodies that principle than our guest today.

Time and again over the past two decades, President Lagarde has been called upon to lead in extraordinarily difficult moments. In 2007 she became French finance minister, the first time a woman was appointed as G7 finance minister. Only months into the job, she helped not just her country but the rest of Europe and her counterparts here in the US navigate the global financial crisis.

In 2011 she became the first woman to lead the International Monetary Fund. Here she was asked to help manage the unfolding eurozone crisis and strengthen and stabilize the IMF after a difficult period.

In 2019 she became the first woman to lead the European Central Bank, just before a global pandemic and a land war in Europe would send shockwaves through every economy in the euro area.

In each of these roles, she demonstrated what true leadership looks like. And on a personal note, for me, the opportunity to work for her at the IMF was an incredible honor, as I know it is for all those who have had the chance to learn from her. And many of them are here in this room.

So it is truly my pleasure today to welcome President Lagarde back to the Atlantic Council as she joins the president and CEO of the Atlantic Council, Fred Kempe, for this special conversation.

Fred, over to you.

FREDERICK KEMPE: Thank you.

So, Madam Lagarde, first of all, you trained Josh really well.

CHRISTINE LAGARDE: He came with high recommendation from you.

FREDERICK KEMPE: So salute to Josh and his remarkable GeoEconomics team; another amazing week you’re putting together. And you’re putting it together as we dismantle our offices here.

Good morning to all of you for this, our last major event at our old headquarters. We’re already moving into our new headquarters at 1400 L. I think you’re going to be amazed at the new convening space.

And good afternoon in Europe. Good evening in Asia. Hello all over the world. We’ve got people tuning in all over the place because they want to hear what you have to say. So if you have questions we’re going to do them online today. All those in the audience live here can send them in through your phone if you like, and it’s AskAC.org. Send it to AskAC.org.

Let me get started with monetary policy, which seems like the right place to start with you, and I’m really interested in a situation where you’re looking at inflation coming down. One point eight percent in September. It was as high as 10.6 percent October 2022.

So that’s the good side. The bad side is growth is slow. In Germany it could be negative this year, probably will be negative this year, and they may be on the edge of a recession.

GDP outgrowth—growth outlook forecast under 1 percent for the euro zone. As you weigh these factors looking at future decisions how do you weigh inflation coming down but growth—which is a good thing, but growth being as slow as it is, which is not a good thing?

CHRISTINE LAGARDE: Thank you, Fred. Thank you, Josh, very much for your way too kind introduction and it’s really a pleasure being here.

I was wondering whether you follow a tradition that is often observed where when you leave a place you allow anybody who is here for the last time to pick up something from the—

FREDERICK KEMPE: That’s the end of our program today.

CHRISTINE LAGARDE: No, but it’s wonderful to be back at the Atlantic Council and congratulations for having expanded so much the scope of your work and your research, bringing together geopolitics, economics, and security under one single roof.

Back to your question, and thank you for starting with monetary policy because this is really my business. So at the European Central Bank we are driven by a mandate which is pretty simple and straightforward, which has a primary objective which says price stability.

It’s upon us to define what it is and we have in our last strategy review defined it as 2 percent medium term symmetric. So we, first of all, look at inflation, at prices. We dissect inflation as much as we can and we try to distinguish what is sort of headline inflation, which is what is felt and resented sometimes by people, from what is permanent, from what is temporary, to really understand where it is heading and how our decisions on interest rates in particular are going to affect inflation.

So that’s what we look at primarily. But, of course—and we are—at this point in time we are rather satisfied with the progress made because, as you just mentioned, we started off back in October two years ago at a reading of 10.6 percent on average and we are now below 2 percent for the moment.

We have reasons to believe that it will move up again above 2 percent in the next few months but it’s really good progress that we have contribute—we have largely contributed to.

Growth. So we are attentive to growth, of course, because it impacts on inflation and it is that impact of growth on inflation that we are attentive to. It’s different from the Fed. The Fed has this dual mandate of price stability but also growth, economic activity, employment. The ECB does not have that. We have a primary mandate which is price stability.

