IMF Official Warns Local-Currency Stablecoins Could Accelerate
The global stablecoin market is entering a new phase of scrutiny as policymakers increasingly question whether digital currencies designed to protect local money can actually produce the opposite result.
Dan Katz, First Deputy Managing Director of the International Monetary Fund, has warned that stablecoins may fundamentally change how people access foreign currencies, particularly in countries where governments rely on banks and capital controls to manage the movement of money.
The concern is straightforward.
A stablecoin linked to a local currency may be designed to keep users inside the domestic monetary system. But if users can easily exchange that token for a dollar-backed stablecoin on a blockchain, they may gain a digital route into foreign currency markets without relying on traditional banks.
That could make it more difficult for authorities to control capital flows and could accelerate the very dollarization that policymakers are attempting to prevent.
The issue is becoming more important as stablecoins expand beyond cryptocurrency trading and move closer to mainstream financial infrastructure.
At the same time, the enormous transaction numbers associated with stablecoins can be misleading. The Bank for International Settlements estimates that stablecoins generated roughly $35 trillion in annual transaction volume in 2025, but only about $390 billion represented payment-related flows tied to the real economy.
The distinction matters because much of the activity taking place on blockchains consists of trading, liquidity management, transfers between crypto platforms and other transactions that do not represent ordinary purchases of goods and services.
That leaves policymakers facing a complicated question: Are stablecoins becoming a new global payments system, or are they still primarily infrastructure for the cryptocurrency economy?
The answer may be both.
The Dollarization Problem
Dollarization occurs when residents of a country increasingly use a foreign currency instead of their domestic currency for savings, transactions or pricing.
For many emerging markets, the U.S. dollar has historically been the preferred alternative when domestic currencies become volatile or lose purchasing power.
People may hold dollars because they trust them more.
Businesses may price contracts in dollars.
Banks may hold foreign-currency deposits.
And households may convert part of their savings into dollars as protection against inflation.
Stablecoins introduce a new way to accomplish the same objective.
Instead of keeping physical dollars or maintaining a foreign-currency bank account, a user can hold a digital token designed to track the value of the U.S. dollar.
That token can then be transferred through a blockchain at any time.
The IMF has explicitly identified this possibility as one of the most important macroeconomic consequences of stablecoins.
In a May 2026 speech, the IMF said foreign-currency stablecoins can displace local currencies in transactions and savings when inflation is high, exchange rates are volatile or confidence in institutions is weak. The institution warned that such substitution could weaken monetary-policy transmission, reduce financial stability and make capital-flow management more difficult.
The technology therefore creates a new pathway for dollarization.
And unlike traditional dollarization, the barriers to entry can be significantly lower.
Why Local-Currency Stablecoins May Not Be Enough
Governments and financial institutions have explored stablecoins linked to domestic currencies as a potential alternative to dollar-backed tokens.
The logic is understandable.
If consumers want the speed and programmability of blockchain-based money, authorities may prefer that they use a digital asset denominated in the local currency.
A rand-linked stablecoin, for example, would theoretically allow South African users to conduct blockchain transactions while remaining exposed to the rand rather than switching directly into dollars.
But the problem is liquidity.
A local stablecoin is useful only if users want to hold it and merchants or counterparties are willing to accept it.
If users ultimately prefer dollar-denominated digital assets, a local stablecoin can become little more than a temporary bridge.
A user could acquire the local token, move it on-chain and then exchange it for a dollar stablecoin.
The blockchain has effectively created an alternative foreign-exchange channel.
That is the mechanism behind the concern raised by Katz.
Instead of preventing dollarization, local-currency stablecoins could potentially make the transition easier by creating a more efficient on-chain route from domestic money into dollars.
South Africa Provides an Important Example
South Africa has become one of the countries discussed in the stablecoin debate because of its relatively sophisticated financial system, active cryptocurrency community and experience with foreign-currency markets.
The country's currency, the rand, remains the dominant domestic medium of exchange.
Yet the dollar has an important role in international commerce and global investment.
The stablecoin market introduces another layer.
Users can potentially move between rand-linked assets and dollar-linked tokens without depending entirely on conventional bank infrastructure.
