Goldman Sachs interprets "stablecoins": If they put pressure on exchange rates, foreign governments are expected to implement "capital controls"

Goldman Sachs believes that although dollar stablecoins provide investors with a way to bypass the traditional financial system, if this process leads to significant capital outflows and puts pressure on the exchange rates of the relevant countries, it is highly likely to prompt these governments to implement capital control measures to restrict it.

According to news from the Chase Trading Desk, Goldman Sachs analyst Bill Zu stated in a research report released on September 8 that for foreign private investors facing capital controls in their home countries and finding it difficult to obtain dollars through traditional channels, dollar stablecoins provide a "truly incremental" source of demand for dollar assets.

However, any such transactions ultimately need to be completed through foreign exchange conversion. Goldman Sachs warns that once the scale of capital outflows driven by stablecoins becomes large enough, it will inevitably put pressure on the exchange rates of the relevant countries.

Goldman Sachs believes that in order to stabilize exchange rates and control capital outflows, foreign governments are likely to take action at this time to incorporate stablecoins into a regulatory framework similar to that of traditional capital flow channels, such as implementing capital controls. This poses a clear policy risk for investors hoping to achieve asset "dollarization" through stablecoins.

Incremental Demand: How Stablecoins Attract Foreign Investors

Goldman Sachs' report analyzes that the demand for dollar stablecoins from foreign investors mainly comes from three aspects:

• Conversion from traditional dollar assets: Due to the low yield of stablecoins, this is unlikely.
• Conversion from physical dollar cash: This demand is real. According to Federal Reserve data, as of the first quarter of 2025, foreign holders of physical dollar cash amount to about $1 trillion, accounting for roughly half of the total currency in circulation. This conversion will directly increase the net demand for U.S. Treasury bonds.
• New demand bypassing capital controls: This is the most concerning channel, where foreign investors who cannot obtain dollars through traditional channels enter the dollar system via stablecoins. This demand will be a "pure incremental" demand for U.S. assets.

Among these, the most imaginative potential lies with those private investors who cannot access dollar assets through traditional channels due to capital controls in their home countries.

The report points out that this demand channel almost entirely comes from the foreign private sector, representing "a truly incremental source of demand that would not exist without stablecoins," which will directly translate into demand for dollar assets (especially U.S. Treasury bonds).

In addition, the other two sources of demand include converting held physical dollar cash into stablecoins and converting traditional dollar assets into stablecoins. Goldman Sachs believes that the latter is unlikely due to the low yield of stablecoins. However, the potential of the former should not be underestimated; according to Federal Reserve data, as of the first quarter of 2025, the scale of physical dollar currency held by foreigners is about $1 trillion. If this cash is converted into stablecoins backed by U.S. Treasury bonds, it will also directly boost demand for Treasury bonds.

Regulatory Barriers: Exchange Rate Pressure as the Catalyst for Intervention

Although stablecoins provide a new channel for cross-border capital flows, they ultimately still need to go through foreign exchange transactions as an "entry point." Goldman Sachs emphasizes that it is this link that may become the "Achilles' heel" of their growth The logic of the report is that foreign investors must first complete the exchange of local currency for US dollars at some stage in order to purchase US dollar stablecoins. Regardless of how the transaction structure is designed, it will ultimately create buying pressure for US dollars and selling pressure for local currency, thereby putting pressure on the local exchange rate.

Goldman Sachs foresees that once this pressure becomes significant enough, foreign governments are likely to intervene, "implementing capital controls similar to those that restrict traditional channels for foreign capital." The report concludes that the advantage of stablecoins in this scenario does not stem from the technology itself, but rather from the differences in regulation between stablecoins and traditional financial channels in various countries. Once regulation places both in a "fairer competitive environment," this arbitrage opportunity will disappear.

Stablecoins May Erode the Foundations of the US Banking Industry

In addition to external influences, the report also reiterates the potential impact of stablecoins on the domestic financial system in the United States. Goldman Sachs believes that if depositors migrate en masse from bank deposits to stablecoins, it will have profound implications for the US banking industry.

The report analyzes that, although at the macro level, deposits flowing out of one bank may ultimately return to another bank, keeping the total amount of system deposits unchanged in the short term. However, in the long term, this transfer of funds will alter the yield balance for market participants, potentially leading to increased bank financing costs, impaired net interest margins, and possibly resulting in a contraction of the entire banking system's balance sheet.

Goldman Sachs specifically points out that this risk poses a particularly severe challenge for smaller banks that have a concentrated deposit base and are more reliant on deposit financing, or when there are frictions in the interbank market and liquidity redistribution is not smooth. The rise of stablecoins adds a new dimension of risk for banks in managing liquidity demands, especially during periods of market pressure