Foreign exchange nightmare
Crypto was meant to be an alternative to fiat, especially the dollar. Stablecoins do the opposite and thus accelerate dollarization, the BIS said.
The report revealed increasing flows of non-dollar currencies into stablecoins pegged to the US dollar, and said these flows can weaken national currencies in the spot market. They also expose frictions in arbitrage between crypto markets and conventional foreign exchange markets, and can increase the cost of purchasing dollars through the foreign exchange swap market.
The BIS presents this as a new, faster version of an old problem: deposit dollarization, where households create foreign currency bank deposits during periods of macroeconomic instability in the home country. The same triggers apply, the report said, as high inflation and sovereign tensions drive greater inflows to foreign stablecoins. And once this type of dollarization takes hold, notes the BIS, it tends to persist for years.
What makes the stablecoin version more difficult to manage is the application. A number of countries, particularly emerging and developing economies, have already imposed restrictions on the cross-border use of stablecoins. But the BIS says such measures “are likely imperfect given the digital nature of tokens and the availability of unhosted wallets.”
In other words, capital controls that work reasonably well on traditional bank deposits do not translate clearly into a self-custodial, borderless token.