FREDERICK KEMPE: And so let’s get to European competitiveness and growth. Your predecessor Mario Draghi just released a major report on the future of competitiveness. As Josh said in his opening, you’ve not just been in your current job as a central bank governor but you’ve been a minister in France. You’ve been the head of IMF. You were in the private sector for twenty years, and so you know that it all links together in how competitive a place is.

He raised many issues that fall on the fiscal side—not your job—but the ECB does play a role in financial regulation of capital markets. You have urged people to swiftly follow up on Draghi’s plan, I think particularly on capital markets. But I guess the question behind this is, how concerned are you about European competitiveness, and what’s most urgent in the Draghi report?

CHRISTINE LAGARDE: Well, first of all, his report is comprehensive, analytical, documented, and, as I said, a severe but just diagnosis of where Europe is. From my position, as president of the central bank, I’m particularly attentive to three directions that he’s identified. The first one—because they matter for monetary policy.

So the first one is productivity. Europe lags in productivity way behind the United States. Just to give you a number, between 1995 and, say, 2020, US productivity has increased by 50 percent. Europe, productivity has increased by 28 percent. So Europe is lagging behind in terms of productivity. That’s objective number one, improve, catch up, and identify which sectors are going to drive productivity. When you look at the gap between 50 and 28 percent, you see that a lot of that results from the tech sector. Very obvious.

Second item, which he also identifies, is energy costs, and what can Europe do about it. If you look at the price of energy, it’s about two or three times higher in Europe than it is in the US If you look at the price of gas, it’s four to five times higher in Europe than in the United States. So are we suddenly going to find oil, find gas? Do we actually want that? No. What he identifies as the way forward is rapid and smart decarbonization of the economy so that Europe can lead in terms of non-fossil energies, where we are a little bit ahead of the game—with caveats—but which would lead to a much cheaper source of energy once the investments are made, once the transition is completed. And which would also be a good way to adapt—to adapt to the climate change impacts that we are suffering more and more by the day.

The third dimension which he identifies as well is digitalization of our economies. And that is one where the productivity gap is obvious, and where a collective endeavor by the Europeans is called for. What is needed behind it and why does it matter to us, you know, in terms of monetary policy, is the financing. To progress in digitalization, to move into the innovation journey that is needed for that, you need capital. And you need capital that is prepared to take risk. This is not something that we are very good at in Europe. If you look at the volume of venture capital that is raised in Europe, it’s minimal relative to what is raised in the US, or even China.

So he advocates, and I have advocated before that myself, for a capital market union that is common to all, at least, countries of the euro area, if not the whole of the European Union. And for that we need a single, integrated market from a regulatory point of view, from a supervision point of view, with common trade and post-trade infrastructure, where we are completely scattered all over. So those are the three directions where it matters to us—improved productivity, of course it matters to us, especially with an aging population as we have in Europe. Cheaper energy. Of course it matters, because it’s clearly one of the domain that can shock our economies, and has shocked all our economies but Europe in particular recently. And digitalization, because there will be productivity improvement as a result as well.

FREDERICK KEMPE: So, coming back to the core question behind this, how worried are you about it, we’ve known that these things need to be fixed for a long time. And so you look at the Draghi report, and you can’t help but embrace it. But how does one now—what would be different now that one would actually execute on something like capital markets, when one hasn’t before?

CHRISTINE LAGARDE: You remind me of a famous Margaret Thatcher comment. You know, don’t tell me what to do, tell me how to do it. And that’s exactly where I think Europe is. Because, yes, those things have been identified—probably in a more piecemeal way. One of the great values of the excellent Draghi report is that it brings it all together by someone who’s been in all positions. National central bank, so he knows about the territorial aspects of some of the reforms. He has been president of the European Central Bank before me, so he knows how bringing everyone together is necessary and relies also on other unions than just monetary union. And he’s been president of—prime minister of Italy, so he appreciates the politics that is behind it. So value is comprehensive by somebody who has a holistic view of the issues.

