IMF’s Dan Katz warns local-currency stablecoins may speed dollar token adoption

IMF First Deputy Managing Director Dan Katz warned on Aug. 7 that local-currency stablecoins built to cut dollar dependence could instead speed adoption of dollar-denominated tokens once both operate on the same blockchain infrastructure.

Speaking at the University of Cape Town in South Africa on Aug. 7, Katz warned that domestic-currency stablecoins could ultimately provide users with a faster route into dollar-denominated tokens once both types of assets operate on the same blockchain infrastructure.

The concern goes beyond competition between different types of crypto assets. For emerging markets, the IMF sees the growing accessibility of digital foreign currency as a potential challenge to capital-flow controls, monetary policy and financial stability.

“If FX stablecoins are gaining traction,” Katz said, countries may try to encourage domestic-currency instruments instead. But he cautioned that local stablecoins could become an on-ramp to dollar assets rather than a barrier.

Dollar stablecoins have a powerful network effect

The IMF’s warning centers on a basic market reality: users tend to gravitate toward assets that are liquid, widely accepted and easy to transfer.

Katz pointed to South Africa as an early example. Dollar-based stablecoins have so far gained limited traction in the country, but rand-linked stablecoins have attracted even less demand. The IMF official stressed that it is still too early to draw definitive conclusions from the trend.

Still, the difference offers a clue about what users may value.

Dollar-backed tokens can be used across multiple crypto platforms and for transactions spanning national borders. That broader ecosystem can give them a network advantage over currencies with smaller user bases and thinner liquidity.

Katz said the divergence “may suggest that users prefer dollar-linked instruments because they offer greater liquidity, stronger network effects, and are widely accepted across platforms and cross-border transactions.”

That preference could become particularly important when local stablecoins and dollar stablecoins share the same blockchain environment.

Instead of converting through a bank or traditional foreign-exchange dealer, users could potentially swap between the assets directly through decentralized exchanges, liquidity pools or peer-to-peer transactions.

The on-chain FX market could bypass traditional intermediaries

That shift is where the IMF sees a major policy challenge.

Traditional foreign-exchange transactions generally pass through regulated institutions, giving governments and financial authorities visibility into capital movements. But blockchain-based exchanges can move the conversion process into an on-chain environment.

Katz warned that the friction created by banks and FX dealers currently provides authorities with tools to monitor and manage capital flows. If those transactions move onto decentralized infrastructure, that friction could disappear.

“The on-ramp from local-currency to dollars moves from the regulated perimeter of banks and FX dealers to the on-chain perimeter,” Katz said, pointing to decentralized exchanges, liquidity pools and peer-to-peer swaps as examples.

His conclusion was particularly striking: local stablecoins could actually accelerate adoption of foreign-exchange stablecoins.

That possibility matters because stablecoins already provide users with a relatively frictionless way to obtain digital exposure to foreign currency. The IMF said stablecoin market capitalization nearly tripled between 2021 and 2025 and stood at around $300 billion over the past year, with nearly 99% of stablecoins denominated in U.S. dollars.

The IMF has also identified significant cross-border stablecoin activity. Its April 2026 Global Financial Stability Report estimated that gross flows of the two largest dollar-pegged stablecoins, Tether’s USDT and Circle’s USDC, rose sharply between 2020 and 2025, with a substantial share directed toward emerging markets.

IMF warns risks will differ across emerging markets

The IMF is not arguing that every country will experience the same outcome.

Katz said the consequences depend on factors including existing levels of dollarization, the strength of a country’s economic institutions, its financial-market structure and access to foreign currency.

In economies that are already heavily dollarized, stablecoins may simply replace physical dollars or conventional dollar deposits with a digital alternative. In that scenario, the overall demand for foreign currency may not change dramatically.

The situation can be more serious in countries where access to dollars is restricted and economic frameworks are weaker.

In those markets, stablecoins could create additional demand for foreign currency by allowing households and businesses to obtain dollar-linked assets more easily. Katz noted that dollarization is historically associated with inflation, exchange-rate volatility, institutional weakness and concerns about policy credibility.

The speed of digital adoption could also make the process different from traditional dollarization. Physical cash, dollar bank deposits and offshore accounts historically required considerable time and infrastructure to spread. Stablecoins can potentially reach users through smartphones and digital wallets much faster.

That is why the IMF is calling for local stablecoins and foreign-currency stablecoins to be incorporated into broader regulatory frameworks rather than treated as separate markets.

Regulators face pressure to catch up

Katz urged emerging-market authorities to strengthen oversight of crypto exchanges, custodians, payment platforms and on- and off-ramp providers.

He also called for better data collection, arguing that regulators cannot effectively manage capital flows if they lack visibility into the size and direction of stablecoin transactions.

The IMF’s recommendation is not simply to restrict stablecoins. Katz emphasized that the technology could lower payment costs, increase competition and improve cross-border financial services.

The challenge is designing rules that capture those benefits without allowing digital foreign-currency markets to undermine monetary and financial stability.

That balancing act could become increasingly important as local stablecoins emerge alongside dollar-backed tokens. If domestic digital currencies fail to match the liquidity and acceptance of dollar alternatives, policymakers could find that an instrument designed to protect local-currency demand instead makes dollar access easier.

For emerging markets, the IMF’s message is therefore less about choosing between domestic and foreign stablecoins and more about understanding how the two markets interact.

As Katz put it, policymakers need to create conditions where “competition and innovation can flourish without undermining macroeconomic and financial stability.”