Central Banks Sound Alarm on Dollar-Based Stablecoins Threatening Monetary Sovereignty

Central banks are sounding the alarm over dollar-based stablecoins, which they see as a threat to their monetary sovereignty. This is not about inflation, but rather digital dollarization, where people opt out of domestic currencies and into USDT or USDC.

The mechanism is simple: when people in high-inflation economies convert their local currency into dollar stablecoins, they're essentially opting out of the domestic monetary system. Central banks set interest rates to influence borrowing and spending behavior, but if a significant portion of the population holds dollar stablecoins instead, rate changes have less bite.

Studies by the Bank for International Settlements have found that stablecoin adoption is strongest in high-inflation economies, creating a vicious cycle where people flee to dollar stablecoins because their local currency is losing value. This flight puts further downward pressure on the local currency, making more people want to flee.