Domestic-currency stablecoins designed to reduce reliance on dollar-backed tokens may unintentionally facilitate greater use of digital dollars, according to International Monetary Fund (IMF) First Deputy Managing Director Dan Katz.

Speaking at the University of Cape Town on Friday, Katz explained that when local-currency stablecoins and dollar-denominated stablecoins share the same blockchain infrastructure, users can seamlessly convert between them via decentralized exchanges (DEXs), liquidity pools, or peer-to-peer swaps. This interoperability, he cautioned, could shift foreign exchange activity away from traditional banks and licensed currency dealers — entities whose infrastructure currently provides governments with mechanisms to monitor and manage cross-border capital movements.

"In this way, local-currency stablecoins might even accelerate the adoption of FX stablecoins," Katz said.

The warning carries particular weight for emerging markets where citizens have long sought dollar exposure as a hedge against inflation and currency depreciation — a phenomenon documented across economies such as Argentina, Turkey, and Zimbabwe. Dollar-pegged stablecoins, which can be transferred across borders in minutes without traditional banking rails, lower the barrier to acquiring dollar exposure for retail users in countries where access to foreign currency may be restricted or subject to capital controls.

The IMF, a Washington-based institution with 190 member countries, has been increasingly scrutinizing the implications of dollar-pegged tokens such as Tether (USDT) and USD Coin (USDC) for emerging-market financial stability. Together, these two tokens account for the overwhelming majority of the global stablecoin market, which has grown into a multi-hundred-billion-dollar segment of the digital asset industry.

Katz cited South Africa as a case study, noting that while dollar-backed stablecoins have seen limited adoption there, rand-linked tokens have attracted even less demand. Although he said it was premature to draw definitive conclusions, he observed that users may prefer dollar-denominated stablecoins because of their deeper liquidity, stronger network effects, and broader acceptance across platforms and jurisdictions.

The risks differ markedly across economies, Katz noted. In highly dollarized countries, stablecoins may largely substitute for existing dollar holdings. However, in nations where dollar access is restricted and macroeconomic frameworks are fragile, the introduction of stablecoins could intensify demand for foreign currency, potentially undermining local monetary policy.

The remarks come as governments worldwide are racing to establish stablecoin rules. The European Union's Markets in Crypto-Assets (MiCA) regulation, which began phasing in during 2024, imposes reserve and disclosure requirements on token issuers, while several jurisdictions — including Singapore, the United Kingdom, and the United States — are advancing their own frameworks. Some central banks, meanwhile, are exploring or piloting retail central bank digital currencies (CBDCs) as a state-controlled alternative to privately issued tokens.

Katz urged policymakers to incorporate crypto onramps, offramps, and on-chain exchange points into comprehensive regulatory frameworks to preserve oversight of capital flows.

Related: Dollar stablecoins could improve FX access but amplify currency runs: IMF

Source: IMF Speech by First Deputy Managing Director Dan Katz