IMF warns: Local stablecoins may accelerate dollarization

This may improve local payments while changing the convenience for users to switch between different currencies. Once local stablecoins are traded on the same infrastructure as USDT, USDC and other US dollar tokens, the conversion process that originally relied on banks or traditional foreign exchange markets may be completed directly on the chain. For countries already worried about dollarization, this poses an issue that needs to be carefully examined before local stablecoins become popular.

Key Points

Local tokens may simplify the acquisition of digital dollars.

Dollar stablecoins have dominated liquidity on the chain.

stablecoin flows may spill over into the foreign exchange market.

Economic conditions will determine the ultimate impact.

What happens to local stablecoins after they are received?

Dan Katz, First Vice President of the International Monetary Fund, raised this issue in August 2026, pointing out that local currency stablecoins may accelerate the adoption of foreign currency stablecoins in some circumstances.

This concern becomes clearer when reviewing the redemption process. Converting from local currency to U.S. dollars through the traditional financial system may involve banks, foreign exchange dealers, documentation procedures or foreign exchange trading restrictions. Tokenized currency can create additional redemption channels. If a liquid trading market is formed between the local stablecoin and the USDT or USDC, users can swap through exchanges, liquidity pools or point-to-point transactions. As a result, some currency exchanges are divorced from traditional infrastructure.

For policymakers, distribution is only part of the design. Trading pairs, liquidity and where exchanges occur determine what role a token ultimately plays.

Local currency stablecoins: pros and cons

Potential advantages:

may improve local payments and simplify domestic transactions.

May accelerate the adoption of foreign currencies (US dollars) stablecoins.

Provide more transparent market prices when access to US dollars is limited.

Potential risks:

Dollar stablecoins have a liquidity advantage of as much as 98% to 99%, making competition difficult.

When the official exchange rate is credible, it can improve the allocation of scarce foreign exchange; but if the situation is the opposite, it may put depreciation pressure on the local currency and push up the US dollar financing premium.

Dollar stablecoins enter with significant liquidity advantages

Newly issued local stablecoins will also compete in already highly dollarized markets. The IMF says nearly 99 percent of stablecoins are denominated in dollars. The BIS analysis for 2026 puts that at about 98 percent. Dollar pricing is only part of the advantage. USDT and USDC have benefited from extensive exchange listings, wallet support, mature trading pairs, and deep liquidity in the crypto market. Even if local stablecoins operate completely as designed, there are relatively few places where users can use them to consume, trade or transfer money.

This is crucial for countries that want local alternatives to compete with U.S. dollar tokens simply because they represent local currencies. The same concentration problem arises in other areas of tokenized finance. We have previously reported on why the International Monetary Fund views stablecoins as a potential weak link in tokenization, and analyzed how settlement assets can become a venue for concentration of liquidity and financial risk. In the monetary context, the existing liquidity of the US dollar has caused local tokens to face difficult market access from day one.

Demand for stablecoins can extend to traditional currency markets

The impact may go beyond crypto transactions. The 2026 International Monetary Fund working paper studied the relationship between four stablecoins pegged to the US dollar and 27 legal currencies, and found a quantifiable correlation between stablecoins flows and traditional foreign exchange markets. The authors estimate that for every 1% increase in net stablecoin inflows, the spread between stablecoin and spot foreign exchange prices will widen by about 40 basis points. The results also showed that the local currency was under depreciation pressure and the US dollar financing premium rose. As a result, the demand for tokenized dollars may be large enough to affect traditional foreign exchange pricing and dollar financing conditions. For central banks, stablecoin activity becomes relevant even if the original transaction never passes through traditional money markets.

Existing foreign exchange controls may have different effects on the chain

For economies that already restrict or regulate access to foreign exchange, the problem becomes even more intractable. Banks and licensed foreign exchange dealers provide authorities with identifiable locations to monitor, report or restrict transactions. Stable coin conversions may involve different intermediaries, while decentralized and peer-to-peer markets may completely eliminate some traditional checkpoints. A July 2026 study by the Bank for International Settlements covering more than 130 economies found that stablecoin activity and traditional dollarization tend to increase under similar conditions such as financial pressure and exchange rate pressure. Foreign exchange and capital flow restrictions appear to have a much smaller impact on stablecoin flows than on traditional foreign currency deposits. Researchers believe that activities outside the scope of traditional regulation may help explain the differences.

This poses a surveillance challenge that has emerged in broader tokenization discussions. Our previous analysis of why the International Monetary Fund called for changes in the way tokenization risks is monitored explores what happens when financial activity moves outside the institutions around which many existing safeguards surround. Research by the Bank for International Settlements also found that traditional dollarization and dollarization of stablecoins are sustainable. Once households start holding some of their wealth in dollars, this behavior may continue even after the initial period of economic stress has passed.

READ MORE:Bank of Italy: Stablecoins Are Not Always Cheaper

Economic conditions determine the severity of risks

Dollar gains do not produce the same effect everywhere. The 2026 International Monetary Fund working paper studied the fixed exchange rate system and found that stablecoins can provide another source of foreign exchange and more transparent market prices when access to the US dollar is limited. This additional market can improve the allocation of scarce foreign exchange when official exchange rates remain credible. But when the official exchange rate deviates significantly from economic conditions, the situation becomes even more fragile. Visible stablecoin prices may provide households and businesses with a common reference for the value of local currencies outside the official market. If confidence is deteriorating, easier access to dollar tokens may allow more users to respond to this information at the same time.

This is why the macroeconomic starting point is so important. In a country with low inflation, credible monetary policy, and efficient domestic payments, households have little reason to turn to the dollar. And in an economy already facing devaluation, inflation or foreign exchange shortages, demand for the U.S. dollar may already exist even before the emergence of local stablecoins. Technology has changed the way this demand is expressed, but it has not created fundamental economic pressure.

How does a country know whether its stablecoin is effective?

Issuing local stablecoins is relatively easy to measure. Authorities can count the number of wallets, transaction volume and circulation supply. But these numbers may not explain what users are actually doing. Local stablecoins can generate a lot of trading activity, but mainly serve as an intermediate step between local currencies and U.S. dollar tokens. Statistically, usage seems to be high, even though users rarely hold local assets for long periods of time. Liquidity can provide clues. If the deepest market for the token is formed with the USDT or USDC, authorities need to know how much of the activity is ordinary transactions and how much reflects continued conversion into U.S. dollars. The location where these exchanges take place is also important. Activities conducted through banks and regulated exchanges are often easier to observe than transactions scattered across decentralized exchanges and peer-to-peer markets. Holding behavior may be more informative than the raw transaction count. If users regularly receive local tokens and quickly convert them to U.S. dollar stablecoins, the high adoption figures will be very different from the story told by people using the token for local currency-denominated wages, savings, or daily payments.

The economic situation remains part of the assessment. Stable monetary policy and reliable domestic payments reduce incentives to seek alternative stores of value. Where currency confidence is already weak, more convenient digital conversions could provide another channel for existing U.S. dollar demand. Therefore, for governments considering issuing local stablecoins, success may require broader measures than wallets or transaction volume. The really useful question is: What will users do with the token after they get it?