The Role of Stablecoins in Monetary Policy Transmission: How Emerging Market Central Banks Are Losing Control to USDC Dominance

Stablecoins can function like portable U.S. dollars that sit outside domestic banks.

In emerging markets, that can weaken monetary policy transmission by shifting deposits and payment flows away from local currency rails and by increasing FX substitution pressure.

The IMF warns that currency substitution via stablecoins can impinge on monetary sovereignty and weaken central banks’ control over liquidity and interest rates if activity shifts into foreign-currency stablecoins.

Key Takeaways

• USD stablecoins can weaken monetary policy transmission if they drive currency substitution away from local deposits and payments.
• The biggest immediate risks for EMs are reduced deposit traction, harder FX management, and weaker enforcement of capital flow measures.
• Stablecoins are already a ~$280B+ market per central bank analysis, dominated by USDT and USDC.
• Most stablecoin volume still supports crypto trading, but EM retail signals exist where inflation and depreciation are acute.
• Policy responses that work focus on on/off-ramp supervision, better domestic payment rails, and stronger macro credibility, not guesswork.

Foundations: What Monetary Policy Transmission Actually Is

Monetary policy transmission is the set of channels through which a central bank’s actions, typically changes to policy interest rates and liquidity conditions, affect inflation and economic activity.

In a simplified EM setting:

• The central bank adjusts a policy rate and/or liquidity provision.
• Banks reprice deposits and loans, which changes credit growth and consumption/investment.
• The exchange rate and capital flows react, which changes imported inflation and local financial conditions.
• Expectations shift, influencing wage/price setting.

Transmission is strongest when the domestic currency is the unit of account for prices and wages, domestic bank deposits are widely used, and the payment system keeps most everyday activity inside the regulated financial perimeter.

Stablecoins: What They Are And Why They Matter For EM Transmission

A stablecoin is a digital unit designed to track a reference asset (often the U.S. dollar) and is typically issued against reserve assets (for fiat-backed stablecoins).

Where the stablecoin market stands (measured, not guessed)

• The ECB reports that stablecoin market capitalisation exceeded USD 280 billion (mid-November 2025), dominated by USD stablecoins; it cites Tether (USDT) at roughly USD 184 billion (63%) and USDC at roughly USD 75 billion (26%).
• Circle reports USDC in circulation at 78.5B as of December 11, 2025.
• DeFiLlama’s stablecoin dashboard is cited (via its data feed) at about USD 310.1B total stablecoin market cap at the time of capture.
• The IMF reports stablecoin issuance roughly doubled since 2024, reaching about USD 300B in September 2025.
• The IMF also reports trading volume growth: stablecoin trading volume increased 90% to about USD 23T in 2024.

A critical caveat: “USDC dominance” is context-dependent

• If “dominance” means overall supply share, the market is dominated by USD stablecoins generally, and led by USDT more than USDC, per ECB figures.
• If “dominance” means regulated/institutional-facing rails and disclosures, USDC is often positioned as a compliance-forward stablecoin with frequent disclosures, and its supply remains systemically large (tens of billions).

To keep this analysis fact-anchored, the rest of the article focuses on USD-stablecoin dominance (USDT + USDC) and then treats USDC-specific implications where the evidence supports it.

Why Emerging Markets Are More Exposed Than Advanced Economies

The IMF’s framework is straightforward: stablecoin-driven currency substitution tends to arise where people seek monetary stability and where domestic systems face inflation, institutional fragility, or limited financial access.

In many EMs, residents already have incentives to hold “dollars” (formal or informal dollarization). Stablecoins can reduce the friction of acquiring, holding, and transferring dollar exposure, especially when bank access is limited or capital controls are strict.

The ECB also notes claims that stablecoins are used as a store of value in EMDEs in high inflation settings, while emphasizing that measured retail usage remains small in aggregate stablecoin volumes today.

Core Mechanisms: How USD Stablecoins Weaken Monetary Policy Transmission

1) The Interest Rate Channel Weakens When Money Migrates Outside Local Deposits

Most interest-rate transmission in EMs still runs through banks: deposit rates, loan rates, and funding conditions.

If households and firms move savings from local currency deposits into USD stablecoins:

• Domestic deposits can shrink or become more volatile.
• Banks’ marginal funding costs can rise.
• Credit supply can tighten or reprice in ways less tied to the policy rate.

