Local Stablecoins Could Accelerate Dollarization, IMF Warns
A government worried about growing use of dollar stablecoins has an obvious option: offer a digital version of its own currency.
That may improve local payments. It could also change how easily users move between currencies.
Once a domestic stablecoin trades on the same infrastructure as USDT, USDC and other dollar tokens, a conversion that once depended on banks or traditional FX markets may become possible directly onchain. For countries already concerned about dollarization, that creates a problem worth looking at before local stablecoins become widely used.
Key Takeaways
- Local tokens could ease access to digital dollars.
- Dollar stablecoins already dominate onchain liquidity.
- Stablecoin flows can spill into FX markets.
- Economic conditions will shape the final impact.
Tokenization Changes the Route to Dollars
Dan Katz, IMF First Deputy Managing Director raised the issue in August 2026, noting that local-currency stablecoins could, in some cases, accelerate adoption of foreign-currency stablecoins.
The concern becomes clearer when looking at the conversion process.
Moving from local currency into dollars through the traditional financial system may involve a bank, an FX dealer, documentation or restrictions on foreign-currency transactions.
A tokenized currency can create additional ways to make that exchange.
If a domestic stablecoin develops liquid trading markets against USDT or USDC, users may be able to swap between the two through exchanges, liquidity pools or peer-to-peer transactions. Part of the currency conversion has then shifted away from the infrastructure through which it traditionally took place.
Its economic role will depend partly on the markets that form around it – particularly its trading pairs and available liquidity.
Local-Currency Stablecoins: Pros & Cons
| Pros (Potential Benefits) | Cons (Risks & Challenges) |
|---|---|
| May improve local payments and streamline domestic transactions. | Could accelerate the adoption of foreign-currency (dollar) stablecoins. |
| Can provide a more visible market price where dollar access is restricted. | Dollar stablecoins hold a massive 98% to 99% liquidity advantage, making competition difficult. |
| Can improve the allocation of scarce foreign currency when official exchange rates remain credible. | Can trigger depreciation pressure on local currencies and increase dollar funding premiums. |
Dollar Stablecoins Enter With a Major Liquidity Advantage
A new domestic stablecoin would also be competing in a market that is already overwhelmingly dollar-based.
The IMF says close to 99% of stablecoins are denominated in US dollars. A 2026 BIS analysis puts the share at roughly 98%.
Dollar denomination is only part of that advantage.
USDT and USDC already benefit from extensive exchange listings, wallet support, established trading pairs and deep liquidity across crypto markets. A local stablecoin can function exactly as intended and still offer users fewer places to spend, trade or transfer it.
That matters for countries hoping a domestic alternative will compete with dollar tokens simply because it represents the local currency.
The same concentration issue appears elsewhere in tokenized finance. We previously covered why the IMF sees stablecoins as a potential weak link in tokenization and examined how the asset used for settlement can become a place where liquidity and financial risk concentrate.
In the currency context, existing dollar liquidity gives domestic tokens a difficult market to enter from day one.
Stablecoin Demand Can Reach Traditional Currency Markets
The effects may extend beyond crypto trading.
A 2026 IMF Working Paper examined four dollar-pegged stablecoins against 27 fiat currencies and found measurable links between stablecoin flows and conventional foreign-exchange markets.
The authors estimate that a 1% exogenous increase in stablecoin net inflows widened the difference between stablecoin and spot FX prices by around 40 basis points. Their results also showed depreciation pressure on local currencies and higher dollar funding premiums.
Demand for tokenized dollars can therefore become large enough to affect conventional FX pricing and dollar funding conditions.
For central banks, that makes stablecoin activity relevant even when the original transaction never passes through a traditional currency market.
Existing FX Controls May Work Differently Onchain
The problem becomes harder for economies that already restrict or manage access to foreign currency.
Banks and licensed FX dealers give authorities identifiable places where transactions can be monitored, reported or limited. Stablecoin conversions may involve different intermediaries, while decentralized and peer-to-peer markets can remove some of those traditional checkpoints entirely.
