In 2023, in my article ‘Bond Management and Higher Rates’, I explored the consequences of persistent inflation for bond investors. The issue was stark: the unprecedented monetary expansion orchestrated by the central banks, coupled with massive stimulus programmes, had triggered inflationary pressures that the bond market had not seen in decades.

Two years on, inflation has moderated, but the budget deficits remain. And the debate has evolved. Beyond the simple process of interest rate management, a more fundamental question is emerging: is monetary depreciation inevitable in our fiat systems? And if so, do digital innovations – from Bitcoin to stablecoins – offer viable alternatives?

This review does not seek to defend cryptocurrencies against traditional paper money, or vice versa. It aims to examine, with the due rigour expected of finance professionals, how these new technologies fit into the current monetary landscape and what implications they have for the bond markets.

→ Our starting point:

is Satoshi Nakamoto's white paper published in 2008, which proposed a technological response to an age-old economic problem – that of trust in paper money.

→ Our principal aim:

is to understand whether this response delivers on its promises, in light of post-COVID data and recent developments around stablecoins.

When printing money becomes excessive

The post-Covid chapter: anatomy of an inflationary crisis

The Covid-19 pandemic has provided a real-life case study for monetary policy.

The US Federal Reserve's balance sheet grew from $4.2 trillion at the beginning of 2020 to more than $8.9 trillion by mid-2022. At the same time, governments rolled out unprecedented stimulus packages – $2.2 trillion for the US CARES Act alone.

This massive injection of liquidity was initially met with a collapse in the velocity of money as lockdowns meant that money was circulating less. But as soon as restrictions were lifted, pent-up demand came head-to-head with paralysed supply chains. Investors were reminded of Milton Friedman's equation MV = PY (money supply × velocity of money = price level × output): with M rising steeply and Y constrained, P could only explode.

The figures speak for themselves. US inflation peaked at 9.1% in June 2022, while eurozone inflation peaked at 10.6% in October. On the bond markets, the shock was brutal: 10-year US Treasury yields climbed from less than 1% to over 4% in the space of two years, squeezing valuations and forcing a massive repositioning towards shorter maturities and inflation-linked securities.

This chapter highlighted a fundamental reality that inflation remains the silent enemy of bondholders, inexorably eroding the purchasing power of fixed coupons. But it also raised a deeper concern about the very nature of our monetary systems.

Currency depreciation: when trust breaks down

Although post-Covid inflation shook the developed markets, it remains modest compared to other episodes of hyperinflation in recent times. Two examples illustrate the vulnerability of fiat systems when monetary discipline evaporates.

Zaire in the 1990s is a textbook case. Under Mobutu Sese Seko's regime, the printing of money financed corruption and unrestrained military spending. The exchange rate of the zaire (the local currency at the time) surged from Z3 = US$1 in 1985, to Z3 million = US$1 in 1994. Inflation peaked at 23,760% in 1994, wiping out savings and reducing the economy to barter or the US dollar.

Argentina in 2001-2002 tells a different but equally instructive story. The collapse of the peso's peg to the dollar, under the weight of budget deficits and payment defaults, triggered a devastating spiral of 40% inflation, 75% devaluation, 25% unemployment and a poverty rate in excess of 50%. The ‘corralito’ – a freeze on bank deposits – led to riots and political instability, with five presidents in two weeks. This fiasco prompted the Argentinians to turn collectively to the dollar and tangible assets.

The common denominator to these crises was the erosion of trust in the issuing authority. In stable economies with independent central banks and strong institutions, such scenarios remain unlikely. But they serve as a reminder of an uncomfortable truth: paper money is only worth as much as the trust that people have in it.
It is precisely this fragility that the creators of cryptocurrencies claim to correct.

Bitcoin and the promise of scarcity

Satoshi's vision: reinventing trust

In October 2008, in the midst of the financial crisis, a pseudonymous Satoshi Nakamoto published a nine-page white paper: ‘Bitcoin: A Peer-to-Peer Electronic Cash System’. The timing was not without significance. While the central banks were injecting billions of dollars to save the financial system, Satoshi was proposing a radical alternative in the form of a decentralised digital currency, functioning without a central authority.

At the heart of this proposal lay a technological response to an age-old economic problem: how do you create a currency that is immune to depreciation?

Satoshi's solution can be summed up in one number: 21 million. This is the maximum number of bitcoins that can ever exist and is written into the very code of the protocol. No central bank to adjust the supply, no government to finance its deficits by creating money. Just a mathematically guaranteed scarcity.

This vision sits within an intellectual tradition that is older than one might think.

