Stablecoins and Dollar Dominance: New Challenges for Emerging Markets

A new Bank for International Settlements working paper examines how stablecoins—digital tokens designed to maintain stable value—are reshaping currency dynamics in emerging market and developing economies, drawing parallels with traditional foreign currency deposits.

Researchers analyzed stablecoin inflows and foreign currency deposit data from more than 130 countries to understand how digital dollar-pegged tokens compare to conventional deposit dollarisation. The analysis reveals several key patterns:

• Both stablecoins and traditional dollar deposits are driven by similar macroeconomic factors, including exchange rate sensitivity and financial crises
• Once dollarisation becomes established through either channel, it tends to persist and proves difficult to reverse
• Stablecoin flows show little substitution effect with traditional dollar deposits—they operate as separate channels for dollar access
• Unlike traditional deposits, stablecoin transactions largely bypass capital flow restrictions and regulatory controls because they often circulate outside formal regulatory frameworks
• Historical evidence suggests moderate deposit dollarisation correlates with somewhat elevated inflation risks, though monetary policy transmission mechanisms remain largely unaffected

The findings raise important questions for central banks managing monetary policy in developing economies. The ease of accessing dollar liquidity through stablecoins creates new pathways that existing regulatory tools may struggle to contain, potentially complicating efforts to maintain monetary control and financial stability.