The International Monetary Fund (IMF) has issued a stark warning about the risks of stablecoin adoption, particularly how it could accelerate currency substitution—a process where a foreign currency often the US dollar gradually replaces a local one in everyday transactions, savings, and economic activity.

This concern was outlined in the IMF’s 56-page departmental paper titled “Understanding Stablecoins.” The report highlights how stablecoins, especially those pegged to the US dollar which dominate about 97% of the $300+ billion stablecoin market, could erode monetary sovereignty in vulnerable economies.

The IMF emphasizes that stablecoins aren’t just a crypto novelty—they’re a structural shift in global money flows, driven by their ease of access via smartphones and the internet. Unlike traditional foreign currency stablecoins can “penetrate an economy rapidly via the internet and smartphones,” bypassing banks and capital controls.

This is especially risky in emerging markets like Africa, Latin America, the Middle East, and the Caribbean, where stablecoin holdings are rising faster than foreign exchange deposits used for monetary policy.

In high-inflation or unstable environments, people turn to dollar-pegged stablecoins like USDT or USDC for stability, leading to “digital dollarization.” If a large share of payments, savings, or remittances shifts to foreign stablecoins, central banks lose grip on domestic liquidity, interest rates, and credit creation.

The report notes this could amplify capital flow volatility during crises, as users flock to or flee from stablecoins en masse. Unhosted— self-custodied wallets exacerbate this by making transactions harder to track.

Stablecoin market cap has tripled since 2023 to over $260 billion for just USDT and USDC, with 2024 trading volumes hitting $23 trillion—surpassing Bitcoin and Ethereum flows for the first time.

Asia leads in activity, but substitution risks are highest in regions with weak institutions or low banking access. The IMF views this as a “survival strategy” for users in fragile economies but warns it could stifle innovation if unregulated, potentially transmitting crypto volatility to traditional banking.

To mitigate these risks without stifling growth, the IMF calls for: Harmonized rules on reserves, definitions, and oversight to avoid regulatory arbitrage. Issuers should hold high-quality, liquid assets like short-dated Treasuries and face “same activity, same risk, same regulation.”

Countries should prohibit stablecoins from being legal tender and restrict their use in official payments to protect local currencies. Late-launch central bank digital currencies (CBDCs) might struggle against established stablecoins, so proactive design is key.

This isn’t isolated— the European Central Bank echoed similar worries in November 2025 about dollar stablecoins draining deposits from local banks. Proponents, like economist Eswar Prasad, argue stablecoins expose inefficiencies in legacy systems and could enhance financial inclusion, but the “paradox” is their potential to concentrate power in the US dollar ecosystem.

The IMF sees stablecoins as “here to stay” but urges swift action to balance innovation with stability. Digital dollarization occurs when populations in emerging markets increasingly adopt USD-pegged stablecoins as a store of value, medium of exchange, or unit of account, effectively substituting local currencies amid inflation, devaluation, or capital controls.

This phenomenon, highlighted in the IMF’s recent warnings, has accelerated since 2023, with stablecoins settling over $2.6 trillion in the first half of 2024 alone, much of it in non-trading uses like remittances and savings.

Strict capital controls limit formal USD access, pushing users toward stablecoins for savings, remittances, and even property transactions. Argentina led Latin America with $91.1 billion in crypto inflows from July 2023 to June 2024, where stablecoins comprised 61.8% of transaction volume—far above the global average.

Retail-sized transfers under $10,000 grew fastest, with over 60% of crypto activity involving USD stablecoins. About 5 million users actively engage, and stablecoins trade at a 30% premium over USD, reflecting high demand.

Stablecoins act as a “digital dollar” hedge, preserving wealth and enabling cross-border payments in minutes versus days. This has accelerated dollarization, with over 50% of real estate deals now in USD equivalents, but it exacerbates peso depreciation and reduces central bank seigniorage.

Businesses benefit from lower remittance fees unlocking trapped capital. The government has eased some crypto restrictions but maintains capital controls; platforms like Bitso see surges during devaluations, highlighting informal adoption.

The Nigeria naira’s 65% drop against the USD since 2022, 34% inflation, and forex shortages have made traditional USD banking inaccessible. Stablecoins offer a workaround for remittances, salaries, and trade, appealing to a young, tech-savvy population facing unemployment and black-market premiums.

Nigeria ranks in the global top 10 for crypto use, with 54 million users and 26 million stablecoin holders. 77% of surveyed users have converted naira to stablecoins, primarily for savings (64%) and payments (57%); USDT dominates with 70% market share.

Peer-to-peer volumes on Binance P2P lead globally, and stablecoins form the largest portfolio share among emerging markets. They provide stability and yield up to 6% via platforms like Yellow Card, bypassing government interference and enabling $156 billion in annual remittances.

However, this fuels “crypto-dollarization,” pressuring the naira and complicating monetary policy, with regulators warning of volatility transmission. A 2021 central bank ban on formal crypto banking persists, but informal P2P channels thrive; recent lifts on some restrictions signal cautious integration.

The lira’s 80% value loss since 2018 and 65% inflation in 2024 stem from unconventional policies and eroding credibility. Stablecoins attract users seeking yields up to 6% and dollar exposure without banking hurdles, especially for trading and savings.

Stablecoin purchases equal 4.3% of GDP—the world’s highest—with over half the population owning crypto and 50% of transactions involving USD stablecoins. 68% of users have converted lira to stablecoins; holdings exceed $100 billion in foreign deposits, with USDT preferred for liquidity.

Stablecoins democratize access to “safe” digital dollars, hedging inflation and facilitating B2B payments, but they intensify dollarization, reducing lira demand and amplifying capital flight risks during crises.