Hayek's legacy: monetary competition

In 1976, the economist Friedrich Hayek, future Nobel Prize winner, published ‘Denationalisation of Money’. His argument was ‘Why should governments have a monopoly on issuing money?’ Hayek advocated a system of competing private currencies, where market discipline would prevent the inflationary excesses that plague paper money systems.

“Why not let people freely choose the currency they wish to use?” asked Hayek. He envisaged that a sound currency would emerge naturally from market forces rather than by government decree. Irresponsible issuers would see their currency abandoned in favour of those that maintain their purchasing power.

Satoshi's white paper can be read as a practical extension of this Hayekian philosophy. Blockchain provides the technical mechanism for creating a currency that is outside arbitrary control, whose voluntary adoption replaces forced circulation. But does this conceptual elegance stand up to economic scrutiny? Can Bitcoin effectively fulfil the essential functions of money, namely serving as a store of value, a medium of exchange and a unit of account?

The rigidity debate: productivity versus stability

Chen Zhao, chief strategist at Alpine Macro, presents a powerful critique of cryptocurrencies in his August 2025 report, ‘On Crypto Currency, Again.’ In his view, fixed-supply cryptocurrencies such as Bitcoin are akin to a ‘voluntary Ponzi scheme’ and their widespread adoption would create a catastrophic deflationary trap.

His argument is based on the history of the gold standard. This system, which was abandoned in the 20th century, regularly constrained economic growth because gold production did not keep pace with economic expansion, creating a chronic monetary shortage that led to deflation and recessions. With Bitcoin, whose supply is even more rigid than that of gold, Zhao predicts a scenario ‘ten thousand times worse’ in that its mass adoption could cause global prices to collapse by 70% to 80%, paralysing investment and consumption as everyone hoards it in anticipation of ever lower prices.

This criticism echoes post-Covid observations: expansionary monetary policies, although inflationary, have enabled recovery and shored up productivity, particularly in technology sectors. Without this flexibility, economies could have fallen into prolonged stagnation.

However, this much-criticised rigidity is precisely what makes Bitcoin so attractive to its advocates: it guarantees immunity from depreciation. And unlike gold, Bitcoin addresses certain practical objections.

These advantages are not just theoretical. During the Russian-Ukraine conflict, Ukrainians turned to cryptocurrencies to preserve their assets in the face of banking disruption. A similar phenomenon occurred in Turkey in response to the depreciation of its lira in 2021. In a world marked by capital controls and geopolitical instability, Bitcoin offers a cross-border portability that physical gold cannot match.

But is that enough to make it a real currency? To answer that question, you have to start by recognising that currency itself is a more flexible concept than it appears.

Currency as a collective belief

Monetary history is full of examples of assets serving as currency without any obvious intrinsic utility. The rai stones of the Micronesian Yap islands – huge immovable limestone discs – circulated as currency for centuries, with their value deriving solely from community recognition. Cowrie shells served as currency in ancient Africa and Asia. Katanga crosses (copper crosses from the pre-colonial Democratic Republic of Congo) functioned as a medium of exchange before the arrival of the Europeans and the creation of the Union Minière du Haut-Katanga in 1906.

As Niall Ferguson writes in ‘The Ascent of Money’, "Money is a matter of belief, even faith: belief in the person paying us; belief in the person issuing the money they use (…). Money is not metal. It is trust inscribed. And it does not matter much where it is inscribed: on silver, on clay, on paper, on a liquid crystal display.”

Yuval Noah Harari takes this reflection further in ‘Sapiens’, presenting currency as a “shared myth” that enables cooperation between strangers. Like religion or nations, the power of currency derives from a collective belief. If enough actors – individuals, businesses, countries – adopt Bitcoin, its “myth” could solidify into reality, just as fiat currencies have done.

Could the concept of “trust inscribed” extend to the Bitcoin blockchain, where scarcity is guaranteed by code rather than by nature or authority? It's an open question. But it may be becoming less relevant with the emergence of a third channel: stablecoins.

Stablecoins: a pragmatic compromise?

Stability and innovation: the best of both worlds?

While Bitcoin seeks to solve the problem of depreciation through scarcity, it creates another: volatility. With average annualised fluctuations of 54% in 2025 (according to data from BlackRock), it is difficult to imagine a retailer setting their prices in bitcoins or an employee accepting their salary in a currency that could lose 20% of its value in a week. It is precisely this dilemma that stablecoins claim to solve.

The principle is simple: back a cryptocurrency with a stable asset, generally the US dollar, by maintaining a parity of 1:1. Each stablecoin in circulation is theoretically guaranteed by one dollar (or equivalent in investment-grade assets such as Treasury bills) held in a reserve. The result is the stability of a fiat currency combined with the speed and efficiency of blockchain transfers.