He doesn’t go, in my humble view, deeper enough into the action list, what needs to be done. And that’s probably not—you know, it’s—this is now going into the weeds and rolling sleeves up and getting the job done, but this is what the European leadership at all levels of institutions will have to do. How do you go about a capital market union? What do you need to tackle first? Who do you need to bring around the table to say, OK, you have your territory at the moment, it’s not a question of taking it away from you, but bringing it to a level where major operations, major issuance, will be taken at a different level? So all this needs to be done, and the urgency of the matter is now.

FREDERICK KEMPE: Thank you for that very clear, clear statement.

So I won’t—we don’t want to turn this into a press conference; that’s not the purpose of the Atlantic Council. But I do have one follow-up question on your first answer, from Mark Conahan: Is it appropriate for markets to begin pricing in an aggressive rate-reduction path in anticipation for economic data even when the ECB’s forecasts seem more sanguine? And this really gets to the point that if you look only at the inflation data you may go in one direction. It’s not your mandate to look at the economic data, but you’ve said how much it’s linked. I think the real question behind this is: Are you being too sanguine?

CHRISTINE LAGARDE: What we have done since last June on the basis of the data that we had and our baseline, we have gradually cut interest rates once, in June; then we held, in July; then we cut again, in September; and we cut again, in October. So we do not have a linear, systematic sequence that would be, you know, the way to go.

We have reiterated many times—and I’m happy to do it again, because it’s really the way it works—we are data dependent and we look at everything that’s available. And we analyze those data on the basis of three key criterias, which include the inflation outlook, the underlying inflation, and the transmission of monetary policy. And when we last cut, in October, we were confident on the basis of the data that we were receiving and observing that the disinflationary path was underway and that we could continue to dial back the restrictive monetary policy that was in place—that is in place.

But of course, we need to be cautious. We need to be cautious because data will come—will come up and will indicate to use what is the state of the economy, what is the state of inflation, of underlying inflation, and there will be a judgmental aspect to our decisions. But we will, indeed, have to be cautious in doing so.

FREDERICK KEMPE: Thank you for that.

So from the immediate to the generational question, you’ve delivered a truly fascinating speech last month at the IMF, and you said central bankers today—and any of you who have not read it, you should go and read the whole thing.

CHRISTINE LAGARDE: Oh, thank you.

FREDERICK KEMPE: As you know, I’m an amateur historian as well as a think tank leader. But you talked about how central bankers today have better tools to manage structural changes than the 1920s, even if some of the headwinds are similar. Here’s your quote: “Two specific parallels between two ‘twenties’, the 1920s and the 2020s,” which I found fascinating. “Then, as now, we’re seeing a setback in global trade integration and a stride toward progress in technological progress.” So AI on the one side and decoupling/derisking. I would add a third element to this that was there in the 1920s, which is a rising geopolitical risk.

So we all know how the 1920s ended, which is the disasters of the 1930s, whether it was the Great Depression or whether in the end it was world war. What makes you more confident of our challenges today? You know, if you’re looking at the 1930s versus the potential 2030s, how do we avoid wrong turns at this point?

CHRISTINE LAGARDE: OK. Well, each one of us has to do what one has to do. So you are the historian and you can do the sort of geopolitical comparative analysis between the 1930s back then and the 2030s now. I will not venture in that area, because I have to focus on what impacts monetary policy. And you would take me into too political direction.

But what gives me more confidence today—maybe it’s twofold. One is, if you look at trade, back in those days, in the 1920s, trade went down significantly. In a couple of decades, trade went down by 20 percent—down. The numbers we have on trade are not downward. They are up. So if you look at the forecast by the IMF for the next couple of years, it’s an increase of trade. I think it’s 3.1 next year and 3.4 the year after.

So we are not in a world where trade stops and trade declines. We are in a world where trade continues. But it continues in a different way. And I think we have to be attentive to the composition and the distribution; so no less trade, but trade with other partners, trade in a different risk distribution, if you will.

It’s the whole, you know, strategies of corporate to have China plus one or to have plus one, but certainly to continue to use the world in order to benefit from elasticity or in order to benefit from larger market outside home base. So I don’t think that trade is here to go on the basis of the information that we have and the analysis that we can conduct.

