The impact of stablecoins on the international monetary and financial system

Author | Iñaki Aldasoro, Jon Frost, and Hiro Ito

Source | BIS

Translation | Ma Yimeng

In May 2026, the Bank for International Settlements (BIS) published a working paper titled "The impact of stablecoins on the international monetary and financial system." This paper systematically analyzes how stablecoins are reshaping the international monetary system and having profound impacts on the monetary sovereignty of emerging markets and developing economies. Based on the theoretical framework of the functions of international money, the authors point out that currently, US dollar stablecoins dominate absolutely, which may reinforce rather than weaken dollar hegemony. The paper constructs three scenarios—"niche applications," "digital dollarization," and "domestic stablecoin integration"—to provide insights into the complex effects of stablecoins on monetary sovereignty, capital flows, and financial stability. The Institute of Financial Technology at Renmin University of China has translated this study.

Introduction

The international monetary system is at a critical historical juncture. For over seventy years, the US dollar has maintained its dominant position in the international monetary system, thanks to its strong network externalities, highly liquid financial markets, and institutional foundations. Although there are frequent predictions of the imminent end of dollar hegemony, this status remains firmly intact to this day.

However, the rise of digital finance, especially the rapid expansion of stablecoins, is introducing new forces that could reshape the global monetary system. Stablecoins are digital tokens issued by private entities, designed to maintain a stable value relative to a reference asset (usually sovereign currency). Since their first appearance in 2014, stablecoins have evolved from niche tools serving cryptocurrency traders to a global phenomenon with a market capitalization exceeding $300 billion by 2026. More importantly, about 98% of stablecoin value is denominated in US dollars, which suggests that in the short term, they are not a challenge but rather a reinforcement of the existing dollar dominance.

The core contribution of this paper lies in connecting two previously parallel academic fields: one focusing on digital currencies and crypto-assets—mainly on technological architecture, financial stability risks, and regulatory frameworks; the other on theories of international monetary competition—analyzing the determinants of reserve currency status, currency usage, and currency zone dynamics. By integrating these perspectives, the paper aims to reveal how technological innovations in payment systems interact with the deeper forces shaping the international monetary order.

For emerging markets and developing economies (EMDEs), stablecoins pose particularly profound challenges. They could reduce cross-border payment costs and enhance financial inclusion, but also threaten monetary sovereignty and complicate capital flow management.

Introduction to Stablecoins

Stablecoins are privately issued cryptocurrencies recorded and transferred on distributed ledgers, typically operating on public, permissionless blockchains. Unlike “trustless” cryptocurrencies like Bitcoin or Ethereum, stablecoins have a clear issuer responsible for “minting” and “burning” tokens on the blockchain and holding corresponding reserve assets. The most mainstream stablecoins today are Tether (USDT) and USD Coin (USDC), which together account for the vast majority of the market.

From a mechanism perspective, most mainstream stablecoins adopt a “fiat-collateralized” model: a recognizable legal entity issues tokens after receiving funds and commits to redeem them at face value in the reference currency. Their stability relies on three elements: explicit fiat redemption promises, mechanisms to keep secondary market trading close to par (similar to exchange-traded funds, ETFs), and reserve arrangements holding high-quality, highly liquid assets. In practice, leading US dollar stablecoins explicitly promise face-value redemption, but transparency varies, with differences in disclosure frequency and the degree of independent audits of reserve assets.

Regarding the composition of reserves, most major US dollar stablecoins hold U.S. Treasuries, repurchase agreements, and cash equivalents. For example, Tether currently allocates a significant portion of its reserves to U.S. Treasuries, while Circle’s USDC holds both Treasuries and overnight repos. However, transparency issues persist: some issuers only provide “attestation reports” rather than audited financial statements, and disclosure formats are inconsistent, making it difficult for outsiders to accurately assess reserve quality and sufficiency.

Currently, stablecoin usage is highly concentrated within the crypto ecosystem, mainly as a settlement medium for centralized and decentralized exchanges. However, a little-noticed fact is that most on-chain transactions are automated, including high-frequency trading, transfers within exchanges, and arbitrage bots. After adjusting for these factors, the actual trading volume of stablecoins is only about 1% of the unadjusted data, with retail transactions (below $250) accounting for just 0.4% to 0.9%. This sharply contrasts with industry claims that “stablecoins are widely used for remittances.”

Nevertheless, stablecoins have seen growing use in cross-border payments, especially in areas where traditional agency services are slow or costly. Since 2022, cross-border flows of US dollar stablecoins have at times surpassed those of Bitcoin and Ethereum, with Asia-Pacific leading in absolute scale, and Africa, the Middle East, and Latin America representing a higher proportion relative to their economies. Notably, high inflation and exchange rate volatility are the most significant national-level drivers of stablecoin adoption—characteristic of the “financial subordination” in international monetary hierarchy theory.

Looking ahead, with the development of tokenization, stablecoins could be used to purchase tokenized assets or facilitate settlement in smart contracts. However, their widespread adoption still depends on regulatory clarity, interoperability with traditional systems, and competition from tokenized deposits or retail central bank digital currencies (CBDCs).

Stablecoins and the Functions of International Money

To systematically assess how stablecoins might reshape the international monetary system, the paper adopts the classic framework proposed by Cohen (1971) and Kenen (1983). This framework considers two dimensions: the three traditional functions of money (unit of account, medium of exchange, store of value) and two types of users (private sector, official sector), resulting in six specific international monetary uses.