That raises questions about whether a domestic stablecoin can compete effectively with global dollar stablecoins.
If demand for the local version remains limited while dollar-backed tokens become increasingly accessible, the policy objective can become difficult to achieve.
The IMF has similarly warned that stablecoin adoption is likely to be strongest in countries with weaker currencies, higher inflation and less credible monetary frameworks.
In those markets, the attraction of a dollar-linked digital asset can be particularly strong because users are already looking for ways to protect their savings from domestic currency risk.
Stablecoins Can Make Capital Controls Harder to Enforce
Capital controls are designed to restrict or manage the movement of money across national borders.
Governments may use them to reduce capital flight, stabilize exchange rates or protect foreign-exchange reserves.
Traditional capital controls generally operate through regulated financial institutions.
Banks can be instructed to limit transfers.
Foreign-currency purchases can be monitored.
International payments can require documentation or approval.
Blockchain networks operate differently.
A user with an unhosted wallet can potentially transfer stablecoins directly to another wallet without using a bank as an intermediary.
The IMF has specifically noted that peer-to-peer transfers through unhosted wallets can fall outside traditional regulatory perimeters.
This does not mean every blockchain transaction bypasses regulation.
Centralized exchanges, payment providers and other financial intermediaries can still be subject to know-your-customer requirements, sanctions rules and transaction monitoring.
But the existence of permissionless blockchain networks creates a technical pathway that governments cannot control in the same way they control domestic banks.
That distinction could become increasingly important as stablecoin adoption expands.
The $35 Trillion Figure Needs Context
Stablecoins generated an extraordinary amount of transaction activity in 2025.
The BIS estimates annual stablecoin transaction volume at approximately $35 trillion.
At first glance, that number appears to suggest that stablecoins have already become a major global payments network.
But the underlying activity tells a more complicated story.
The BIS says much of the volume is associated with on-chain trading and activity within the cryptocurrency ecosystem.
Payment-related flows were estimated at roughly $390 billion for 2025.
That represents only a small fraction of total stablecoin transaction volume.
McKinsey and Artemis Analytics reached a similar conclusion, estimating actual stablecoin payment activity at approximately $390 billion on an annualized basis and around 0.02% of global payments.
The figures demonstrate why raw blockchain volume should not automatically be interpreted as evidence that stablecoins have replaced traditional payment networks.
Much of the activity is still crypto-native.
Stablecoins are frequently used as trading collateral, settlement assets and liquidity between digital assets.
That is different from buying groceries, paying salaries, settling invoices or purchasing services.
But Real-World Stablecoin Use Is Growing
The relatively small payment figure does not mean stablecoins have failed.
The $390 billion estimate represents real economic activity, and it has grown significantly.
McKinsey's analysis found that stablecoin payment activity more than doubled from 2024 levels.
Business-to-business transactions represented the largest category, with approximately $226 billion in annualized payment volume. Consumer-to-consumer payments accounted for about $77 billion, while consumer-to-business activity was around $76 billion.
These numbers suggest that stablecoins are beginning to find specific areas where their characteristics can provide an advantage.
Cross-border payments are one example.
International settlement can be slow and expensive when multiple banks and currencies are involved.
Stablecoins can move between blockchain addresses within minutes, potentially operating around the clock.
For businesses that need to move money internationally, that can create meaningful efficiencies.
The Real Competition May Be Between Currencies
The stablecoin debate is therefore not simply about crypto versus banks.
It may increasingly become a competition between currencies.
A dollar-backed stablecoin can effectively extend the reach of the U.S. dollar into digital networks.
A euro-backed stablecoin can provide a similar function for the euro.
A rand-backed stablecoin could theoretically strengthen the role of the rand in digital finance.
But consumers ultimately choose the currency they trust.
If inflation is high, people may prefer dollars.
If the domestic currency is stable and the financial system is efficient, local-currency stablecoins may have a better chance of gaining adoption.
This creates an uncomfortable policy reality.
Technology cannot by itself solve the underlying economic conditions that drive dollarization.
A government can issue a local stablecoin, but it cannot force consumers to value that token more highly than a competing dollar stablecoin.
Stablecoins Could Increase Monetary Competition
The IMF has increasingly described stablecoins as a force that could introduce competitive pressure into monetary systems.
