Local stablecoins could boost demand for dollar tokens, IMF

Dan Katz, the IMF’s First Deputy Managing Director, warned on Friday at the University of Cape Town that local-currency stablecoins running on the same blockchain as dollar-backed tokens could make conversion between the two easier.

Katz warned: ‘In this way, local-currency stablecoins might even accelerate the adoption of FX stablecoins.’

Shared blockchain infrastructure enables conversions through decentralized exchanges, liquidity pools and peer-to-peer swaps, which reduce the frictions that typically occur in foreign-exchange transactions handled by banks and licensed currency dealers.

Katz cautioned that shifting foreign-exchange activity onto blockchain platforms could move capital flows away from traditional financial intermediaries and limit authorities’ ability to monitor and manage cross-border movements.

Using South Africa as an example, Katz noted dollar-backed stablecoins have seen some use while rand-linked tokens have attracted less demand. He observed users may favor dollar tokens for reasons including greater liquidity, stronger network effects and wider acceptance across platforms and borders, and he said it is too early to draw firm conclusions about long-term trends.

Katz outlined that risks differ by country. In highly dollarized economies, stablecoins could largely replace existing dollar holdings. In countries with limited access to dollars and weaker economic frameworks, local stablecoins might increase demand for foreign-currency tokens. Those shifts could affect exchange rate dynamics and central banks’ ability to implement monetary and capital controls.

Katz urged policymakers to bring on-ramps, off-ramps and onchain exchange points within regulatory frameworks so transactions can be supervised and risks managed. He recommended regulators consider integrating crypto infrastructure with existing financial oversight to preserve the capacity to monitor capital flows and respond to currency pressures.

Stablecoins are digital tokens pegged to a fiat currency or other assets to maintain a stable value. Proponents say local-currency stablecoins can support digital payments and financial inclusion, while critics point to potential risks for monetary sovereignty, financial stability and regulatory oversight when onchain trading becomes widespread.