by Maryann O. Keating, Ph.D.
Is cryptocurrency becoming a substitute for the U.S. dollar? Curiosity about cryptocurrency is understandable, even for those unlikely to become crypto billionaires. Without a bit of actual cash, we wonder how children ever learn to multiply and divide without the loss of copper pennies, no longer being minted. On a more serious note, we ask, “Are our retirement accounts like crypto, merely digital entries somewhere on a balance sheet without any backing?”
Gold buried in Fort Knox and in the basement of the New York Federal Reserve accounts for less than 3 percent of all circulating coins and paper dollars. Without commodity backing, what ensures the purchasing power of our life-time earnings, the value of the U.S. dollar in foreign exchange, or, for that matter, cryptocurrency?”
U.S. dollars, we realize, are fiat currency and cannot be converted into metal or any other commodity. They are, however, legal tender meaning that they may be used to fulfill all debts public and private. The value of a dollar ultimately depends on the price level, the availability of goods and services produced in the U.S. (GDP), and global demand for holding and trading U.S. dollars.
Although the Federal Reserve’s mandate is to maintain the longterm value of dollar, we have internalized a more or less 2 percent annual increase in prices and hope that greenbacks in the future will remain always and everywhere accepted. The Greek word “crypto” means “hidden,” yet some speculate that cryptocurrencies have or will become a substitute for fiat currencies issued by national governments.
Analogies to crypto, including digital wallets like Venmo, limp but share a desire for faster and lower-cost transfers distributed between trusted participants. Also, they do not require approval from any third-party. Consider two other examples. Babysitting co-ops, popular in the 1970s, exchanged units of baby-sitting time. Non-members were excluded from providing or receiving services. Most of these co-ops were discontinued due to the reluctance of members to provide hour to hour services relative to demand. Similarly, time-share participants own a right to occupy or trade a specific unit for a specified period of time each year. In the U.S., civilians are at liberty to create co-ops, time shares, and all types of assets, financial or otherwise, including crypto. For most financial transactions, however, money, not borrowing, is preferred.
So-called cryptocurrencies emerged along with a technical breakthrough known as blockchain. A blockchain is a decentralized shared digital ledger, recording and verifying every single transaction without needing a central bank or middleman. Suppose, for example, Member Smith earns a piece of crypto from another member and sends this info onto the net. A network of computers, called nodes, checks the digital signature and ensures that the sender’s claim is legitimate. Pending transfers are pooled together into a data containers or block. Member Jones in competition with other members validates the block according to an agreed upon consensus mechanism. Jones, in some crypto platforms, could be referred to as a “miner” and earns digital credit for his service. Once verified, a new block is locked into the previous block with a unique hash code to form a permanent chain.
Various cryptocurrencies rely on blockchain technology, although some are hybrid systems using distributed ledger systems, referred to as “DeFi” or decentralized finance. As such, decentralized digital accounts record transactions, according to an agreed upon algorithm, without the need for central approval. The case for crypto is the cost and ease of transferring assets, avoidance of government regulations that inhibit supply chains, international acceptability, and its perception as a good investment.
Essentially, there are two types of cryptocurrencies: bitcoin and stablecoin. Generic bitcoin represents the original type of crypto, designed as a longterm hedge against inflation and used mainly as a store of value. In some cases, a fixed supply on the amount of crypto to be generated is agreed upon, and it is the owners’ responsibility to monitor their private holdings. Stablecoin, unlike bitcoin, is linked, or, better said, specified in terms of the U.S. dollar or another national currency. Stablecoin platforms “mint” or “burn” coins to control supply to target a specified link. Initially, stablecoins stored funds temporarily, but currently are used for low-cost day to day purchases and transactions. Presently, stablecoin is increasing faster than bitcoin, though bitcoin platforms remain the larger asset in terms of total market cap.
The rapid expansion of stablecoins is due to their role as a bridge between traditional finance and blockchain networks, enabling faster, cheaper and more transparent global payments.
Some individuals use crypto platforms to make predictions, gamble or merely indulge in or speculate in memes, similar to collectors of baseball cards. However, decentralized finance is now attracting private individuals, businesses, and governments who are directly issuing crypto-like instruments, often referred to as “tokens,” to buy, sell, transfer or store assets. Certain exchange-traded funds (ETFs) offer ordinary individuals an indirect exposure to crypto. These EFTs often represent an index of securities issued by publicly traded companies whose operations, assets, and revenue streams are connected to crypto or a similar digital asset system.
Bitcoin (BTC) is the first an oldest crypto currency platform with a supply limit (21million) released via mining rewards. Ethereum (ETH) is the second-largest bitcoin network, in which developers build apps and make contracts.
Because stablecoin tokens are pegged to real money like the U.S. Dollar, their values fluctuate less than bitcoin. Tether (USDT) and USD Coin (USDC) are widely traded major stablecoins pegged 1 to 1 with the US dollar. Banks can band together to launch a tokenized deposit system. These assets, however, are not without risk. In May 2022, Terra’s algorithmic stablecoin TerraUSD (UST) collapsed in days, wiping out around $45–$50 billion in market value.
With rare exceptions, bitcoin and stablecoin cannot be used to satisfy all public and private debt; they are not backed by a sovereign government. Compare this with how traditional commercial banks in the U.S. create actual money when they issue loans based on excess reserves. Of course, the Federal Reserve defines what reserves are considered “excess” and functions as a lender of last resort for commercial banks. In other words, private commercial bank lending along with the sale of U.S. Treasuries, expand and contract the money supply and ultimately are responsible for maintaining the value of the U.S. dollar.
