Latin America's Stablecoin Surge Sparks Fears of Currency Substitution

Stablecoins are gaining traction in Latin America, particularly in Argentina where they account for 61.8% of crypto transaction volume, according to Chainalysis data.

This phenomenon is a result of households seeking to protect their savings from high inflation and currency depreciation by moving into dollar-backed stablecoins, which offer a digital wallet with access to a dollar-denominated asset without the need for physical banknotes or an offshore account.

The use of stablecoins can accelerate dollarisation in Latin America, a process that traditionally involved frictions associated with physical banknotes, foreign-currency accounts, or intermediaries. However, stablecoins reduce these barriers dramatically, raising concerns about monetary sovereignty and the potential for currency substitution.

The Bank for International Settlements estimates that around 98% of stablecoin value is dollar-denominated, warning that digital dollarisation can pose acute risks to emerging market and developing economies.

Tether, the issuer of the world's largest stablecoin, has reported direct and indirect exposure to US Treasury bills worth around $141bn. The company's chairman, Giancarlo Devasini, maintains a limited public profile despite its growing importance in global financial markets.