Capital Control Effectiveness May Be Weakened as BIS Warns Stablecoins Pose "Digital Dollarization" Risk to Emerging Markets

Odaily News Researchers from the Bank for International Settlements (BIS) have found that dollar-pegged stablecoins are creating a new form of "digital dollarization," which is largely insensitive to capital controls in emerging markets and more difficult for governments to manage than traditional foreign currency deposits. The researchers analyzed foreign currency deposit and dollar stablecoin inflow data from over 130 economies, discovering that both increase during periods of macroeconomic stress, but stablecoin flows show little to no reaction to capital controls or foreign exchange restrictions, possibly because they operate "partially outside the regulatory perimeter." The BIS noted that stablecoins could undermine monetary sovereignty, and policymakers need to employ new tools to address financial stability risks.