Trust in the U.S. dollar is important given its status as a “reserve currency.” This means that presently foreign nationals are willing to store their earnings in US dollars. This advantages US residents in purchasing foreign goods and services, but is a contributing factor to International Balance of Payment Trade Deficits. Also, the U.S. government, given the reserve status of the dollar, can borrow at a lower than otherwise interest rate.
A Harvard economics professor, Ken Rogoff, suggests that cryptocurrencies could pose a longterm challenge to U.S. dollar dominance as the major global reserve currency. This could significantly alter global monetary dynamics, geopolitical relationships and financial stability.
For example, Rogoff’s concern is that if cryptocurrencies bypass traditional financial intermediaries, the effectiveness of international sanctions and Federal Reserve domestic monetary policy will be weakened.
Nations such as China are developing and piloting central bank digital currencies (CBDCs), which are designed to facilitate international trade and settlement without involving the U.S. dollar. CBDCs offers a state-backed alternative to dollar-based transactions.
Although crypto technologies are advancing, about 60 percent of international transactions continue to be done in U.S. dollars. Volatility, scams and a general lack of trust in cryptocurrency, along with increased regulation, could restrain cryptocurrencies’ potential as a perfect substitute for money, backed by sovereign governments. China has banned crypto trading and bitcoin mining. The issue, then, is not crypto technology per se; it is how U.S. policymakers will come to terms with a financial world in which the dollar, yuan, euro and crypto compete.
in September 2026, the Digital Asset Market Clarity Bill fell short of the required 60 Senate votes required to pass a law designed to establish a clear regulatory framework for cryptocurrency. The bill attempted to protect holders from fraud and market manipulation with Securities and Exchange Commission (SEC) oversight. Senate Democrats objected fearing official conflict of interest. Republican opponents were responding to lobbying from community banks concerned with competition for deposits if stablecoins were entitled to paying interest or offering rewards. The Clarity Act would have split oversight of the crypto sector across two agencies, the Security and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC). The CFTC’s larger role would have emphasized regulatory clarity, market integrity, and responsible technological progress; it also included oversight of emerging financial technologies. The Clarity Bill’s failure followed extensive bipartisan negotiations and engagement with regulators, academics, and industry.
The GENIUS Act, previously enacted in 2025, initiated a comprehensive regulatory framework for stablecoins requiring licensing, anti-money laundering compliance and oversight by federal or state regulators. This federal Act required stablecoin to maintain 1:1 reserves, ensuring that these firms be viewed simply as financial intermediaries not commercial banks. The Genius Act did not grant stablecoins FDIC insurance protection.
Banks promise to have depositors’ money immediately available and earn their profits by assuming the risk of lending at longer maturities. Ordinarily, banks are disciplined by market competition and concerns about excessive risk. Consider, however, that the Fed stands ready to supply liquidity during panics, and the Federal Deposit Insurance Corporation assures most depositors that they need not bear the consequences of placing their savings in an unsound bank. The Fed, then, to address the moral hazard, associated with these guarantees, mandates capital requirements and standards for issuing loans. Ironically, these necessary but onerous interventions are a prime reason for the movement towards cryptocurrencies; blockchain and decentralized technologies are secondary causes.
To keep the dollar sound, commercial bank lending could operate behind a firewall separating itself from crypto liability. Investors and creditors in all financial institutions are subject to loss, including dealers in crypto, who voluntarily take on the associated risk.
Government regulators have to catch up with expertise in emerging financial technology residing within the crypto industry rather than with government regulators. This does not suggest that U.S. firms meanwhile should be forced to operate at a disadvantage in transferring funds between individuals, companies and governments across national borders. Nevertheless, Americans must be concerned if taxpayers are placed in the default position of bailing out crypto issuers and holders, who may have little concern for U.S. long term interests and the value of the dollar.
FTX, once a $32-billion cryptocurrency exchange founded by Sam Bankman-Fried (SBF) in 2019, imploded after a sudden spike in customer withdrawals revealed an $8 billion shortfall in its accounts. Customer funds had been diverted to an affiliated hedge fund. Misconduct by subsidiaries was overlooked, and growth was prioritized over calculated risk.
Wall Street Journal editors write that crypto is quite entangled with the traditional banking system and crypto firms may aspire to become quasi-banks without abiding with the same regulations (Board of Editors, “The Crypto Lobby Objects on the Clarity Act,” The Wall Street Journal, Aug. 6, 2026). The FDIC applied the systemic risk exception rule to cover insured and uninsured Silicon Valley Bank deposits, including crypto, when the Silicon Valley Bank failed in 2023. Therefore, the editors argue that if crypto firms fail, causing banks to be threatened and investors burned, politicians probably might insist that government come to the rescue.
Of course, individuals and firms with crypto seek to influence policy in their own interests. The public interest is less obvious. To preserve the value of our life-time earnings in terms of their ability to purchase goods and services, the following requirements must be addressed:
- A cohort of public officials and U.S. civilians knowledgeable about money and banking economics.
- A Federal Reserve prioritizing the domestic and international role of the dollar and committed to supporting commercial banks as partners in sound monetary practices.
- Commercial banks free to offer and charge for crypto services, but without government guarantees. Otherwise, but not necessarily recommended, the Fed could consider commercial banks like any other financial intermediary, initiate 100 percent reserve requirements, and tolerate the failure of all financial institutions and crypto platforms.
- A recognition of Crypto firms as valuable financial intermediaries issuing tokens denominated in dollars, yet fully responsible for maintaining the integrity of their block chains and algorithmic decentralized financial instruments.
- A banking public aware of the specific limits of FDIC insurance and willing to accept the risk of trading, holding, and investing in crypto.
Maryann O. Keating, Ph.D., a resident of South Bend and an adjunct scholar of the Indiana Policy Review Foundation, is co-author of “Microeconomics for Public Managers,” Wiley/Blackwell.
