IMF warns stablecoins may accelerate currency substitution, weaken central bank control

Stablecoins risk accelerating currency substitution in countries with relatively weak monetary frameworks, potentially undermining central banks’ control over capital flows, the International Monetary Fund warned Thursday.

In a report titled “Understanding Stablecoins” published Thursday, the IMF cautioned that the rapid rise of dollar-denominated stablecoins — combined with their ease of cross-border use — could push households and businesses to abandon local currencies in favor of dollar stablecoins, especially in high-inflation or low-trust environments.

“Stablecoins may contribute to currency substitution, increase capital flow volatility by circumventing capital controls, and fragment payment systems unless interoperability is ensured,” the IMF wrote. 

“These risks could be more pronounced in countries experiencing high inflation, in countries with weaker institutions, or in countries with diminished confidence in the domestic monetary framework,” it added.

The concerns, outlined in a separate IMF blog post and the new report, stemmed from an expansion of stablecoin markets. The two largest stablecoins, USDT and USDC, have tripled in size since 2023 to a combined $260 billion, while trading volumes surged to $23 trillion in 2024, the report said. 

Asia now leads all regions in total stablecoin activity, though usage relative to GDP is most pronounced in Africa, the Middle East and Latin America — regions where currency substitution risks are historically elevated.

Meanwhile, the IMF also sees potential for widening financial access. In many developing regions, mobile-based digital services already outpace traditional banking. Stablecoins — if supported by strong regulatory and legal frameworks — could increase competition, lower payment costs and integrate more people into digital financial ecosystems.

Systemic risks

However, the IMF argued that these benefits come with significant macro-financial hazards. Runs on stablecoins remain a central fear: if users lose confidence in redemption rights or if reserve assets decline in value, issuers could be forced into fire sales of their reserve assets and other holdings, roiling broader markets.

The IMF also said that stablecoins’ pseudonymous, cross-border nature could weaken capital controls, facilitate illicit finance and erode the quality of macroeconomic data. The global distribution of holders, often unknown due to unhosted wallets, complicates crisis monitoring and policymaking.

Fragmented rules

Regulation is emerging but remains inconsistent. Its comparative review of Japan, the EU, the U.S. and the UK finds differences in who can issue stablecoins, how reserves are held in custody, and how foreign issuers are treated. 

Such gaps may create opportunities for regulatory arbitrage and weaken the overall effectiveness of oversight, the IMF warned.

The IMF noted that stablecoins are “here to stay,” but their impact on the global financial system will depend heavily on coordinated international action to prevent fragmentation, volatility and runaway currency substitution.

The U.S. passed the GENIUS stablecoin bill into law over the summer, and federal agencies are charging forward to write the rules. Earlier this week, Rep. Bryan Steil asked regulators testifying for updates on their progress in implementing the new law.

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