The IMF notes that if stablecoin reserves are held with commercial banks, deposits may not fall, but funding volatility can increase; and that demand for foreign stablecoins could lead to a greater reduction in deposits (particularly if reserves are held overseas rather than domestically).

Why this matters for transmission:
Central banks can move a policy rate, but if the deposit base and payment activity are migrating to “offshore digital dollars,” the link between the policy rate and private borrowing conditions can loosen.

2) The Exchange Rate Channel Becomes Harder To Manage When Residents Hold “Digital USD” Directly

In many EMs, exchange rate dynamics are central to inflation outcomes (import prices, fuel, food, tradables). When residents hold stablecoins as a substitute for domestic currency, they are effectively holding FX, often without needing domestic banks.

The IMF explicitly warns that if a significant share of economic activity shifts to foreign-currency stablecoins, the central bank’s control over domestic liquidity and interest rates could weaken monetary policy transmission.

That is the mechanism of digital dollarization:

• Prices and contracts remain in local currency initially, but savings and settlement increasingly rely on USD stablecoins.
• Over time, that can pressure local FX markets and reduce the effectiveness of traditional FX and liquidity tools.

3) Capital Flow Management And FX Controls Can Be Circumvented More Easily

EMs often use capital flow management measures (CFMs) and FX regulations to reduce destabilizing outflows, manage shortages, or defend a peg.

The IMF notes that stablecoins could be used to circumvent CFMs and that implementing CFMs relies on established intermediaries; stablecoins can provide an avenue for capital flows outside common rails, undermining implementation. It also highlights that enforcement can be limited due to unhosted wallets outside the regulatory perimeter.

This is not a claim that stablecoins always bypass controls; it is the narrower, evidence-backed point that the enforcement surface changes:

• Regulated on/off-ramps can be supervised.
• Peer-to-peer flows and self-custody reduce visibility and control.

4) Seigniorage And Fiscal Linkages Can Deteriorate

Seigniorage (the economic benefit of issuing currency) is not just a technical concept for EMs; it can affect public finances directly.

The IMF states that, with reduced demand for local currency under currency substitution, seigniorage income can fall, reducing dividend payments to government.

That is a fiscal channel:

• Less demand for local base money can compress a government revenue stream.
• Fiscal stress can feedback into inflation and risk premia, further weakening policy credibility.

5) Data, Measurement, And Policy Reaction Lags Get Worse

Even where regulators have authority over local intermediaries, stablecoins are natively cross-border and can move across wallets and chains.

The IMF highlights the “super-national” nature of stablecoins and the challenges for enforcement and data availability, including pseudo-anonymity and limited information on holders’ nationality that impedes statistics on cross-border flows.

For central banks, that means:

• Harder real-time monitoring of money-like aggregates (what is “M1” if a chunk of transactional value sits in stablecoins?).
• Slower diagnosis of capital flight vs. normal payment activity.
• Greater reliance on indirect indicators (exchange order books, on/off-ramp flows, banking system liquidity stress).

Evidence Snapshot: What The Data Says Today (Without Overreaching)

Stablecoins are already systemically “large” in market footprint

Market cap levels in the high hundreds of billions, approaching ~300B+, are documented by multiple institutional sources.

But most volume is still crypto-market infrastructure

The ECB is explicit: crypto trading is the most important use case, and stablecoins are the preferred units of account on crypto trading platforms; it estimates ~80% of centralized exchange trades involve stablecoins.

Retail payment use remains small in aggregate volumes, but EM signals exist

The ECB notes claims of EM store-of-value use (high inflation contexts) while emphasizing that retail use is a tiny share of total volume, and it cites research indicating limited systematic evidence of remittances at scale so far.

However, country-level and regional indicators show stablecoins can become meaningful at the margin:

• Chainalysis reports, for Nigeria, that in Q1 2024 stablecoin value approached almost $3B in transfers under $1M, making stablecoins the largest portion of sub-$1M transactions in Nigeria, tied to inflation and currency depreciation dynamics.

Payment frictions (like remittance cost) remain high globally

World Bank Remittance Prices Worldwide reports a global average cost of 6.49% for sending $200 in Q1 2025, and shows meaningful cost dispersion across corridors and regions.

This matters because payment frictions are part of why stablecoin rails are attractive, even when the macro risks are non-trivial.