At the World Economic Forum in Davos in January, Katz said stablecoins could put pressure on countries with weak fiscal and monetary frameworks to improve their policies. Reuters reported that he viewed this competition as potentially encouraging countries to strengthen their economic systems.
That creates a more nuanced interpretation of stablecoin dollarization.
Stablecoins could weaken monetary sovereignty.
But they could also expose weaknesses that governments have been able to ignore.
If citizens can easily move savings into a dollar-backed digital asset, authorities may face greater pressure to maintain price stability and credibility.
In that sense, stablecoins could act as a market-based test of monetary policy.
The Banking System Faces Another Challenge
Stablecoins also raise questions about the role of banks.
Traditional banks perform several important functions.
They hold deposits.
They provide credit.
They facilitate payments.
They transmit monetary policy.
And they provide regulated access to the financial system.
If consumers increasingly move money from bank deposits into stablecoins, banks could lose part of their traditional funding base.
That could affect lending and financial stability.
The IMF has highlighted the possibility of stablecoins disintermediating banks, while also recognizing that the extent of the impact will depend on how the industry develops and how regulators respond.
The risk becomes more significant if stablecoins begin offering features that closely resemble bank deposits.
Regulators therefore face a difficult balancing act.
They want to encourage faster and cheaper payments while preventing digital assets from creating instability in the banking system.
Stablecoins Are Still Predominantly Dollar-Based
Another important factor is the dominance of the U.S. dollar within the stablecoin industry.
The BIS says approximately 98% of stablecoins are denominated in dollars.
That means the growth of stablecoins is not necessarily producing a more diversified global monetary system.
Instead, it could strengthen the dollar's position by allowing the currency to move through blockchain networks.
A user who previously needed access to a U.S. bank account or physical dollars can potentially gain exposure to the dollar through a stablecoin.
This creates a digital version of dollarization that can operate outside traditional banking channels.
For the United States, that could reinforce the global role of the dollar.
For emerging markets, it creates a potential challenge to monetary sovereignty.
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| Source: Xpost |
The Promise of Financial Inclusion
There is another side to the debate.
Stablecoins can provide financial services to people who have limited access to traditional banking.
The IMF has acknowledged that stablecoins can make international payments faster and cheaper and potentially improve financial inclusion.
For migrant workers sending money home, lower-cost transfers can make a meaningful difference.
For small businesses operating across borders, faster settlement can improve cash flow.
For people living in countries with unstable currencies, dollar-linked stablecoins can provide a digital store of value.
The same characteristics that create risks for policymakers can therefore create benefits for individuals.
That makes outright restrictions difficult to justify in many circumstances.
The policy challenge is to preserve those benefits without allowing digital currencies to undermine financial stability.
Regulation Will Become Increasingly Important
The expansion of stablecoins is forcing governments to reconsider how money should be regulated.
Questions include who should issue stablecoins, what assets should back them, how reserves should be managed, what rights users have when redeeming tokens and how transactions should be monitored.
Cross-border activity makes the problem more complicated.
A stablecoin may be issued by a company in one country, backed by assets held in another jurisdiction and used by consumers around the world.
Regulatory differences can therefore create opportunities for arbitrage.
The IMF has called for stronger international coordination and better data collection to understand stablecoin flows.
The institution is working with international partners to improve the statistical measurement of stablecoin activity.
Why Real-World Payments Matter More Than Headline Volume
The distinction between $35 trillion of total volume and $390 billion of payment activity may ultimately become one of the most important statistics in the stablecoin debate.
The first number measures activity.
The second measures adoption.
If stablecoins eventually become a mainstream payment mechanism, real-world payment volumes should grow substantially.
Businesses should begin using them for invoices.
Consumers should use them for purchases.
Employers could use them for payroll.
Banks and financial institutions could use them for settlement.
At that point, stablecoins would no longer be primarily a crypto-market tool.
They would become part of the global financial system.
That transition has not happened yet.
But the infrastructure is being built.
Coin Bureau Draws Attention to the Debate
The stablecoin discussion has also attracted attention from cryptocurrency-focused commentators, including Coin Bureau on X.
The account has highlighted the growing debate surrounding stablecoins, monetary policy and the future role of digital dollars.
