Washington must do more to maintain dollar-settlement dominance

• Key insight: China does not need to replace the dollar to normalize non-dollar settlements. Washington must offer a faster, cheaper and more interconnected dollar system before China entrenches alternative rails.
• Supporting data: In July, Bank of China reported handling over 600 billion yuan in cross-border mBridge transactions since April 2024.
  

On Sept. 24, The Clearing House announced that it expects to launch an interbank tokenized deposit network in the first half of 2027. Tokenized deposits are simply ordinary bank deposits represented on a programmable network.

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That same day, Bloomberg reported that the Trump administration was considering public-private ventures to promote dollar-backed stablecoins abroad. These tokens, designed to maintain a one-dollar value, could both strengthen the dollar's reserve-currency status and increase demand for the Treasury securities that back them. Washington should encourage stablecoin use, but needs a more enduring system to export digital dollars.

Washington should integrate these approaches. It should build a shared, blockchain-based settlement backbone linking tokenized bank deposits and regulated dollar stablecoins. Deposits should be the banking foundation that stablecoins could augment. A common infrastructure would make private financial services more interoperable while still encouraging market competition. An exporter should not be forced to join its customer's payment network to collect an invoice instantly and cheaply.

Stablecoins broaden public access to digital dollars, but sending a token is just half the transaction. The recipient still needs to convert the proceeds. Exchanging tokens for bank money, navigating proprietary networks, and arranging local payouts can conceal time and monetary costs. Existing digital banking infrastructure faces similar fragmentation problems that confuse, delay and cost customers. 

Tokenized deposits, which combine programmable money with existing banking relationships, offer a stronger digital payment foundation. In this model, the sender's bank would reduce the sender's deposit, the recipient's bank would increase the recipient's deposit and the banks would settle between them. The recipient would then get actual dollars from their own bank rather than another institution's token to trade or redeem.

That preserves existing payment and credit relationships. Besides payments, businesses need working capital and loans. Bank deposits support that lending. Stablecoins backed by cash and government securities cannot provide the same credit function. Tokenized deposits introduce programmable payments within existing banking relationships rather than forcing companies to manage digital money separately.

The commercial benefit is already evident. On Sept. 24, UK Finance announced the first live customer transactions using tokenized sterling deposits, enabling quick, automatic remortgage payments.

In a July case study, JPMorgan reported that the bank's Kinexys blockchain network helped payments provider EBANX cut transfers between its own accounts from over 24 hours to minutes. The next step is to offer these benefits across institutions. Businesses should not be forced to rely on one bank for faster transfers.

A shared programmable ledger would offer participating institutions a secure record of payment conditions and settlement status. Rather than passing money through vulnerable intermediary chains and reconciling disparate records afterward, they could coordinate transfers and settlement simultaneously. Project Agorá, the Bank for International Settlements' cross-border settlement project, demonstrated this approach using tokenized deposits and central bank reserves just this July.

Regulated stablecoins could connect to that backbone. A business paid in stablecoins should be able to pay directly into a supplier's bank account. Preapproved network intermediaries could arrange redemption, allowing settlement banks to streamline the corresponding dollar transfer. The reverse route would fund stablecoin issuance. Businesses could then choose how they want to pay without forcing that choice on their partners.

Issuers would remain responsible for redemption and related GENIUS Act obligations. The platform would simply streamline digital dollar transfers.

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Stablecoins would bring business to dollar banking. Tokenized deposits would offer stablecoin users more places to spend and receive money. Competition would shift from locking in customers to serving them better.

China is attempting to build digital payment alternatives that no longer rely on the dollar. In July, Bank of China reported handling over 600 billion yuan in cross-border mBridge transactions since April 2024. The blockchain-based platform lets participating banks bypass correspondent banking chains. Beijing is not merely promoting the renminbi, but actually building alternative digital payment networks.

These choices may become self-reinforcing. Banks integrate their systems, treasurers reorganize cash management and suppliers become accustomed to receiving the digital yuan. Washington should connect emerging dollar networks before separate systems entrench incompatibility.

Private firms are trying to build networks, but they cannot resolve cross-border legal and regulatory questions alone. Treasury should coordinate that work. A common ledger needs a shared rulebook.

The U.S.-U.K. Transatlantic Taskforce for Markets of the Future offers a diplomatic vehicle. Its July recommendations endorsed stablecoins, tokenized deposits, and other digital money co-existing, and proposed a one-year industry group to test cross-border applications.

The network should publish operating rules and secure initial customer commitments by mid-2027, followed by a limited commercial service pilot by the end of 2027. Initial service could prioritize banks in Asia and the Gulf to offer a dollar-based competitor to mBridge.

While a supervised private consortium could operate the infrastructure and user fees could cover operating costs, Treasury must coordinate between regulators and industry. The Fed and partner central banks must also facilitate settlement system access for eligible institutions. Any institution that meets published standards should have network access.

The rulebook should specify payment, fraud and system failure liabilities while protecting sensitive customer data. Furthermore, participating issuers must ensure tokens traded within the network are ultimately redeemable in cash. Regulators should require stress tests for sudden withdrawals and outages.

Washington should aim for instantaneous around-the-clock settlement. Advance-deposited funds could backstop quick transfers outside current operating hours. The Fed also plans additional large-value payment operating days in 2028 or 2029, which would accelerate rapid settlement.

China does not need to replace the dollar to normalize non-dollar settlements. Washington must offer a faster, cheaper, and more interconnected dollar system before China entrenches alternative rails. And to do that effectively, America's digital dollars must work better together.