Currency crises rarely begin with a digital token. They begin when the commitments embedded in an exchange-rate regime no longer match the foreign currency available at the official price. Reserves fall, dollar access is rationed, importers wait, banks raise commissions, and households look for ways to protect their purchasing power. Stablecoins enter that setting as both an escape route and a price.
That dual function is the central contribution of Brandon Joel Tan's July 2026 paper, Stablecoins and Fragility in Fixed Exchange Rate Regimes. It is an IMF Working Paper, meaning that it presents research in progress by its author and does not represent the official position of the IMF, its Executive Board, or IMF management. The paper's argument is more balanced than a warning about digital dollarization. Stablecoins can improve access to foreign-currency hedges and strengthen price discovery in normal conditions. Once an exchange-rate regime becomes severely misaligned, however, the same public price can help households coordinate an exit. [1]
A liquid USDT market can reduce the cost of obtaining dollar exposure, speed up currency substitution, and give a large population the same high-frequency signal. The policy implications require more care. A stablecoin premium may intensify pressure on a fixed exchange rate while simultaneously revealing scarcity, rationing, and declining credibility that predate widespread token use. A durable response has to address both effects. Suppressing the signal while leaving the imbalance intact is unlikely to restore stability.
Stablecoins as Access and Information Technologies
Tan's model begins with an economy operating a fixed or heavily managed exchange rate. The degree of misalignment, represented by the variable θ, measures the distance between the official rate and the shadow market-clearing value of foreign currency. Households cannot observe θ directly. Instead, they receive private signals through cash dealers, bank commissions, transfer delays, personal networks, and other fragmented trading opportunities. [1]
Stablecoins introduce a public signal. A local-currency quotation for USDT or another dollar-linked token aggregates order flow in a common market. In the model, the variance of that signal declines as stablecoin demand increases. Greater market depth therefore produces a more precise price, and households assign more weight to it when forming beliefs about the true exchange-rate imbalance. [1]
In practical terms, a thin stablecoin market offers a noisy indication of dollar scarcity. A deeper market processes more transactions and produces a quotation that is harder to dismiss as an isolated trade. Participants gain a clearer view of the parallel dollar price and of what everyone else is observing.
The paper distinguishes two motives for holding foreign currency. Ordinary hedge demand reflects a desire to insure against depreciation. Run demand is strategic. A household becomes more inclined to exit when it expects enough others to do the same and overwhelm the regime's effective defence capacity. In the model, that capacity weakens as misalignment rises, while aggregate run demand grows as more households cross a private-signal threshold. [1]
Stablecoins influence both decisions. Their first role is to reduce access costs relative to fragmented cash markets. This makes reasonable hedging cheaper, particularly for people without privileged access to banks or physical dollars. It also lowers the cost of taking a run-related position. Their second role is informational. As the stablecoin price becomes more precise, beliefs become less dispersed. Households need not become more pessimistic on average. They become more certain that others are reacting to the same public signal. That common reference strengthens strategic complementarity because running becomes more attractive when each participant expects others to run as well. [1]
The feedback loop is clear. Greater misalignment increases demand for dollar exposure. Stablecoins intermediate part of it, deeper trading sharpens the public price, and that price shifts beliefs and the threshold at which households decide to exit. Additional run demand then increases stablecoin activity. Under weak fundamentals, a market that began as a hedge can become a coordination venue. [1]
This produces the paper's state-dependent welfare result. At low misalignment, cheaper access and better hedge allocation dominate. At high misalignment, the social cost of synchronized exit can outweigh those gains. The benchmark simulation illustrates a welfare reversal around θ = 0.59, with the information channel turning sharply negative in stressed states. These numbers come from an illustrative parameterization. They are not estimated crisis probabilities, universal policy thresholds, or a calibration of Bolivia. The author is explicit that the exercise demonstrates a mechanism rather than measuring a country episode. [1]
Bolivia and the Move From Many Prices to One
Bolivia provides the paper's motivating case. Before stablecoin trading became widely visible, the effective price of dollar access was dispersed across cash dealers, bank commissions, transfer limits, waiting times, inventory shortages, and quotations that could not always be executed. Exchange houses could post different prices on the same day, while some had no dollars available at the quoted rate. The economy contained several indicators of scarcity, but no continuous parallel price. [1]
After the Central Bank of Bolivia rescinded restrictions on electronic payment instruments for virtual-asset transactions in June 2024, activity expanded and USDT/BOB became an observed reference for the parallel dollar. The central bank began publishing USDT prices, while merchants and news reports increasingly used the digital quotation as a conversion benchmark. [1]
This sequence is consistent with the paper's information mechanism. It does not, by itself, establish that stablecoins caused Bolivia's dollar shortage or the underlying exchange-rate pressure. Scarcity, rationing, and the widening gap between official and effective dollar access were already present before a common USDT price emerged. Stablecoins changed the visibility, accessibility, and tradability of that imbalance. [1]
The distinction between creating fragility and revealing it is central to sound policy. A public parallel price can accelerate the speed at which households respond. It can also expose costs that an administered rate had previously displaced into queues, commissions, personal connections, and informal dealing. The absence of a visible market price does not imply the absence of pressure. It may simply mean that the pressure is being expressed through less transparent channels.