I think the second reason I’m more optimistic is that central banks in those days, they exacerbated the problems because they were operating within a rigid framework. And I think that we don’t have that rigid framework anymore. I mean, the gold standards and the reference that currencies had vis-à-vis each other with gold as the standard is no longer with us. And we have invented, over the course of the last few decades, a much more flexible system which allows for that room to maneuver in a less brutal and rigid way on the economies.

Second, still in that monetary toolbox that we have and the way that framework is organized, inflation expectations is one of the major compass that is being used in order to make sure that inflation comes back to that target that most of us around the world have of 2 percent, more or less.

So those are two reasons, in my field, that give me hope that those twenties, while there are interesting similarities in terms of decline of trade and massive technology breakthrough, will not give rise, I hope—and I’m sure you do as well, Fred—to the thirties.

FREDERICK KEMPE: Thank you for that, because the saying, those who forget history are condemned to repeat it, I hope you’re right.

I’m going to ask for a visual aid here from our AV team, because I’m going to talk here about central-bank digital currency, which I know is, you know, something of a passion of our GeoEconomics Center here. We’ve studied central-bank digital currencies closely. What you’re seeing right now is one of our most clicked-on and most-viewed webpages of the Atlantic Council, which tells you what geeks follow the Atlantic Council. But the ECB is currently in a two-year preparation phase of the digital euro, so you’re testing it for real-world-use cases.

Two questions from this, really. What are the factors that are going to lead to a decision on whether a digital euro will be deployed at the end of the two years? Aligned with that is you’ve made an argument for digital euros, a European sovereignty issue. So I’d like you to elaborate on this.

So I guess there’s actually three questions, those two questions, and then the third is we’ve been pushing for the US participation and leadership on this issue of digital assets. As a peer central bank, how do you view the role of the US on central bank digital currency? So it’s really a three-part question on digital currencies.

CHRISTINE LAGARDE: So your second—or, it was—sorry—

FREDERICK KEMPE: The first one is, how are you going to make a decision to go? The second is, what is the sovereignty issue? And the third is, how does the US play?

CHRISTINE LAGARDE: OK. You know, I might start with your second question, because—no, I’ll tell you where we are. So we are, as you rightly said, in the—what we call the exploratory phase. And it’s a phase that will finish at the end of 2025. So we have still one year to go. And at the end of 2025, provided that the legislative process is completed, then the governing council of the euro system will decide to launch for real or not.

Why do I say the legislative process? Because in Europe, it follows this two-prong approach that hopefully will work, and do work at the moment, in parallel, where we explore from a technological and practical point of view how the digital euro will work. And the legislator, meaning the European Parliament, will have to pass a law that will define what the digital euro is, what its threshold is, how it will operate, whether it will be fiat—well, whether it will have tender status, rather, with fiat currencies. And those two tracks are working in parallel.

My hope—because a lot of work has already been covered under the previous Belgium presidency—my hope is—and Hungarian presidency, to a certain extent. But we now have a new European Parliament which has, you know, now a lot of work on its—on its plate, and will look at that, I hope, in the not-too-distant future. My hope is that in the course of 2025, the law will be voted by parliament. We will have a legal framework in which our technology efforts and definition will be inserted. But the two are coming together.

Your second question, which is more fundamental, is, you know, why do we do that? I think the reason we do that is that everything is digital. And what is not digital, is gradually—and more rapidly than gradually—becoming digital. You buy digitally. You we speak digitally. There are lots of things that are taking place that way. So why wouldn’t currency also be digital? I’m going to oversimplify it. You have central bank money, which is essentially, let’s say, banknotes. And that central bank money is critically important for the trust that people have in the system.

The fact that you hold a dollar, that I hold a euro, is—you know, in euro we trust. And we know that that bank note is always going to be honored. It is central bank money. Then you have commercial bank money, which is what commercial banks create by activating, granting loans. And it’s a whole different situation. But if you just look at central bank money, why would it not also turn digital? Why would we always and forever rely on banknotes as our basis for the currency?

