Fed Governor Says DeFi Trading Will Strengthen US Dollar's Global Dominance

Some crypto observers and critics have warned that digital currencies could destabilize the U.S. dollar, but U.S. Federal Reserve Gov. Christopher Waller predicted that trading in decentralized finance (DeFi) may have a positive effect on the dollar's global strength.

At the "Climate, Currency, and Central Banking" conference in the Bahamas Thursday, Waller said there is a "shifting payments landscape," which includes the rapid growth of digital currencies, as per a press release.

While there's speculation that cryptocurrencies like Bitcoin might replace the dollar as the global reserve currency, the majority of trading in DeFi revolves around stablecoins that in turn are pegged to the dollar. This means that even within the crypto world, assets are essentially traded in dollars, strengthening its position.

Waller said that around 99 percent of the stablecoin market's capitalization is "linked to the U.S. dollar, meaning that crypto-assets are de facto traded in U.S. dollars."

Finally, he predicted that "any expansion" of DeFi trading "will simply strengthen the dominant role of the dollar."

He also revealed during the conference that by standard measures of the use of international currency, "there has not been any notable erosion in the dollar's dominance" over the last several decades.

"Recent developments that some have warned could threaten [the U.S. dollar's] status have, if anything, strengthened it, at least so far," he said during the conference, which was sponsored by the Global Interdependence Center and Nassau's University of the Bahamas,.

This is not the first time Waller had an optimistic view of the impact of DeFi trading.

During the Swiss National Bank SNB-CIF Conference on Cryptoassets and Financial Innovation in Zurich in mid-2022, Waller said there has been a rise in the use of alternatives, such as "'DeFi' arrangements, meant to provide alternatives to a range of financial products and services."

Waller noted that DeFi traders, in particular, understand the "dynamics" of the new trading marketplace.

"If they don't embrace them, they still accept them as the natural state for a new, exciting, and still relatively unregulated marketplace. And they have a point: Crypto and DeFi may be new, but these kinds of freewheeling markets aren't," he said.

The DeFi market has maintained steady popularity as the world shifts to digital transactions. However, concerns remain about the system. There have also been doubts about the stability of stablecoins, which allow DeFi market participants to avoid conversions at every turn.

Moody's said in October that stablecoins "have not always lived up to their promised stability," adding that many investors have divested their stablecoin holdings, in part due to the lack of transparency regarding the reserves that back many stablecoins.