A recent paper from the International Monetary Fund (IMF) raises alarms about the growing influence of dollar-pegged stablecoins in economies that are maintaining fixed exchange rates. The study indicates that in situations where those rates are overvalued, these cryptocurrencies can exacerbate currency runs, allowing households to withdraw their funds simultaneously due to the emergence of a unified signal from these digital assets.
According to IMF researcher Brandon Joel Tan, stablecoins can offer benefits during periods of stability, but their role can shift dramatically in times of crisis. The paper outlines how stablecoins can mask misalignments in the economy until a tipping point is reached.
When governments impose an official exchange rate that deviates from market values, foreign currency often becomes scarce, forcing buyers into fragmented parallel markets. Here, a mix of street dealers, brokers, and banks quote varying rates, preventing any single figure from accurately reflecting true supply and demand. The introduction of stablecoins like Tether (USDT) provides a solution by creating a public reference price, which is constantly updated and visible on exchanges.
This public price aids households in managing their finances more effectively. Nevertheless, it also poses risks: as everyone reacts to the same price point, the potential for coordinated exits increases, amplifying crisis conditions. The abstract of the paper suggests that while stablecoins can improve access to foreign currency, they also make the potential for financial runs more likely.
Bolivia's case exemplifies this dynamic. Following a central bank decision in June 2024 to lift restrictions on cryptocurrency transactions, engagement in virtual assets surged twelvefold over several months. The USDT to Boliviano exchange rate subsequently became a standard reference for the parallel dollar, even prompting the central bank to publish USDT values on its web portal.
Tan's research involved simulating three economic models to delineate these effects. By comparing a cash-only market to one with stablecoins, his findings reveal a notable increase in crisis exposure rising from 3.9% in a cash-only economy to 7.4% in a stablecoin-driven market. The risk further escalates under extreme misalignment scenarios, demonstrating the dual-edged nature of stablecoins.
Despite the benefits of stablecoins in providing currency access, Tan cautions against overly broad restrictions that could limit options for unbanked households, emphasizing that regulations for stablecoins should complement, rather than replace, necessary macroeconomic adjustments.
This material is informational and should not be taken as financial advice.
