The abrupt collapse of Paraguay's digital lender Ueno Bank left nearly three million customers — roughly 60% of the country's adults — locked out of their accounts, and the fallout has turned dollar-pegged stablecoins (tokens designed to hold their value against a reference currency, in this case the US dollar) into an emergency liquidity channel for households and businesses caught in the middle.

Paraguay's Central Bank placed Ueno into resolution — the legal procedure regulators use to wind down or restructure a failing lender while safeguarding depositors — on Nov. 3 after the lender's solvency ratio fell below half the legally required minimum, according to the central bank's resolution announcement. An investigation uncovered questionable lending practices along with deficiencies in credit documentation and accounting.

The failure quickly escalated into a political crisis. Thousands of people took to the streets to protest, and President Santiago Peña attempted to resign before being impeached and arrested on charges of breach of trust and using his office for personal gain.

Paraguay's peer-to-peer crypto market registered the turmoil almost immediately, with some sellers demanding a premium of up to 13% on USDt — effectively raising the local-currency cost of acquiring the token. “USDt is a lifeline for hundreds millions of people in the world,” Tether chief executive Paolo Ardoino said in a post on X.

For many Paraguayans, the intervention created sudden uncertainty over savings, wages and the money needed to cover everyday expenses. With the local guaraní (PYG) falling 12.3% in a week, some turned to stablecoins to protect the value of their funds — or simply to keep payments moving.

David Eisenmann, founder and chief executive of the Paraguayan crypto exchange X4T, told Cointelegraph's Magazine that the timing magnified the liquidity squeeze. “The intervention came in the first days of the month,” he said, “exactly when salaries, rent and supplier invoices are due.” Many business owners, he added, “couldn't make payroll.” For some customers, USDt was “suddenly the most liquid money” they had. “This week they learned that having an account isn't the same as having access to your money,” he said.

Crypto as a source of liquidity

Eisenmann said X4T processed more than $10 million in local on-ramp volume over the 30 days to early November, though part of that activity predated Ueno's collapse. “The dollar began recovering against the guaraní in October,” he said, “and the Ueno news sped up a move that was already underway.”

According to Eisenmann, the activity “runs in both directions.” Some customers sold crypto for guaraníes or dollars to cover payments they could no longer route through Ueno, while “demand for USDt and USDC as a dollar store of value has risen sharply.”

The Central Bank said 93.1% of customers with Ueno deposits had been repaid as of Nov. 9, leaving the remainder yet to receive their funds. Even so, confidence has been shaken: X4T continued to log elevated online inquiries for dollar-denominated stablecoins, and Eisenmann said the level “has not changed significantly” from the week of the collapse.

Rhys Hicks, associate analyst at data and analytics company GlobalData, said the digital bank's failure showed “how much can go wrong when governance does not keep pace with growth.”

Still, Hicks sees no evidence of a mass migration from Paraguayan banks into stablecoins. Other banks “picked up the slack,” he noted, and people “seem to have been angrier” with the government than with the banks. “Some consumers will look for different ways to keep their money safe, but I do not see an overwhelming shift to stablecoins yet,” he said.

An old impulse, with new rails

Seeking dollars when confidence in domestic banks falters is hardly new. During Argentina's 2001 financial crisis, the government imposed the “corralito,” restricting cash withdrawals from bank accounts after a run on deposits, as documented in the Journal of Financial Crises. Amid a deepening crisis over the country's currency peg and sovereign debt, the government later converted dollar-denominated deposits into pesos, cutting people's savings by about 30% overnight and further damaging confidence in the country's fraying banking system.

Stablecoins, however, are not decentralized, and they are not insulated from the banking system either. During the March 2023 collapse of Silicon Valley Bank, stablecoin issuer Circle disclosed that $3.3 billion of USDC reserves — around 8% of the total — were held at the lender. USDC briefly depegged and fell to 86 cents on secondary markets after Circle said it could not withdraw the funds, an episode later examined in a Federal Reserve note.

A BIS paper on stablecoins and the international monetary system warns that widespread use of dollar-backed tokens could create challenges for monetary sovereignty in emerging markets.

Hicks said stablecoins can provide an alternative during periods of political instability and “low trust in the local system” because they are pegged to a more stable currency, such as the US dollar. But he argued regulators need to address “transparency” and “consumer protection,” because stablecoin holders do not benefit from the same deposit guarantees as bank customers, and there is no central bank to step in and make them whole.

Eisenmann said he expects the episode to spur more “diversification,” with people “spreading their money across banks, cash and digital assets” instead of relying on a single institution.

“How quickly trust in the banks returns will depend on how quickly and transparently the authorities handle the resolution,” he said.