From observable indicators, the US dollar overwhelmingly dominates all six dimensions: it appears in nearly 90% of foreign exchange transactions, accounts for about 60% of cross-border bank claims, nearly half of international debt securities, over half of official foreign exchange reserves, and a significant share in trade invoicing, SWIFT payment messages, and interest rate derivatives. This dominance far exceeds what can be explained by the size of the US economy alone, reflecting strong network externalities and increasing returns to scale.

The impact of stablecoins on different monetary functions varies significantly. In EMDEs, the store of value function is most likely to be the initial entry point. Against the backdrop of high inflation and volatile exchange rates, residents’ primary motivation for using US dollar stablecoins is preservation of value, rather than trade invoicing or daily payments. Empirical evidence supports this: stablecoin adoption correlates closely with macroeconomic instability. The next most affected is the medium of exchange function, although current volumes are low, stablecoins’ 24/7 instant settlement and smart contract integration are attractive for remittances, e-commerce, and B2B payments. The unit of account function faces the highest barriers to entry, as trade invoicing is deeply embedded in long-term commercial relationships, commodity pricing conventions, and exchange rate hedging practices.

Official sector functions are unlikely to be directly impacted by stablecoins in the short term. Central banks have almost no official use of stablecoins. However, large-scale private sector adoption of foreign currency stablecoins can indirectly constrain official policies: if residents can quickly shift savings into US dollar stablecoins when their domestic currency weakens, the autonomy of monetary policy is undermined, capital flow management becomes more difficult, and exchange rate management loses effectiveness. In extreme cases, authorities may be forced to formally acknowledge “de facto dollarization” enabled by stablecoins.

Stablecoin-driven dollarization differs from traditional dollarization in several key ways: first, lower entry barriers—no need for foreign currency bank accounts, accessible via exchanges or peer-to-peer transfers; second, more convenient medium—just a smartphone, potentially bypassing domestic banking systems and capital controls; third, more difficult to monitor—pseudonymous on-chain transactions are far less visible to regulators than bank systems. These features suggest that stablecoin-driven dollarization could proceed faster and be harder to reverse than traditional forms.

Future Use Cases for Stablecoins

Scenario 1: Niche Adoption

In this scenario, stablecoins remain primarily within the crypto ecosystem, serving as on-chain transaction tools with limited penetration into the real economy. Although some use them as offshore stores of value in high-inflation economies, daily retail payments are still conducted in local currencies. Public confidence is periodically shaken by hacks, de-pegging, or bank runs. Capital flow management measures experience some leakage but remain relatively small compared to overall balance of payments, allowing central banks to retain meaningful policy autonomy. Financial stability risks are mainly confined within the crypto ecosystem. The implied policy stance is “light-touch regulation,” focusing on consumer protection and anti-money laundering compliance rather than systemic oversight.

Scenario 2: Digital Dollarization

This scenario envisions US dollar stablecoins rapidly becoming de facto cross-border retail payment infrastructure in many EMDEs, spilling over into domestic pricing and settlement. Network effects accelerate adoption in remittance channels and cross-border e-commerce platforms, with large merchants quoting directly in stablecoins. Domestic banks do not resist but actively provide deposit and withdrawal services, even offering stablecoin-denominated savings products, further accelerating dollarization. The private sector increasingly conducts contracts, invoicing, and balance sheets in “synthetic dollars.”

The macroeconomic and financial stability impacts are profound. Monetary policy loses traction as interest rate changes only influence a shrinking share of economic activity. Savings are diverted into U.S. Treasuries rather than supporting domestic credit creation, hindering local financial market development. Stablecoins provide 24/7 channels to bypass foreign exchange controls, rendering traditional monitoring indicators ineffective and making capital flow management extremely difficult. Corporate balance sheets accumulate large dollar stablecoin exposures; if major issuers face problems, panic could transmit directly to EMDEs, increasing financial stability risks. Empirical evidence shows that increased stablecoin flows are significantly correlated with subsequent exchange rate deviations, local currency depreciation, and deviations from covered interest parity.

Scenario 3: Domestic Stablecoin Integration

In this scenario, multiple EMDEs authorize banks, fintech firms, or financial market infrastructures to issue domestic stablecoins, interoperable with national fast payment systems, retail CBDCs, or tokenized central bank reserves. Reserve assets are strictly segregated—held in central bank reserves, bank deposits, or short-term government securities. If reserves are held in domestic government securities, domestic stablecoin issuance can also support sovereign debt issuance, keeping savings within the local financial system.

The macroeconomic impacts here are milder than in digital dollarization, with improved payment efficiency and potential enhancements in financial inclusion. However, banks face structural pressures—migration of demand deposits to stablecoins compresses net interest margins and may push the financial system toward a “narrow banking” model. Additionally, if users can easily exchange local stablecoins for foreign stablecoins via decentralized exchanges or cross-chain bridges, capital controls could be circumvented.

Conclusion

Looking ahead, the development trajectory of stablecoins will be shaped by technological adoption, regulatory choices in key jurisdictions, and competitive dynamics with other forms of digital currencies. For policymakers in EMDEs, the immediate priority is to develop sound macroeconomic frameworks and strengthen regulatory capacity, but the window for action is closing. Conditions such as high inflation, exchange rate volatility, and institutional weaknesses that promote stablecoin dollarization also limit countries’ ability to respond. In the coming years, policy choices made by EMDEs themselves and by the jurisdictions of major stablecoin issuers and market players will be crucial. International coordination on regulation, reserve standards, and cross-border resolution mechanisms is not only essential for managing financial stability risks but also vital for maintaining policy space for developing countries to independently shape their monetary futures.