Dollarization Rarely Reverses, Stablecoins Are the Next Test

Working paper no 1370, "Dollarisation and monetary control: what lessons for the rise of stablecoins?" by Boris Hofmann, Aaron Mehrotra and Jan Paulick, uses deposit data for more than 130 economies from 1990 to 2019 and stablecoin flow data for the two largest dollar-pegged stablecoins, USDT and USDC, across 184 countries from 2017 to 2024.

Dollarization here means residents holding foreign currency, most often US dollars, in place of local currency. Views expressed are the authors' and not those of the BIS.

Inflation falls, dollarization stays

The finding rests on an event study, which lines countries up by the year each left a high-inflation regime rather than by calendar year, then compares the years before and after. In the median country, foreign currency accounted for about half of all bank deposits in the year it left a high-inflation regime. Four years later, the share was still close to half.

The paper first counted a country as out of a high-inflation regime once its inflation, averaged over five years, fell below 100%. That is a low bar. A country with 80% inflation clears it and is still in trouble, so it is no surprise savers kept their dollars. So the paper ran the test again with the bar at 5%, a level a country can only clear if inflation is genuinely under control. In this group the median country held less to start with, under 30% of deposits in foreign currency. The share still did not fall afterwards.

A separate test across 153 economies measures how quickly the foreign currency share returns to a country's own normal level once something moves it. The answer is slowly: about 83% of a move is still there a year later. It is no lower in rich countries than in poorer ones, and no lower now than in 2000.

Stablecoin numbers are shakier

So far this is a story about bank deposits. The stablecoin record is much shorter, and harder to measure.

For about a dozen Latin American countries the paper has figures every three months, which lets it run the same test on deposits and on stablecoins side by side. From one quarter to the next, more than 90% of the deposit share carries over. For stablecoin inflows it is above 40%.

The gap between 90 and 40 is not as wide as it looks. Deposits are money sitting in an account, which barely moves from quarter to quarter whatever savers do. Stablecoin inflows are money passing through.

It also works the other way. Some of that 40 is just growth: inflows that rise steadily quarter after quarter look persistent even if nobody is holding on, and the paper does not strip out each country's own pace.

The figures are estimates, built from blockchain records and assigned to countries by where an exchange's web traffic comes from. Anyone using a VPN is counted where they appear to be, not where they are.

Where restrictions stop working

The measurement problem is not the only one. The tools that worked on deposits do not reach stablecoins either.

In countries where residents needed official permission to open a foreign currency account, foreign currency made up about 5% of bank deposits. Where no permission was needed, the figure was over 30%. Most other limits on money crossing the border held deposits down too, though less sharply. 

None of these limits shows a significant effect on stablecoin inflows, which the authors call a challenge for emerging market and developing economies' policy frameworks.

Set against how little unwinds once it starts, that leaves little room to wait: dollarization looks easier to prevent than to undo. The authors add one caution. Most of what this paper knows comes from bank deposits, and stablecoins may not behave the same way.