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Regulators in emerging markets have long hoped that homegrown digital currencies could anchor users to local financial systems and reduce dependence on the US dollar. The IMF is now raising an uncomfortable possibility: that strategy could achieve precisely the opposite.
Speaking at the University of Cape Town on Friday, IMF First Deputy Managing Director Dan Katz argued that once domestic-currency stablecoins and dollar-backed tokens share the same blockchain infrastructure, the barriers separating them effectively dissolve. Users can shift between the two through decentralised exchanges, liquidity pools, or peer-to-peer swaps, with far less friction than traditional foreign exchange channels allow. “In this way, local-currency stablecoins might even accelerate the adoption of FX stablecoins,” Katz said.
Shared Rails Create an Unintended On-Ramp to Dollarisation
The mechanism Katz describes is straightforward and worth unpacking. When a government or private issuer launches a stablecoin pegged to the local currency, the goal is typically to offer a digital payment tool that keeps value denominated at home. But stablecoins live on public or permissioned blockchains, and those blockchains are agnostic about what tokens trade on them. Once a rand-linked token and a USDC-equivalent both exist on the same chain, any decentralised exchange can pair them in a liquidity pool. A user who starts with the local token can convert to the dollar token in seconds, without touching a bank or a licensed currency dealer.
That matters enormously for capital flow management. Traditional foreign exchange controls work partly because banks and dealers are regulated chokepoints. They report transactions, apply limits, and give authorities visibility into how money moves across borders. If that activity migrates onto blockchain swap protocols, those chokepoints disappear. Katz said the shift could move foreign exchange activity away from banks and currency dealers, reducing the friction that gives authorities tools to monitor and manage capital flows.
South Africa offers a telling early data point. Katz noted that dollar-backed stablecoins have gained only limited traction there, but rand-linked tokens have attracted even less demand. The observation suggests that users, when given a choice, gravitate toward liquidity and global acceptance rather than local familiarity. Dollar stablecoins carry deep network effects: they are accepted across more platforms, more borders, and more trading pairs than any domestic alternative is likely to match in the near term.
The Risk Is Not Uniform, But the Vulnerable Are Most Exposed
Katz was careful to note that the danger is not identical everywhere. In highly dollarised economies, where citizens already hold significant dollar savings, stablecoins may largely substitute for existing dollar positions rather than create new demand. The net effect on currency stability could be limited in those cases.
The more serious concern lies in countries where access to dollars is formally restricted and macroeconomic fundamentals are fragile. In those environments, a local-currency stablecoin that inadvertently lowers the cost of converting into digital dollars could accelerate currency flight precisely when authorities can least afford it. Katz said it was still too early to draw firm conclusions, but the directional risk is clear enough to warrant preemptive regulatory attention.
His prescription focused on the infrastructure layer rather than the tokens themselves. Katz urged authorities to bring onramps, offramps, and onchain exchange points within regulatory frameworks, meaning the fiat-to-crypto entry points, the crypto-to-fiat exit points, and the swap protocols in between should all face oversight. That is a significantly broader perimeter than most existing crypto regulations cover, which tend to focus on exchanges and custodians rather than the decentralised protocols sitting between them.
What This Means for Southeast Asia’s Stablecoin Ambitions
The IMF’s warning lands at a moment when stablecoin regulation is accelerating across Southeast Asia. Singapore’s Monetary Authority of Singapore finalised its stablecoin regulatory framework in 2023, setting reserve, redemption, and disclosure requirements for single-currency stablecoins pegged to the Singapore dollar or G10 currencies. Malaysia’s Securities Commission and Bank Negara Malaysia have been more cautious, with digital asset frameworks still evolving and no licensed domestic stablecoin issuer yet operating at scale.
The dynamic Katz describes is directly relevant to both jurisdictions. If either regulator were to license a ringgit or Singapore dollar stablecoin, and that token were issued on a public blockchain such as Ethereum or Solana, the conversion pathway to USDC or USDT would exist from day one. Neither the MAS nor the SC nor BNM would control that layer. Governing it would require either restricting which blockchains domestic stablecoins can operate on, or extending regulatory reach to decentralised exchange protocols, a technically and jurisdictionally complex undertaking.
For retail users in Malaysia and Singapore, the practical implication is more immediate. A well-designed local stablecoin could improve payment efficiency and financial inclusion. But if it simultaneously makes it trivially easy to move savings into dollar-denominated tokens, the macroeconomic calculus for central banks changes considerably.
The IMF’s intervention here is not a call to abandon domestic stablecoin projects. It is a call to design them with eyes open to the infrastructure they will inevitably share with the global dollar stablecoin ecosystem. The tokens themselves may be local, but the rails they run on are not, and that distinction carries consequences that no issuer mandate or peg mechanism can fully contain on its own.
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