The broader economic argument, however, extends well beyond the cryptocurrency industry.
The IMF and BIS have both identified stablecoins as a development capable of changing payment systems, capital flows and the relationship between domestic currencies and the U.S. dollar.
That makes the issue relevant to central banks, commercial banks, governments and consumers alike.
The Bigger Question for Emerging Markets
For emerging economies, the central question may not be whether stablecoins are good or bad.
It may be whether domestic financial systems are strong enough to compete with them.
A country with low inflation, credible institutions, deep capital markets and an efficient banking system has less reason to fear rapid dollarization.
A country with persistent inflation, weak institutions and restrictions on foreign-currency access faces a different challenge.
Stablecoins can provide citizens with an alternative.
The technology essentially lowers the cost of choosing another currency.
That can increase pressure on governments to improve the fundamentals supporting their domestic money.
Stablecoins Could Change the Meaning of Capital Controls
Capital controls were designed for a world in which money moved through banks, financial institutions and regulated payment networks.
Blockchain technology introduces a different architecture.
A person can hold assets directly.
Transfers can occur globally.
Transactions can happen continuously.
And the network itself does not necessarily recognize national borders.
This does not eliminate government enforcement.
Authorities can still regulate exchanges, issuers and payment providers.
But the existence of self-custodied wallets means that some forms of capital movement can occur outside the traditional perimeter.
That creates a structural challenge for policymakers.
A New Monetary Era Is Taking Shape
The stablecoin market remains relatively small compared with the traditional financial system.
The BIS estimates stablecoin market capitalization at approximately $315 billion as of early April 2026, compared with about $8 trillion in U.S. bank deposits alone.
Yet the technology is developing rapidly.
Stablecoins are increasingly connected to payment companies, cryptocurrency exchanges, financial institutions and tokenized assets.
Their importance therefore cannot be measured only by today's market capitalization.
The infrastructure being built today could support much larger volumes in the future.
That is why central banks are paying attention.
The Road Ahead
The future of stablecoins may ultimately depend on whether they can move beyond crypto trading and become genuinely useful payment instruments.
If real-world payment volumes continue growing, stablecoins could become an important part of global financial infrastructure.
If most activity remains concentrated inside cryptocurrency markets, their macroeconomic impact may remain limited.
But even in that scenario, dollar-backed stablecoins could continue to influence emerging markets by providing an accessible digital form of foreign currency.
For policymakers, the most important issue is therefore not simply how many transactions occur.
It is what those transactions represent.
A $35 trillion blockchain volume number can sound revolutionary.
A $390 billion real-payment figure tells a different story.
Both numbers can be true at the same time.
The first shows the extraordinary velocity of digital assets.
The second shows that mainstream payment adoption is still in its early stages.
The Dollarization Debate Is Just Beginning
Dan Katz's warning highlights a fundamental tension at the heart of the stablecoin industry.
Governments may attempt to build local-currency stablecoins to keep digital finance anchored to domestic money.
But if users ultimately prefer dollar-backed tokens, blockchain technology could make switching currencies easier rather than harder.
That could accelerate dollarization, particularly in economies where citizens already have strong incentives to hold foreign currency.
At the same time, stablecoins could reduce payment costs, improve access to financial services and create faster international settlement.
The technology is therefore neither inherently a threat nor inherently a solution.
Its impact will depend heavily on the economic environment in which it is adopted.
For countries with strong currencies and trusted institutions, stablecoins may become another payment technology.
For countries struggling with inflation and capital flight, they could become something far more consequential: a new channel through which citizens can choose their preferred currency.
That is why the stablecoin debate is increasingly moving beyond cryptocurrency markets.
It is becoming a debate about money itself.
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Writer @Victoria
Victoria Hale is a writer focused on blockchain and digital technology. She is known for her ability to simplify complex technological developments into content that is clear, easy to understand, and engaging to read.
Through her writing, Victoria covers the latest trends, innovations, and developments in the digital ecosystem, as well as their impact on the future of finance and technology. She also explores how new technologies are changing the way people interact in the digital world.
Her writing style is simple, informative, and focused on providing readers with a clear understanding of the rapidly evolving world of technology.
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