So I think we owe it to future generations, and to all of us, to build that alternative of digital currency, which is, you know, to—again, to put it—to oversimplify it, it’s digital banknote. With less total anonymity, which is probably right given, you know, the security that we want to give each other, and the respect that we have for both the confidentiality of information, which we’re working hard so that there is as much privacy as possible, but equally the fact that it cannot be totally, totally anonymous and facilitate the likes of money laundering, financing of terrorism, and what have you.

So, number one, everything is digital. Central bank money should be digital as well. And there are countries in Europe where banknotes are hardly ever used. So we need to have that anchor established in digital—in a digital way.

I think the second reason we are doing that is the fact that payment systems are not exactly sovereign, and more to the point they are very fragmented. In Europe, you know, if you want to pay digitally, there are at the moment thirteen countries that are operating in an isolated manner and which are not linked to the rest of the system. Having a digital euro is a way to actually bring that together on the back of whatever infrastructure will be available, but which will essentially facilitate peer-to-peer point of sales off-hours payment between people in the trade, people between themselves in a cheap, fast, transparent manner. That’s the objective that we have. And I think it’s—you know, if you look after your currency, it’s also a way to really establish your sovereignty, which is what we are all doing.

FREDERICK KEMPE: Well, let’s drill down on the sovereignty issue. Ananya Kumar from our team is asking about the parallel conversations happening about undercutting the international role of the dollar and the euro at the BRICS summit this week. How do you view the geoeconomic role of the digital euro within this context? And perhaps we could add the digital dollar to that, but your business is the digital euro.

CHRISTINE LAGARDE: Yeah.

So I think here we’re touching on two different things. One was the digital euro, which I tried to explain and which we are working on, we’ll continue to work, and we’ll hopefully launch at the end of 2025.

I think what is also important is linkages between payments systems, because at the moment we have too fragmented a payments system around the world, as a result of which if, for instance, people want to remit money back home—and it is the case for a lot of migrants who are working away from home and want to send their salary back home—it takes forever, it’s very expensive, it does funny loop-the-loop circuits around the world for some countries. So interlinking payments system so that people can actually transact easily and cheaply and transparently, so that remittances can go back to the Philippines or to Thailand or to Mexico in a smooth and cheap way, that is important.

And it’s the reason why we in Europe, we have a system which is called TARGET Instant Payment system, which applies to retail transactions and which, within Europe, work in that fashion—fast, cheap, transparent. And yesterday or a couple of days ago, we announced that we were prepared to link that TIPS—this instant payment system—with other instant payment systems around the world, and they are blossoming.

And I would like to pay tribute to your CBDC Tracker, which is really elaborate and top quality. But I think it would be interesting to also track the instant payments systems that are blossoming around the world. If you look at India, if you look at Brazil, if you look at Europe, we are heading in that direction. And it’s a system that should not be closed off or restricted to the G7 countries, for instance. It’s a system that has vocation to open up to multi-countries around the world in order to serve consumers and people who transact in the best possible ways, in the cheapest way, and introduce good competition.

FREDERICK KEMPE: Fascinating. And, obviously, you can’t comment or instruct the US what to do on its own digital currency, but we seem to be a little bit behind on that from that the European—

CHRISTINE LAGARDE: Can I say something on that?

FREDERICK KEMPE: Yeah. Yeah.

CHRISTINE LAGARDE: I will not comment on it. But I think we need to be really attentive to developments around the world. We publish annually the International Role of the—of the Euro. That’s an ECB annual publication. And we follow, you know, in which currency people transact, in which currency they keep reserves at the central banks in which currency they do trade finance. And the role of a currency should never be taken for granted.

Now, of course, the dollar has the dominant role, and has had it for a long time. It’s the exorbitant role of the dollar that Giscard d’Estaing, the former president of France, had identified. And the dollar is at around 50 percent of all those transactions, when the euro is just below 20 percent. But we have to be attentive and careful. And there is—there are rising—there are phenomenons of rising movements concerning gold, notably. I mean, China has been buying gold like never before. Russia is supporting gold because it is extracting a lot of gold out of its underground, and there are clearly attempts to push other currencies. The renminbi is neck to neck with the euro on trade finance.