How Much Fragility Is Created, and How Much Is Revealed?
The IMF model identifies a genuine coordination externality. Empirical BIS research also supports the view that stablecoin flows can spill into conventional foreign-exchange markets. Using data on four dollar-pegged stablecoins traded against 27 fiat currencies across 64 exchanges from 2021 to 2025, BIS Working Paper No. 1340 finds that an exogenous 1 percent increase in net stablecoin inflows raises stablecoin-versus-spot parity deviations by 40 basis points, depreciates the local currency, and widens the dollar premium in synthetic funding markets. The effects are stronger when intermediary balance sheets are constrained. [2]
That evidence rules out a casual laissez-faire dismissal. Stablecoin demand can move beyond crypto markets and affect spot exchange rates, funding costs, and intermediary balance sheets. Digital dollarization may weaken monetary transmission, accelerate capital movement, and make domestic conditions more sensitive to the policy stance of the currency underlying the stablecoin. BIS Papers No. 170 also notes that about 98 percent of stablecoin value is dollar-denominated and identifies rapid currency substitution as an acute risk for emerging and developing economies facing macroeconomic instability. [2] [3]
Causality still has several layers. Weak reserves, fiscal stress, an overvalued peg, or declining confidence can raise demand for stablecoins. That demand can then amplify pressure through lower transaction costs, public price discovery, and cross-market arbitrage. The initial imbalance and amplification can operate together.
The analytical error would be to treat the second link as a complete explanation for the first. Closing a stablecoin venue may remove one route for coordinated exit, but it does not replenish reserves, repair a fiscal imbalance, or make an overvalued official rate clear the market. Tan's conclusion is direct: stablecoin safeguards cannot substitute for restoring credibility, easing foreign-exchange scarcity, and moving the official allocation system closer to market-clearing conditions. [1]
Where Does Dollar Demand Go After Restrictions?
Any restriction should be assessed against a credible counterfactual. Households seeking dollar protection can turn to physical cash, informal brokers, offshore accounts, trade misinvoicing, private messaging groups, or less regulated crypto intermediaries. Some demand may disappear as controls raise costs. Some may move into markets that are harder to monitor and more dependent on trusted relationships.
The BIS Annual Economic Report 2026 reaches a measured conclusion. Controls on cross-border stablecoin transactions can mitigate circumvention to some degree, particularly where domestic intermediaries are barred from handling unapproved tokens. The BIS also finds that such measures are likely to remain imperfect because tokens have bearer-like features and can be held in unhosted wallets. Its cross-country evidence shows broadly similar stablecoin inflows in economies with and without restrictions on stablecoin use between residents and non-residents. This does not establish that every control fails. It suggests that restrictions may redirect activity without eliminating the underlying demand for foreign currency. [4]
The enforcement challenge is structural. Issuers, exchanges, users, reserve assets, and blockchains may sit in different jurisdictions. Peer-to-peer transfers through self-custodied wallets can occur outside the conventional intermediary perimeter, while offshore platforms add further blind spots. The IMF has therefore argued that countries should consider access to foreign-denominated assets through regulated channels rather than rely solely on outright bans, while recognizing that better data and international cooperation remain necessary. [5]
A transparent, regulated stablecoin market can sometimes provide authorities with better information than the alternatives. Driving transactions into cash or informal networks may reduce the precision of the public price, but it can also weaken regulatory visibility, consumer protection, and the quality of capital-flow data. A policy that lowers the measured stablecoin premium while increasing unrecorded dollarization has improved the indicator more than the underlying condition.
Who Loses Access When Controls Are Imposed?
Traditional foreign-exchange rationing rarely affects all users equally. Large firms, banks, politically connected actors, and households with offshore accounts generally have more options. Small businesses, migrants, unbanked users, and ordinary savers face higher search costs and weaker bargaining power.
