IMF Paper Warns Stablecoins Could Fuel Currency Runs During Market Stress

Highlights:

• The IMF says dollar stablecoins can improve access to foreign currency when official exchange channels fall short.
• Market stress could push more people into stablecoins and increase pressure on local currencies.
• Better rules for stablecoins can reduce financial risks and support safer digital payments.

A new IMF working paper says dollar stablecoins can improve access to foreign currency in economies with fixed or heavily managed exchange rates. However, the study also warns that stablecoins could accelerate currency runs when pressure on domestic currencies intensifies. Economist Brandon Joel Tan found that easier access to dollar-backed digital assets can improve foreign currency access during normal conditions but increase financial fragility during periods of severe market stress.

🚨 IMF WORKING PAPER WARNS DOLLAR STABLECOINS COULD TURBOCHARGE CURRENCY RUNS DURING FX STRESS

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Tan examined how dollar-stablecoins affect parallel foreign exchange markets in economies with fixed or heavily managed exchange rates, where governments ration official access to U.S. dollars. The paper explains that households and businesses in those economies often struggle to obtain foreign currency through banks or official allocation systems. Therefore, households and businesses often buy dollar-backed stablecoins when banks and official exchange channels cannot supply enough U.S. dollars.

The paper said stablecoins allow households and businesses to access dollar-like assets outside official allocation systems when governments ration foreign currency. At the same time, stablecoin trading creates a public market price that reflects demand for U.S. dollars in parallel foreign exchange markets. Traditional parallel markets rely on scattered private quotes because dealers, banks, and informal brokers offer different exchange rates.

Research Explains How Stablecoins Influence Dollar Demand

The paper argues that stablecoin prices can become public indicators of dollar scarcity in economies with fixed or heavily managed exchange rates. Traditional foreign exchange markets rely on street dealers, private brokers, bank commissions, and informal transactions. Consequently, households and businesses in controlled foreign exchange markets often receive different exchange rates because trading information remains fragmented across dealers and banks.

Tan explained that a visible stablecoin price may encourage many households to move out of the local currency at the same time. Consequently, synchronized demand for dollar-linked assets could weaken confidence in the domestic currency and increase pressure on exchange-rate systems. The paper found that cheaper stablecoin access and stronger price discovery can increase the risk of coordinated currency runs when exchange-rate misalignment becomes severe.

The paper used Bolivia to show how stablecoins changed a parallel foreign exchange market after official dollar shortages intensified. It explained that dollar shortages in Bolivia created different exchange rates across street dealers, exchange houses, and banks before stablecoins gained wider use.

After Bolivia lifted restrictions on virtual asset transactions two years ago, stablecoin trading increased rapidly, and the USDT/BOB market gained wider attention. According to the study, wider USDT trading transformed scattered foreign exchange quotes into one public market signal that reflected dollar scarcity.

IMF Recommends Targeted Safeguards for Digital Dollar Markets

The paper recommends different regulatory measures for normal market conditions and periods of severe currency stress instead of permanent restrictions. Tan said authorities could preserve affordable stablecoin access during normal market conditions. However, regulators could introduce temporary limits on unusually large or panic-driven stablecoin transactions during periods of severe exchange-rate pressure.

The IMF also discussed broader digital asset developments through recent public statements. On July 2, IMF Financial Counsellor Tobias Adrian said tokenization could reshape global financial architecture. Adrian also urged policymakers to address money roles, interoperability, legal frameworks, smart contracts, liquidity, and international coordination before expanding tokenized financial systems.

'Tokenization Can Change the World's Financial Architecture'

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The IMF reinforced its position on stablecoin risks and oversight in a December social media post. It said stablecoins can make digital payments easier but may also increase currency substitution and price volatility. The institution added that it is working with the Financial Stability Board and the Bank for International Settlements to close regulatory gaps and strengthen stablecoin supervision.