So I think we all need to be attentive to developments. We all need to be attentive to new technologies. We need to listen to our customers and our compatriots to see what will serve them best with the concern of defending the currency, establishing the sovereignty as it should be by legitimate means, but clearly defending finance.

FREDERICK KEMPE: That’s an excellent answer. Thank you.

So let’s talk a bit about Russia and its immobilized reserves. Six months ago at the last IMF World Bank meetings we’d been through several months of negotiations between the US and EU on the use of $300 billion of frozen Russian reserves.

G7 announced in Italy—brought forward interest income into a fifty-billion-dollar payment, though not yet delivered. It seemed like something as a breakthrough. The CFR—the Council on Foreign Relations—I think it was back in April you were talking about how freezing assets is different than confiscating assets and the global legal consequences of that.

How do you view this new idea? What role would the ECB play now in getting the fifty billion dollars plan over the line?

CHRISTINE LAGARDE: OK. Maybe let me describe what the new idea is so that it’s—we all understand what the difference is with the old idea.

So the new idea that is being discussed is to use the interests generated by those frozen—not confiscated, frozen assets. So this interest generated by the frozen assets that actually belong to the CSD—Euroclear—and to use that in order to serve the debt of Ukraine vis-à-vis the European Union, Japan, the US, the UK. And this is—and, of course, Canada. I don’ t want to forget anyone in that game but, yeah, Canada is also part of the proposal.

So it’s very different from confiscating the capital. What I think the analysis is the interest generated do not belong to Russia. They’re generated by the capital. The links between the CSD and Russia did not provide for any attribution or ownership of those interests as a result of which it is in the books and in the accounts of the CSD—Euroclear—and can be used for the purpose that is intended by the lenders.

So that’s really what is at stake and I think it’s vastly different from saying we confiscate your assets. No, there’s no such thing. Assets are frozen. They will remain frozen as long as it’s determined by those who made the decisions and the interest generated that do not belong to Russia but to the CSD are used to serve the debt of—that is, to Ukraine.

FREDERICK KEMPE: So you’re comfortable with that approach it sounds like. We’re at work—Ukraine’s at work. This is ongoing. Why can’t it move faster and what would be the ECB role in this?

CHRISTINE LAGARDE: No. No. It has moved. I think it was two days ago that the European—I think it was the parliament or the three institutions together have actually decided to issue the loan, which the exact amount I can’t remember—I think it’s thirty billion—that is backed—guaranteed, if you will, in terms of debt services—by the interest generated as such. And I know that other G7 countries are moving in that direction. I think the UK is fairly advanced, as well, and I don’t know about the US You’d have to—you’d have to ask Janet.

FREDERICK KEMPE: Let’s go back to US and China and trade. You talked—it’s one of the overwhelming themes of this week. And so on the one hand you have, you know, European-US tariffs, the danger or potential of more. On the other hand you have manufacturing over capacity of China being imposed on the world.

What are the specific long-term risks of what’s going on with this potential decoupling between Western economies and China? How concerned are you about the Chinese manufacturing overcapacity on the one hand and rising tariffs on the other?

CHRISTINE LAGARDE: I’ll start with that. I think that trade, according to the rules that partners have agreed with each other—meaning essentially the WTO rules—is beneficial for innovation. It’s beneficial for the development of the activity. Has proven extremely good for some countries that have managed to reduce poverty as a result of extended activity and development of the economy, as a result of trade being the major driver. And I think that we all stood to benefit from trade in many respects. So trade barriers, whether they are tariff or nontariff barriers, are likely to have a negative impact on that. On growth, certainly. On—I think it would have an impact on inflation as well. And not one that, you know, would be—would be particularly welcome.

