Dollarisation and monetary control: what lessons for the rise of stablecoins?
Summary
Focus
Stablecoins – digital tokens with the goal to function as money – offer easy access to US dollar liquidity. As a result, one of the main use cases of stablecoins to date has been to serve as a store of value in emerging market and developing economies. However, relatively little is known about the drivers and behaviour of "stablecoin dollarisation", how it may interact with more conventional forms of dollarisation and how it may affect monetary policy.
Contribution
We draw on a large data set of foreign currency deposits and recent data on stablecoin inflows to compare the dynamics and drivers of conventional and stablecoin dollarisation. We provide evidence on the interaction between the two forms of dollarisation and analyse their implications for both monetary control and broader macro-financial stability frameworks.
Findings
We show that deposit dollarisation and recent stablecoin flows are both associated with similar macro-financial drivers, including the strength of exchange rate pass-through and sovereign or banking crises. Both forms of dollarisation appear persistent, meaning that they will be hard to reverse once established, and there is little evidence of substitution between the two instruments for dollar exposure. We show that stablecoin flows seem largely unaffected by foreign exchange or capital flow restrictions, in contrast to deposit dollarisation. The historical record indicates that moderate deposit dollarisation has been associated with somewhat higher inflation risks, although there is little evidence of significant impacts on monetary policy transmission.
Abstract
The emergence of stablecoins has created a new channel to access US dollar liquidity in emerging market and developing economies (EMDEs), similar to the historical role of foreign currency deposits, or "deposit dollarisation". This has raised concerns about the possible implications for monetary control in EMDEs. Drawing on data on foreign currency deposits and dollar-pegged stablecoin inflows for more than 130 economies, we compare the dynamics and drivers of "stablecoin dollarisation" with those of conventional deposit dollarisation. We document that historical deposit dollarisation and recent stablecoin flows are both associated with similar macro-financial drivers, including the strength of exchange rate pass-through and sovereign or banking crises. We further document significant persistence in both deposit and stablecoin dollarisation, suggesting that dollarisation is hard to reverse once established. Unlike deposit dollarisation, stablecoin flows seem to be largely unaffected by either broad or specific capital flow restrictions. This likely occurs because stablecoins are partly circulating outside the regulatory perimeter. The historical record also suggests that moderate deposit dollarisation has been associated with somewhat higher inflation risks, although there is little evidence of significant impacts on monetary policy transmission.
JEL Codes: E44, E58, F32, F38, G15, G23
Keywords: dollarisation, capital flows, stablecoins, monetary control, EMDEs
