Local-currency stablecoins designed to reduce dependence on dollar-backed tokens could have the opposite effect by making digital dollars easier to access, according to International Monetary Fund First Deputy Managing Director Dan Katz.
In an August 7 speech at the University of Cape Town, Katz argued that local and foreign-currency stablecoins operating on shared blockchain infrastructure can be exchanged through decentralized exchanges, liquidity pools or peer-to-peer transactions. Cointelegraph reported his remarks on August 8.
The mechanism matters for payments markets because a user may not need a direct banking relationship or conventional foreign-exchange dealer to move from a domestic-currency token into a dollar token. Katz said that local-currency stablecoins might therefore accelerate adoption of foreign-currency stablecoins rather than displace them.
Liquidity may outweigh local denomination
Katz pointed to South Africa, where he said dollar stablecoins have attracted limited use while rand-linked tokens have attracted even less. He cautioned that it was too early to draw firm conclusions, but said users may prefer dollar tokens because of their liquidity, network effects and acceptance across platforms and borders.
That distinction is important for issuers and payment providers. Creating a token in the domestic unit of account does not automatically create a liquid payment instrument. Adoption also depends on where the token can be acquired, redeemed, exchanged and accepted. If a local token mainly serves as an intermediate balance on infrastructure where dollar liquidity is deeper, it may function as a gateway rather than a substitute.
This is a policy assessment, not evidence that every domestic stablecoin will increase dollar demand. Katz said the effect will differ by country. In highly dollarized economies, stablecoins may replace existing forms of dollar holding. In markets where access to foreign currency is constrained and macroeconomic frameworks are weaker, he said they could increase demand for foreign currency.
Oversight shifts to conversion points
Katz warned that onchain conversion could move foreign-exchange activity away from banks and currency dealers, reducing some of the friction through which authorities monitor and manage capital flows. He called for onramps, offramps and onchain exchange points to be brought within regulatory frameworks.
For payments companies, the practical implication is that oversight cannot stop with the issuer of a local token. Regulators are likely to examine the full conversion path: how users fund wallets, where liquidity is sourced, which venues facilitate swaps, how redemptions occur and what transaction information is available across intermediaries.
The speech also highlights a design tension for domestic stablecoin initiatives. A shared technical standard can improve interoperability and reduce payment friction, but the same interoperability can make currency substitution easier. Policymakers considering local tokens will therefore need to assess market liquidity and cross-border convertibility alongside reserve quality, redemption rights and operational resilience.
The IMF remarks do not announce a new rule or binding policy. They frame a supervisory problem: domestic digital-money projects may expand the addressable network for dollar tokens unless local instruments can compete on liquidity, acceptance and trusted redemption as well as denomination.