Domestic stablecoins, launched to strengthen the role of national currencies in the digital era, may end up doing the opposite by funneling users toward dollar-backed tokens, according to the International Monetary Fund. Rather than reducing reliance on the dollar, these projects could unintentionally build a smoother ramp into digital versions of it.
Dan Katz, First Deputy Managing Director at the IMF, argued that once domestic stablecoins and dollar-pegged tokens coexist on the same blockchain infrastructure, the barrier between them becomes minimal. Speaking at the University of Cape Town, he noted that users can already move seamlessly between different stablecoins via decentralized exchanges, liquidity pools, and direct peer-to-peer swaps – with no need to pass through banks or traditional currency dealers.
This shift has deep implications for how foreign exchange markets operate. Today, conversion between local currency and dollars typically flows through regulated institutions, giving governments tools to oversee cross-border transactions, enforce capital controls, and monitor systemic risk. If substantial FX activity migrates onchain, authorities may lose a key channel of visibility and control.
“In this way, local-currency stablecoins might even accelerate the adoption of FX stablecoins,” Katz warned, highlighting the paradox: a digital rand, peso, or lira could in practice become a convenient bridge into digital dollars, not a shield against them.
Katz used South Africa as an example of this emerging dynamic. While dollar-denominated stablecoins have seen only limited use there, interest in rand-backed tokens has been even weaker. Early data, he said, suggests that many users gravitate toward dollar-backed coins because of three main advantages: deeper liquidity, stronger network effects, and broad acceptance across platforms and borders.
Liquidity is central. Dollar stablecoins typically have larger market capitalizations, tighter spreads, and more active trading pairs than smaller domestic tokens. This makes it easier and cheaper for users to enter and exit positions, especially for cross-border transfers or trading. Network effects compound this advantage: once a particular dollar stablecoin becomes popular, more exchanges, protocols, and merchants integrate it, making it even more attractive than newer, local alternatives.
Cross-border usability further tilts the balance. A worker sending remittances, a trader moving collateral between platforms, or a business paying overseas suppliers gains more flexibility holding a widely recognized dollar token than a national-currency stablecoin that may be usable only in a limited domestic context.
According to Katz, the macroeconomic consequences will differ significantly across countries. In heavily dollarized economies – where residents already hold much of their savings in dollars – stablecoins may partially replace existing dollar deposits or cash holdings with tokenized equivalents, without dramatically altering the underlying currency mix. In such cases, the main transformation is technological: the form of money changes, but the preference for dollars is already entrenched.
In contrast, for countries where access to dollars is restricted by capital controls or where the local economic framework is fragile, the spread of stablecoins could actively increase demand for foreign currency. If residents can use domestic stablecoins as a low-friction gateway into dollar tokens, pressures on the local currency might intensify, particularly in times of stress or political uncertainty.
This scenario raises the risk of faster and more brutal capital flight. When moving funds from a domestic bank account to an offshore dollar account involves paperwork, delays, and scrutiny, many potential outflows never occur. But if a user can shift local stablecoins into dollar tokens within seconds via a decentralized protocol, sudden “digital bank runs” or FX runs become more plausible, especially during crises of confidence.
Katz therefore called on policymakers to ensure that all key access points to the crypto ecosystem – including onramps, offramps, and onchain exchange venues – operate within clear regulatory frameworks. That includes licensing and supervising stablecoin issuers, regulating wallet providers and payment gateways, and setting standards for platforms that offer onchain swapping between different currencies.
The IMF view is not purely critical, however. Stablecoins can also expand access to foreign exchange in positive ways. For individuals and businesses in countries with underdeveloped banking sectors or limited access to international payment rails, digital dollar tokens can provide a cheaper, faster, and more inclusive alternative to traditional correspondent banking. Used responsibly, they can reduce transaction costs for remittances, trade settlements, and cross-border investments.
The challenge for regulators is to harness these benefits without losing control of monetary and financial stability. This may require countries to clarify the legal status of stablecoins, mandate robust backing and transparency for issuers, and ensure interoperability with existing payment systems. For some jurisdictions, it might also spur renewed interest in central bank digital currencies as a way to offer a safe, regulated digital alternative to private tokens.
Design choices for domestic stablecoins will be crucial. A token that is fully redeemable into local bank deposits, integrated with tax and reporting systems, and restricted in cross-border functionality will behave very differently from a freely transferable coin with few built-in safeguards. Authorities must decide whether local stablecoins should be primarily payment instruments within the domestic economy or de facto gateways to global digital dollar markets.
Coordination between countries will also matter. If one jurisdiction imposes strict controls on stablecoin use while its neighbors are more permissive, capital may simply route around the stricter regime via regional or global onchain liquidity pools. This points to the need for at least some level of international alignment on data-sharing, anti-money laundering rules, and standards for stablecoin reserves and disclosures.
For the crypto industry, Katz’s remarks underline a strategic reality: the dominant role of the dollar in traditional finance is likely to carry over into digital assets. Unless regulators or market structures significantly change the incentives, many users will continue to prefer dollar-denominated tokens for savings, transfers, and trading. Domestic stablecoin projects, whether private or public-private, must therefore articulate a clear value proposition beyond simply “being local.”
That could involve tighter integration with domestic payment infrastructures, tax rebates or incentives for using local tokens in commerce, or specialized features such as programmable compliance that make them more attractive for regulated businesses. Yet even then, the gravitational pull of liquid dollar stablecoins will remain strong.
Katz’s assessment ultimately frames domestic stablecoins as a double-edged tool. They can modernize payment systems and extend the reach of national currencies in digital form, but if not carefully managed, they may deepen financial integration with the dollar system and weaken the effectiveness of local monetary policy. How governments respond – through regulation, innovation, or the development of their own digital currencies – will shape the future balance between domestic money and digital dollars in the years ahead.