Bitcoins vs. stablecoins

Two different approaches to digital currency

With $300 billion currently in circulation, stablecoins are no longer a marginal experiment. And according to some projections, this market could reach $4 trillion within five years. To understand this trajectory, we need to examine the perspectives of the players shaping this market.

The IMF summit: three converging visions

At the recent International Monetary Fund (IMF) summit on ‘The Future of Finance’, three interventions stood out.

Jeremy Allaire, CEO of Circle (issuer of USDC, the world's second-largest stablecoin1), sees this as the dawn of a major monetary transformation. He points out that the USDC now accounts for $76 billion in circulation, up 80% year-on-year, with a monthly transaction volume exceeding $2 trillion. This velocity, comparable to that of traditional payment systems but with virtually zero costs along with global accessibility, illustrates the disruptive potential of the technology. Allaire envisions fully reserved fiat currencies circulating on open Internet protocols, enabling ultra-secure, near-zero-cost, high-speed transfers. This infrastructure could transform the web into a platform for programmable contracts and intermediation based on artificial intelligence. He anticipates a million-fold increase in activity over the next 5 to 15 years, driven in particular by AI agents. He sees blockchains as network-effect platforms, whose usefulness is enhanced by developer ecosystems and liquidity.

But he warns against regulatory fragmentation that could stifle this innovation. He calls for collaborative and proportionate supervision, without imposing outdated models. He predicts the emergence of ‘winner-takes-all’ markets with three to five dominant players, which could challenge traditional monetary sovereignty and promote deeper global integration with fewer currencies.

Ajay Banga, President of the World Bank, highlights the role of stablecoins in cross-border flows and financial inclusion. He considers that their potential goes beyond transferring funds: they can facilitate the building of credit histories and access to insurance in emerging markets. He sees them as complementary to traditional systems, enabling programmable payments that ease the financial burden on businesses – and he cites the example of reconciliation activities at banks such as JP Morgan.

Nevertheless, Banga acknowledges the regulatory obstacles, including the reluctance of some emerging markets to accept stablecoins backed by foreign currencies. He advocates for balanced rules that modernise KYC/AML procedures without stifling innovation. He stresses the need for coexistence with bank money and CBDCs, via transparent gateways, allowing for a 3-5 year adjustment period to maintain confidence.

Kristalina Georgieva, Managing Director of the IMF, framed the debate by clearly distinguishing volatile assets such as Bitcoin (capitalisation of $4 trillion, or 7% of US assets) from faster-growing stablecoins. She welcomed regulatory advances, notably the US GENIUS Act of July 2025, while warning of the risks of regulatory fragmentation since inconsistent frameworks could lead to confusion for consumers and macroeconomic repercussions.

But her main warning concerns the dominance of the dollar: 97% of stablecoins are backed by the US currency, which could undermine the monetary policies of emerging markets.

Implications for the bond markets

From a bond investor's perspective, the boom in stablecoins presents some contradictory elements.

The opportunity is clear, with a market capitalisation of US$300 billion (according to JP Morgan), stablecoin issuers already hold substantial portfolios of US Treasury bills. JP Morgan's upper estimates value US$ stablecoins at $2 trillion, which would stimulate additional demand for $1.4 trillion in Treasuries, reinforcing the dollar's dominance in the face of de-dollarisation trends.

The US GENIUS Act of July 2025 reinforces this dynamic by requiring parity coverage with investment-grade assets such as Treasury bonds, with monthly transparency and no direct yields (although rewards via subsidiaries remain possible). These safeguards are aimed at pegging stablecoins to the real economy.

The risks should not be underestimated. Unlike secure deposits, stablecoins carry credit risks for issuers. The collapse of TerraUSD in 2022 resulted in a loss of US$40 billion, while Tether has experienced episodes of decoupling.

As Chen Zhao points out: “Stablecoins carry the credit and liquidity risks of their issuers, unlike CBDCs2.”

Additionally, as Allaire and Banga suggest, the velocity and programmability of stablecoins could streamline the tokenisation of real-world assets (RWAs). Platforms such as Ondo Finance are already exploring the fractionalisation of bond securities, broadening access to these instruments.

¹ USD Coin (USDC) is a stable cryptocurrency pegged to the US dollar. USD Coin is managed by a consortium called Centre, founded by Circle. USDC is issued by a private entity and should not be confused with a central bank digital currency (CBDC) (Source: Wikipedia).

² CBDC stands for ‘Central Bank Digital Currency’. Central bank digital currency, or CBDC, is the digital form of fiat money; it is electronic money issued by a central bank.

Written by Jean-Philippe Donge, Head of Fixed Income
BLI - Banque de Luxembourg Investments, a management company approved by the Luxembourg Financial Sector Supervisory Commission (CSSF)

Final date of drafting: 02/12/2025

Date of publication: 12/12/2025

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