Currency nightmare
Crypto was supposed to be an alternative to fiat, especially the dollar. Stablecoins do the opposite, accelerating dollarization in the process, the BIS said.
The report found increasing flows of non-dollar currencies into US dollar-pegged stablecoins, and said these flows could weaken domestic currencies in the spot market. They also expose friction in arbitrage between crypto markets and conventional foreign exchange (FX) markets and can increase the cost of buying dollars through the FX swap market.
The BIS frames this as a new, faster version of an old problem: deposit dollarization, where households create bank deposits in foreign currency during periods of macroeconomic instability in the home country. The same triggers apply, the report says, as high inflation and government stress drive greater inflows into foreign stablecoins. And once that kind of dollarization takes hold, the BIS notes, it tends to persist for years.
What makes the stablecoin version more difficult to manage is enforcement. A number of countries, especially emerging markets and developing economies, have already introduced restrictions on the cross-border use of stablecoins. But BIS says such measures are “however likely to be imperfect given the digital bearer-like nature of tokens and the availability of non-hosted wallets.”
In other words, capital controls that work reasonably well on traditional bank deposits do not translate cleanly to a self-sufficient, limitless token.
