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Growing use of US stablecoins for international payments threatens to accelerate the dollarisation of emerging market economies, undermine their control of money flows and open the door to criminal activity, senior central bank officials have warned.
Stablecoins — crypto assets pegged to fiat currencies such as the dollar — “raise serious risks for financial integrity and can facilitate regulatory circumvention”, the head of the Bank for International Settlements said in a speech in Japan on Monday.
Pablo Hernández de Cos, general manager of the BIS, said rapidly rising stablecoin use could “make it easier to evade capital controls” in EMs and developing countries trying to keep a lid on financial flows and intensify “dollarisation risks”.
Their growing popularity “opens up new avenues for tax evasion”, he said, citing estimates that “stablecoins now account for most illicit transactions within the crypto ecosystem”.
Rising global use of dollar-denominated stablecoins was raised as a threat to financial stability in EMs by several top financial policymakers when they met in Washington last week for the IMF and World Bank meetings.
“There will be a focus on the extent to which it moves into domestic currency substitution,” Andrew Bailey, governor of the Bank of England, told a financial industry event in Washington.
Bailey, who chairs the Financial Stability Board of global regulators, said “the rate of progress” on developing international rules for stablecoins had slowed. “If you had asked me a year ago, I would have said we are heading very quickly towards it. But I think it is something that we will have to come to terms with pretty soon.”
The rapid growth of stablecoins has been spurred by US President Donald Trump’s enthusiastic embrace of digital assets, which led to Congress last year passing the Genius Act to bring the sector into the regulated framework of the financial system. About 98 per cent of the $315bn global stablecoin market is US dollar-denominated.
Dan Katz, deputy head of the IMF and former chief of staff at the US Treasury, said stablecoins were boosting competition and lowering costs in payments. He added that countries could defend themselves against increased dollarisation by “improving macroeconomic frameworks”.
Brazil recently changed its legislation to include stablecoin providers in rules requiring banks to carry out anti-money laundering checks on payments. As a result, stablecoins in Brazil now have a $100,000 limit on many foreign transfers.
In some EM countries, US dollar stablecoins already account for “a significant share of payments, including cross-border payments”, Tobias Adrian, director of the IMF’s monetary and capital markets department, told the FT.
Adrian said stablecoins could provide benefits for cross-border payments, including speed and lower costs. But he said there were drawbacks. “The major challenge is dollarisation. For the central bank, it may be a threat to monetary sovereignty.”
Dollar stablecoins are being used by growing numbers of people in EMs as a way to guard against high inflation, evade restrictions on international payments and counter the risk of local currency depreciation against the dollar.
Analysts at Standard Chartered estimated savings held in US dollar stablecoins by people in EMs could rise from $173bn late last year to $1.22tn by the end of 2028, although that would still only represent 2 per cent of bank deposits in those countries.
This growth is expected to be strongest in countries that have had a recent balance of payments crisis or are under IMF stabilisation programmes, such as Egypt, Pakistan or Bangladesh, according to StanChart.
“I would be extremely nervous about anything that affected capital controls,” said Reza Baqir, the former governor of Pakistan’s central bank who is now advising governments at consultants Alvarez & Marsal.
The BIS, which acts as a forum for many of the world’s central banks and helps to manage their foreign exchange reserves, has long been suspicious of stablecoins. Last year, it said the new digital forms of cash “perform badly” on key requirements to be considered money.
It is working with leading central banks and commercial lenders to create a challenger to stablecoins by digitising money held in deposits in the banking system through a system of so-called tokenised deposits that could be transferred relatively seamlessly.
The Financial Action Task Force warned in a report in March that stablecoins were “attractive for criminal misuse”. The global financial crime watchdog said virtual currencies were becoming “a preferred method for laundering proceeds from ransomware, phishing, and other cyber-enabled crimes”.