There is clearly overcapacity in certain sectors in China. And we have to remind our partners that there are rules by which we trade, which they have consented when they joined the WTO, and that they have to abide by. And that not being the case, then decisions have to be made. But I think that jumping to the conclusion that the economy will fare better at home because we have a big market, simply because we will raise tariffs, I think is a bit of a far-fetched conclusion that I don’t—I don’t see in the history of large economies. Because when you look at that—you’re a historian—when you look at that, it’s pretty clear that periods of restrictions and barriers have not been periods of prosperity and strong leadership around the world.

So whoever in this country is ultimately the president, I think should at least bear that in mind. The times when the United States has been in strong leadership, and when the economy has been prosperous, have most often coincided with periods of trade around the world and engagement of the country. Because the US economy is such a large and powerful economy, and it has to project in the world on the global stage.

FREDERICK KEMPE: Thank you for that. I’m going to call for another visual aid. And this gets to the question of leadership at central banks and finance ministries. And we’d like to show you the disparity here between—this is our own data visualization, so the team is very good at this kind of thing. Twelve percent of the world’s finance ministers are female. Thirteen percent of the central bank governors. This is fact. You can see it on the chart very strongly. But are there implications for the global economy? Is this something we should fix just because it doesn’t seem right, or is there actually implications for the global economy in this—in this visualization?

CHRISTINE LAGARDE: I think it’s abysmally small and does not reflect the availability of talents and merits that many economists, and macroeconomic experts, and financial experts have around the world. So it does not—there’s a whole pool of talent that is not tapped into, and clearly not reflected on this chart. Thank you, by the way, for putting that in in such a colorful way.

FREDERICK KEMPE: And but so the economic impact is we’re not tapping enough—

CHRISTINE LAGARDE: But, going beyond that, it’s talent—a pool of talent that is untapped. But it’s also a lack of diversity as such. And we all know from, you know, having studied that and practiced it, that diversity is a source of better decision, of more stability, of, you know, better outcome altogether. Whether it’s in the financial sector or otherwise. And I think we should just, you know, learn that lesson, and do it. Just do it.

FREDERICK KEMPE: OK. Thank you for that.

CHRISTINE LAGARDE: I know you do here.

FREDERICK KEMPE: Well, look, first of all, you look at the facts. And if the facts don’t seem right, then you start—you change.

The final question. And I don’t expect you to prognosticate what will happen here in November or give a view on that. But we’re the Atlantic Council. You’re one of the most remarkable transatlantists/atlanticists we know. You lived in the US for a long time. You have a great appreciation of this country and the transatlantic alliance. What message would you share with our American audience about how their decision now and through December 5th can impact not just Europe, but the rest of the world? I’ve had ministers of foreign countries complain to me that they don’t get to vote in the US elections, because they have so much at stake. But what do you think the stakes are in our own democratic process and elections?

CHRISTINE LAGARDE: I agree with them that a lot is at stake, actually. And the domestic decision, that belongs only to the American people, will have ramifications around the world in a very significant way. So it’s not just a decision at home, although I understand the concern is much more at home on inflation and the economy and all that. But it has massive implications outside the United States because of what I’ve just said. The United States is leading in multiple ways and has to deploy its leadership for the common good. That’s what we should always keep in mind.

FREDERICK KEMPE: And maybe then let’s put this a little bit of a different way. For Europe and the US to maintain their leadership role in this inflection point in history, where we’re going to be shaping the global future yet again together, from your standpoint, what you’re doing, what do we need to do better together?

CHRISTINE LAGARDE: I think we need to remember what history has forged between us. And, you know, I don’t want to go back to Washington and Lafayette. But reading their letters, reading the letters that these two men exchanged and how they played a role in structuring that history, which led to this extraordinary country, should always be a reminder that in whichever position, in whichever situation, we need to be together. And I think that there are some bounds of history that is seen on the Normandy beaches, that is seen on the East Coast of the United States, that cannot go to waste. So we are together, and we should stay in this together.

FREDERICK KEMPE: I think Washington and Lafayette is probably a good spot to close. So please join me virtually and also here in the audience in thanking Christine Lagarde, president of the European Central Bank, for this fascinating discussion.

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