Central banks in Europe and emerging markets increasingly view dollar-pegged stablecoins as a threat to their control over domestic monetary policy. The European Central Bank, the Bank for International Settlements, and the International Monetary Fund have all warned that the trend undermines rate policy, and officials say central bank digital currencies aren't proving to be an effective counter.
Central banks now see Tether and other dollar-pegged stablecoins as a threat to their sovereignty over domestic currencies, according to growing warnings from the European Central Bank, the Bank for International Settlements, and the International Monetary Fund. The worry is digital dollarization: residents swapping local currency for dollar tokens on a large scale.
The dollarization mechanism
A June 2025 paper described US stablecoins as posing "severe risks" to monetary sovereignty in both the eurozone and across the global south. When people in countries such as Argentina or Nigeria convert local currency into USDT or USDC, they effectively opt out of the domestic monetary system.
That matters because central banks rely on interest-rate changes to influence borrowing, spending, and saving. If a meaningful share of the population holds dollar stablecoins instead of local currency, rate changes have less bite, and the policy transmission mechanism starts to break down. BIS studies have found that stablecoin adoption is strongest in high-inflation economies, which creates a vicious cycle: people flee to dollar stablecoins as their local currency loses value, and that flight puts further pressure on the currency.
Why CBDCs aren't seen as the fix
Jennie Levin, who has been involved in Bank of England consultations on the topic, has emphasized the urgent need for stablecoin regulation given their expanding influence on global finance. Central banking circles broadly concede that official central bank digital currencies are not an effective counter to the rise of private dollar stablecoins.
Washington, meanwhile, has leaned the other way. The GENIUS Act, enacted in July 2025, established a regulatory framework that explicitly prioritizes private payment stablecoins over retail CBDCs, extending the dollar's global reach without requiring the Federal Reserve to build retail digital-currency infrastructure.
Treasury exposure and what comes next
As adoption grows, the reserves backing these tokens concentrate heavily into US Treasuries, with major issuers holding tens of billions in short-term government debt. ECB, Bank of England, and IMF analyses from 2025 and 2026 have flagged that large shifts into foreign-currency stablecoins can weaken bank resilience too: if deposits migrate from domestic banks to stablecoin wallets, those banks have less capital to lend, further limiting a central bank's ability to stimulate or cool its economy.
Central bank consultations in late 2025, including those involving Levin, have focused on regulatory frameworks for stablecoins operating across borders. The challenge is jurisdictional: a stablecoin issued in the US under the GENIUS Act framework can be used by anyone with a phone and an internet connection, regardless of what their local regulator thinks about it.
Source: Crypto Briefing
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