Measurement: A Practical Framework For Policymakers

Below is a field-ready mapping of channels, mechanisms, and observable indicators (all measurable in principle with central bank + supervisory + market data).

USDC-Specific Considerations (Evidence-Based)

USDC’s macro relevance comes less from being the single largest stablecoin (it is not) and more from:

1. Scale: tens of billions in circulation, documented by Circle and aligned with central bank-referenced market structure estimates.
2. Integration: USDC is widely embedded across exchanges, wallets, and payment/settlement pathways (documented indirectly by stablecoin dominance in crypto trading).
3. Institutional framing: USDC’s disclosure posture and reserve attestations can make it the “default regulated USD stablecoin” in some corridors and institutions, which may matter if regulated entities are restricted in which stablecoins they can use.

So “USDC dominance” is best interpreted as dominance within regulated/institution-facing segments, not dominance of total market share.

Policy Toolkit: Central Bank And Regulator Response Options

The BIS CPMI stresses that stablecoin arrangements in cross-border payments raise design and regulatory challenges, and emphasizes the principle of “same business, same risks” in regulatory outcomes; it also highlights risks of fragmentation/fragility and financial stability concerns.

Within that frame, credible policy responses tend to cluster into five buckets:

1) Strengthen On/Off-Ramp Supervision (Where Perimeter Exists)

• Licensing and supervision of VASPs, payment firms, and custodians.
• Clear requirements on segregation, disclosures, and risk management.

This does not solve self-custody, but it improves control over the dominant fiat access points.

2) Reduce Domestic Payment Frictions

If domestic rails are expensive, slow, or unreliable, “digital dollars” look superior. Improving local fast payment systems can reduce the adoption pressure that comes from pure payment utility considerations.

3) Provide Credible Domestic Stores Of Value

The IMF notes that stablecoin adoption that facilitates currency substitution tends to arise from the pursuit of monetary stability.
Policy credibility (inflation control), fiscal discipline, and resilient banking systems are not “crypto talking points”, they are the fundamentals that reduce substitution incentives.

4) Develop Regulated Domestic Tokenized Money Options (Where Appropriate)

This can include:

• Well-designed CBDC pilots or wholesale tokenized settlement tools.
• Regulated local-currency stablecoins under domestic law, with high reserve quality and strong redemption rules.

The goal is not to ban stablecoins by decree; it is to keep monetary sovereignty compatible with modern payment UX.

5) Improve Data And Cross-Border Coordination

The IMF highlights information gaps (eg, limited holder nationality info) and the need for more coordinated information exchange.

For EMs, this usually means:

• Better reporting on stablecoin-related flows at regulated entities.
• Cross-border supervisory cooperation where issuers, exchanges, and large wallets span jurisdictions.

Conclusion

USD stablecoins do not need to become the dominant payment medium to matter for monetary policy.

In emerging markets, even partial “digital dollarization” can weaken the deposit and FX channels that central banks rely on to transmit policy.

The IMF’s warning is explicit: stablecoin-driven currency substitution can impair monetary sovereignty and weaken transmission if activity shifts into foreign-currency stablecoins.

Read Next:

• The Neobank Transition Report
• USDT November 2025 Market Report
• Where Stablecoins Are Being Spent (2025 New Report)

FAQs:

1. Do Stablecoins Directly “Take Away” A Central Bank’s Policy Rate Tool?

They can reduce its effectiveness if a meaningful share of money-like activity moves into foreign-currency stablecoins, weakening control over domestic liquidity and interest rate transmission.

2. Is This Mainly About USDC Or About USD Stablecoins Generally?

It is mainly about USD stablecoins generally; central bank analysis shows USDT and USDC dominate supply, with USDT larger by market cap.

3. Are Stablecoins Already Used For Everyday Payments At Large Scale?

Not broadly in aggregate data; the ECB notes retail usage is a tiny share of total stablecoin volume and most use is tied to crypto trading.

4. Why Are Emerging Markets More Vulnerable?

Because currency substitution pressures are higher in contexts of inflation, institutional fragility, or limited access to stable domestic financial services, conditions the IMF explicitly links to substitution dynamics.

5. What Is The Most Actionable Early Warning Signal For Policymakers?

Rapid stablecoin substitution for deposits and payment balances, especially during FX stress, because it directly affects bank funding conditions and the policy transmission chain.