US President Donald Trump’s embrace of so-called stablecoins as a means of projecting America’s financial power and preserving the dollar’s global dominance has spurred calls for a “strategic response” by the European Union. If Europe does not stake out its position in this techno-financial revolution, the argument goes, its monetary sovereignty and financial stability will deteriorate. But the warnings are as unwarranted as they are ominous.

The main catalyst of Europe’s stablecoin anxiety is the Trump administration’s Guiding and Establishing National Innovation for US Stablecoins ( Genius ) Act, which aims to promote dollar-backed stablecoins by implementing a comprehensive regulatory framework for them. But the legislation’s actual provisions closely resemble those in the EU’s 2023 Markets in Crypto-Assets ( MiCA ) Regulation, which was passed as a precaution, before stablecoins had much financial significance. So, from a regulatory perspective, the United States has not pulled ahead of Europe. But, even if it had, stablecoins are poorly suited to propel the transformation its proponents anticipate and its detractors fear.

Stablecoins operate essentially like money market funds that pay no interest: the issuer takes one unit of a fiat currency from a depositor, and puts the equivalent into that depositor’s digital wallet. The main difference is that stablecoins are based on the same blockchain technology – a type of distributed ledger – that underpins cryptocurrencies.

This is where the problems arise. As the name suggests, blockchain transactions are not processed individually, but rather are grouped into “blocks”, which are approved simultaneously, at discrete intervals. In the case of bitcoin, one block can contain up to 4,000 transactions, with approvals happening every 11 minutes or so. This makes it unsuitable for most retail transactions.

Stablecoins operating on newer blockchains – such as Tether ( USDT ), issued on the Tron network – are optimized for speed and throughput. But the transaction-processing capacity of blockchain-based technologies will always be subject to constraints, raising the risk of bottlenecks and delays. As a result, such technologies cannot compete with existing retail-payment systems, which process transactions individually – and instantly.

The “distributed ledger” component further complicates matters. The basic idea of a distributed ledger is that the transaction record ( ledger ) is held by thousands of so-called miners around the world. This is grossly inefficient ( Tron’s ledger, for example, comprises over two gigabytes of data ), especially compared to a traditional payment system, in which each transaction is stored only once, on a single centralized account or ledger.

Moreover, given the global distribution of these nodes, issues with data latency and participant availability may slow down data validation. This further undermines stablecoins’ prospects for use in everyday transactions, particularly in advanced economies, where fast, efficient retail-payment systems are already in place.

Stablecoins might be useful in cross-border retail transactions, especially remittances. But, while remittances are important to many economies, their scale is limited: about US$700 billion are sent annually – less than the GDP of a mid-size European country, and a tiny fraction of US GDP. In any case, a family in a developing country receiving stablecoins from a relative working in Europe or the US would still have to bear the costs of converting them into the local currency ( or US dollar bills ), in order to use the funds at home.

One might assume that stablecoins are better suited for wholesale payments: the number of transactions is much smaller, the amounts are larger, and “instant” settlement is irrelevant. But here, too, issues arise. Transactions on a blockchain are not anonymous but “pseudonymous”: all transactions are fully visible, but the wallets’ owners are identified only by addresses comprising a long string of numbers and letters. The problem is that, if a supplier wants to be paid, it must share its wallet’s address with its client, who can then follow all future transactions involving that wallet – including, potentially, sensitive commercial information. The client might even share the address with the supplier’s competitors.

Criminals – such as those carrying out ransomware attacks – circumvent this issue by immediately forwarding payments to another wallet or even a number of new wallets. But legitimate firms cannot obfuscate their accounts in this way without raising red flags for potential partners and clients and, potentially, inviting money-laundering investigations. While less suspicious ways of minimizing this problem exist, they complicate cash management. Stablecoins are simply not a convenient means of payment in industry or among banks, and they are also unlikely to become a popular investment since they do not yield any interest.

Crucially, the barriers to widespread use of stablecoins are structural: they cannot be overcome without fundamentally transforming how the instrument works. As this becomes apparent to businesses, consumers and financial investors, the current hysteria is likely to peter out. Europe’s “strategic response” to the Genius Act should be to remain calm.

Daniel Gros is the director of the Institute for European Policymaking at Bocconi University.

Copyright: Project Syndicate