The Stablecoin Paradox: Why Local Tokens Might Accelerate Digital Dollarization

On August 7, 2026, IMF First Deputy Managing Director Dan Katz delivered a public lecture at the University of Cape Town titled Stablecoins: Promise, Risks, and Policy Choices for Emerging Economies . His core warning was counterintuitive: local-currency stablecoins introduced to reduce reliance on dollar-backed tokens could instead accelerate demand for digital dollars and create new macro-financial risks in emerging markets .

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Key Risks Identified

The Paradoxical Dollarization Effect

When local-currency stablecoins and dollar stablecoins operate on the same blockchain infrastructure, users can convert between them almost instantly through decentralized exchanges, liquidity pools, or peer-to-peer swaps . Katz described this "seamless conversion" as a mechanism that could shift foreign-exchange activity away from regulated banks and currency dealers into opaque on-chain markets, weakening authorities' ability to monitor or manage capital flows .

User Preference for Digital Dollars

Dollar-backed tokens benefit from deeper liquidity, stronger network effects, and near-universal cross-border acceptance — making them far more attractive than local-currency alternatives . Katz cited the South African example: dollar stablecoins have seen meaningful adoption, while rand-pegged tokens remain a niche product with very low demand .

Heightened Risk in Vulnerable Economies

The impact varies by country. In already highly dollarized economies, stablecoins may simply replace existing dollar holdings. However, in countries with restricted dollar access and weak economic fundamentals, local-currency stablecoins could increase overall foreign-currency demand, amplifying capital outflow pressures and complicating monetary policy .

Monetary Policy Constraints and Financial Stability Threats

Broader adoption of dollar-denominated stablecoins can limit the flexibility of domestic monetary policy and elevate financial stability risks — a dynamic Katz described as digital currency substitution . He noted that dollarization tends to be "extremely persistent" once entrenched, even after the conditions that triggered it subside .

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Policy Recommendations

Regulate On-Ramps and Off-Ramps Promptly

Katz stressed that all interfaces where users deposit, withdraw, or exchange stablecoins — the connections between crypto and fiat systems — must be brought within the regulatory perimeter . This includes on-chain exchange points and peer-to-peer swap mechanisms .

Collect Data Without Delay

"Data collection should not wait for perfect regulation," Katz said, pointing to the accelerating role of artificial intelligence in stablecoin adoption and the risk that data gaps will widen further . He noted that the total stablecoin market capitalization has remained relatively flat at around $300 billion, making this a good moment to build infrastructure before the next growth wave .

Build Sophisticated Regulatory Frameworks

Katz called for close coordination among policy authorities — central banks, finance ministries, and financial regulators — to establish frameworks that cover all touchpoints of stablecoin activity . The technology is moving faster than traditional rulemaking, he warned, so agility is more important than perfection .