Tan's heterogeneous-access extension formalizes this asymmetry. Stablecoins generate larger normal-state welfare gains for households facing the highest frictions in traditional FX markets. The information externality created by aggregate market depth, by contrast, is borne across the economy. Broad restrictions can therefore be regressive in access terms even when some intervention is justified by systemic risk. [1]
That result is consistent with the IMF's broader assessment. Stablecoins can lower cross-border payment costs, increase competition with established providers, and widen digital access where banks find customers expensive to serve. The same IMF work warns about reserve risk, limited redemption rights, currency substitution, volatile capital flows, financial-integrity concerns, and fragmented payment systems. [6]
A defensible framework must hold both sides at once. Equal access to a lawful savings or hedging instrument has economic value. Monetary stability and effective enforcement against illicit finance matter as well. Proportionality is essential because a universal restriction places the same legal barrier before a remittance recipient protecting a modest balance and a leveraged actor moving a systemically significant position.
Crisis Tools Without Permanent Financial Gatekeeping
The paper's state-contingent approach is a useful starting point: preserve low-cost access in normal conditions, then apply temporary and targeted measures to unusually large or run-like flows when misalignment becomes severe. The difficulty lies in institutional design. Temporary controls often persist, while broad data mandates can become a permanent architecture for monitoring routine household transactions. [1]
A credible framework should begin with the risks embedded in the instrument and its intermediaries. Fiat-backed issuers should hold high-quality liquid reserves, offer clear and timely redemption rights, segregate customer assets, disclose reserve composition, maintain robust custody and operational controls, and comply with market-integrity, sanctions, and anti-money-laundering obligations. Regulation should remain technology-neutral. Equivalent economic functions and risks should produce comparable outcomes, whether the claim is recorded on a blockchain or a conventional ledger. The IMF's Understanding Stablecoins emphasizes reserve quality, redemption rights, operational resilience, governance, segregation, custody, and cross-border coordination as core elements of credible oversight. [6]
Normal retail activity should remain lawful through regulated channels. Low-value payments, remittances, and household hedging can be subject to proportionate customer due diligence and reporting without imposing institutional-scale burdens on every transaction. Such access preserves competition and reduces reliance on opaque cash markets.
Emergency measures need stricter constraints. Activation criteria should be published in advance and tied to observable indicators such as reserve losses, widening executable FX premia, settlement failures, abnormal leverage, or a surge in concentrated flows. Measures should focus on large, leveraged, or clearly speculative transactions rather than ordinary balances. Their duration should be fixed, with periodic review, public reporting, appeal procedures, and automatic sunset clauses. Renewal should require fresh evidence that the measure remains necessary and effective.
Data collection also requires limits. Authorities need better information on aggregate holdings, residency, flow direction, concentration, and the use of on- and off-ramps. The IMF is right that policy cannot be calibrated without data. Effective statistics, however, do not require indiscriminate access to the transaction history of every user. Reporting can be aggregated, threshold-based, purpose-limited, and subject to retention rules and independent oversight. Privacy and financial integrity are design constraints that must be reconciled rather than treated as mutually exclusive objectives. [5]
Stablecoin policy should rank below macroeconomic repair in the hierarchy of response. Credible monetary policy, sustainable fiscal positions, adequate reserves, a realistic exchange-rate arrangement, and a fair official allocation mechanism remain the first line of defence. The BIS notes that sustained de-dollarization has historically depended on stronger policy frameworks and deeper local-currency markets. It also observes that access to foreign stores of value can sharpen incentives for governments to preserve price stability and improve domestic payment systems. [4]
That competitive pressure is uncomfortable, but it is economically informative. A monetary system earns continued use by preserving value and providing reliable payment services. Administrative barriers can slow substitution. They cannot manufacture trust.
The Price Is Part of the Crisis, Not Its Origin
Stablecoins can make a fragile fixed exchange-rate regime more fragile. They reduce the cost of acquiring dollar exposure, connect crypto and conventional FX markets, and create a common signal that can synchronize exit. The IMF paper offers policymakers a rigorous account of that coordination channel, while BIS evidence shows that stablecoin flows can affect spot exchange rates and dollar funding conditions. [1] [2]
The same instruments perform valuable functions where official systems work poorly. They aggregate information, widen access to hedging, challenge payment incumbents, and reveal the shadow price of rationed foreign currency. Restrictions may sometimes be warranted, but their benefits should be weighed against displacement into less transparent channels, unequal access, enforcement limits, and the institutional risk of permanent discretionary control.
The strongest policy framework combines robust regulation of issuers and intermediaries, lawful low-value access, narrowly designed emergency tools, privacy-conscious data collection, and macroeconomic adjustment. Stablecoins should not be exempt from financial rules. They should not become a convenient explanation for pressures produced by an unsustainable peg or a rationed FX system.
A stablecoin premium can intensify a currency crisis. Silencing that premium cannot restore the credibility that the premium shows has been lost.