A July BIS study covering more than 130 economies found that stablecoin activity and conventional dollarization tend to increase under similar conditions, including financial stress and exchange-rate pressure.
Foreign-exchange and capital-flow restrictions appeared to have much less influence on stablecoin flows than on conventional foreign-currency deposits.
The researchers suggest that activity outside the traditional regulatory perimeter may help explain the difference.
That creates a monitoring challenge already visible in the wider tokenization debate. Our analysis of why the IMF is calling for changes in how tokenization risks are monitored looked at what happens when financial activity migrates away from the institutions around which many existing safeguards were designed.
The BIS research also found persistence in conventional and stablecoin dollarization. Once households begin keeping part of their wealth in dollars, the behavior may continue even after the original period of economic stress has eased.
Economic Conditions Decide How Serious the Risk Becomes
Dollar access does not have the same effect everywhere.
A 2026 IMF Working Paper examining fixed exchange-rate regimes found that stablecoins can provide another source of foreign currency and a more visible market price where dollar access is restricted.
When the official exchange rate remains credible, that additional market can improve the allocation of scarce foreign currency.
The situation becomes more fragile when the official exchange rate is badly misaligned with economic conditions.
A visible stablecoin price can give households and businesses a common reference for what the local currency is worth outside the official market. If confidence is already deteriorating, easier access to dollar tokens may allow more users to react to that information at roughly the same time.
This is why the macroeconomic starting point matters so much.
A country with low inflation, credible monetary policy and efficient domestic payments gives households fewer reasons to move into dollars. In an economy already dealing with depreciation, inflation or shortages of foreign currency, demand for dollars may already exist before any local stablecoin appears.
The technology changes how that demand can be expressed; it does not create the underlying economic pressure.
The Better Test Is Where the Liquidity Goes
Wallet numbers and transaction volume will be easy metrics for governments to report if domestic stablecoins gain traction. They may also be poor measures of whether those projects are strengthening use of the local currency.
A more revealing signal would be the markets that develop around the token.
If most liquidity forms against local goods, services and financial assets, the stablecoin may be deepening the domestic currency ecosystem. If its deepest and most active markets develop against USDT, USDC or other foreign-currency tokens, the infrastructure may be serving a very different purpose.
Authorities would also need to watch the direction of those flows. Heavy trading between a local stablecoin and dollar tokens does not by itself show dollarization. Persistent one-way conversion would be more significant.
That distinction becomes important because a domestic stablecoin can succeed technically while producing an outcome policymakers did not intend. It may process payments efficiently, attract users and generate substantial volume while simultaneously making foreign-currency markets easier to access.
This is where the IMF’s warning becomes most useful. The policy question is not simply whether people will adopt a local stablecoin. It is what kind of financial market develops around it once they do.
- Methodology: The article uses the IMF’s August 7, 2026 remarks on stablecoins in emerging markets together with 2026 research from IMF Working Paper authors and the Bank for International Settlements on stablecoin dollarization, foreign-exchange spillovers and fixed exchange-rate regimes. IMF Working Papers represent research by their authors and do not necessarily reflect the views of IMF management or its Executive Board.
- Disclaimer: This article is provided for informational and educational purposes only and does not constitute financial, legal or investment advice.
Alexander Zdravkov is a market analyst and crypto journalist with interests in economics, broader financial markets and digital assets. His journey into crypto began more than four years ago, driven by a fascination with the rapid evolution of blockchain technology and the transformative potential of decentralized finance. He began analyzing market cycles and identifying emerging trends before they reach the mainstream. He holds a degree in International Relations - a background that helped shape his broader perspective on global economics, geopolitics, and the interconnected nature of modern financial markets. Whether covering the latest developments in the crypto sector or exploring broader macroeconomic themes, Alexander focuses on giving readers context rather than simply repeating headlines. During his career, he has authored more than 5,000 articles covering cryptocurrencies, traditional finance, and global market developments. His work spans everything from Bitcoin and altcoins to macroeconomic trends influencing risk assets worldwide.
