Central bankers fear dollar-based stablecoins threaten monetary sovereignty

The world’s central bankers have a new nemesis, and it’s not inflation. It’s Tether.

Dollar-pegged stablecoins are increasingly viewed by monetary authorities as a direct threat to their sovereignty over domestic currencies, according to growing warnings from institutions including the European Central Bank, the Bank for International Settlements, and the International Monetary Fund. The concern boils down to something economists have worried about for decades, just dressed in new clothes: digital dollarization.

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. The consensus among central banking circles is striking for what it concedes: official central bank digital currencies are not seen as an effective counter to the rise of private dollar stablecoins.

The dollarization problem, now with blockchains

A June 2025 paper described US stablecoins as posing “severe risks” to monetary sovereignty in both the eurozone and across the global south. The mechanism is straightforward: when people in, say, Argentina or Nigeria convert their local currency holdings into USDT or USDC, they’re effectively opting out of the domestic monetary system.

That matters because central banks set interest rates to influence borrowing, spending, and saving behavior. If a meaningful chunk of the population holds dollar stablecoins instead of the local currency, rate changes have less bite. The policy transmission mechanism, the chain of cause and effect that connects a central bank’s decisions to the real economy, 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 because their local currency is losing value. That flight itself puts further downward pressure on the local currency, which makes more people want to flee.

Why CBDCs aren’t the answer

The US has effectively acknowledged this dynamic from the other side of the equation. The GENIUS Act, enacted in July 2025, established a regulatory framework that explicitly prioritizes private payment stablecoins over retail CBDCs. Washington has essentially decided that dollar stablecoins serve American interests by extending the dollar’s global reach without requiring the Federal Reserve to build and maintain a retail digital currency infrastructure.

The Treasury connection

As stablecoin adoption grows, the reserves backing these tokens concentrate heavily into US Treasuries. Major stablecoin issuers hold tens of billions in short-term US government debt.

ECB, BoE, and IMF analyses from 2025 and 2026 have all flagged that large shifts into foreign-currency stablecoins can weaken not just monetary policy transmission but also bank resilience. If deposits migrate from domestic banks to stablecoin wallets, those banks have less capital to lend, which further diminishes the central bank’s ability to stimulate or cool the economy through traditional channels.

What comes next

Central bank consultations in late 2025, including those involving Levin, have focused on what regulatory frameworks might look like 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 internet connection, regardless of what their local regulator thinks about it.