Dollar-backed stablecoins may gain from domestic token initiatives, IMF warns
Dan Katz, IMF's first deputy managing director, suggests digital dollars might remain preferred by users due to strong liquidity, network advantages and global cross-border utility.
Stablecoins pegged to domestic currencies that aim to decrease dependence on digital dollars may actually facilitate easier movement of capital into dollar-backed tokens, a top International Monetary Fund (IMF) executive has warned.
Speaking on Friday, Dan Katz, who serves as IMF First Deputy Managing Director, explained that when domestic and dollar-denominated stablecoins run on identical blockchain infrastructure, users gain the ability to exchange between them using decentralized exchanges, liquidity pools or direct peer-to-peer transactions.
During his address at the University of Cape Town, Katz noted that such a transformation could transfer foreign exchange trading activity away from traditional banks and currency dealers, diminishing the barriers that provide regulatory authorities with mechanisms to track and control capital movements.
In this way, local-currency stablecoins might even accelerate the adoption of FX stablecoins.
Katz highlighted South Africa as an example, noting that while dollar-pegged stablecoins have seen modest adoption, rand-denominated tokens have experienced even lower levels of user interest.
Though he acknowledged it was premature to reach definitive conclusions, Katz suggested that numerous users may gravitate toward dollar tokens due to their superior liquidity, network effects and broad acceptance across various platforms and international boundaries.
According to Katz, the potential risks differ depending on the country. In economies that are already highly dollarized, stablecoins might mainly substitute existing dollar holdings, whereas in nations where dollar access faces restrictions and economic institutions remain fragile, they could potentially stimulate increased foreign-currency demand.
He called on regulatory authorities to incorporate onramps, offramps and onchain exchange mechanisms into existing regulatory frameworks.