The International Monetary Fund (IMF) has issued a warning against the rapid rise of dollar-denominated stablecoins. The agency is arguing that the sector’s accelerating growth threatens monetary sovereignty in weaker economies. 

Stablecoin market now exceeds $300 billion, with more than 97% of tokens pegged to the U.S dollar. This concentration attracts concerns as the Fund says it could disrupt domestic liquidity conditions and weaken the transmission of interest-rate policy.

IMF Flags Rising Currency Substitution Risks

In its new 56-page report, Understanding Stablecoins, the IMF highlights widening regulatory fragmentation across major jurisdictions. This causes a risk of unregulated stablecoin circulation. According to authors at the international agency, mass replacement of national currencies with dollar-pegged stablecoins may undermine the central bank authority in nations with weak currencies or frail institutions.

“Stablecoins may contribute to currency substitution, increase capital flow volatility. These risks could be more pronounced in countries experiencing high inflation, weaker institutions, or diminished confidence in the domestic monetary framework,” the IMF report read. 

With roughly 97% of all stablecoins pegged to the U.S. dollar, this strengthens the influence of issuers such as Tether and Circle. As per data by DefiLlama, USDT’s market cap now sits near $185 billion. Meanwhile, USDC has a market capitalization of $77 billion. The two stablecoins dominate global liquidity and dictate reserve strategies that vary across short-term U.S. treasuries, repos, and other cash-equivalent instruments.

According to IMF, use of these dollar-backed stablecoins can grow very fast in economies shaken by inflation or capital erosion. As a result, foreign stablecoins may replace domestic currencies in payment, savings, and online commerce. Such a change could make interest-rate policies less effective. It could also make the central banks channels ineffective in managing liquidity. Some economies may also lose monetary traction long before they launch sovereign digital alternatives. 

Regulatory Fragmentation Fuels Market Risks

As per the IMF report, the Fund believes that fragmented regulations across the United States, Europe, and Asia create difficulties. This makes it challenging to have clear global oversight over the stablecoin market. The differing regulations such as the GENIUS Act in the U.S, the EU’s MiCA regime, Japan’s stablecoin framework, and several U.S. state-level systems allow issuers to exploit geographic gaps by shifting activity into more permissive jurisdictions, according to the IMF. 

“Many authorities have started implementing international standards for stablecoins, but the landscape remains fragmented. A comparative analysis of legal and regulatory frameworks in Japan, the European Union, the United States (yet to be fully implemented), and the United Kingdom (still in the proposal stage) highlights different approaches in several important areas…This may create regulatory arbitrage opportunities that could affect the overall effectiveness of the regulations,” the Fund wrote. 

The imbalance can be seen across Tether and Circle whose reserve structures, according to the IMF, make it difficult to supervise. Tether holds roughly 75% of its collateral in short-term U.S. Treasuries but also holds 5% in bitcoin, a detail that raises questions for regulators. 

On the other hand, Circle maintains around 40% of its reserves in Treasuries, and the rest in cash and regulated banking instruments. The Fund says these contrasting approaches demonstrate why global standards remain essential.

The IMF warns that liquidity has already split between American and European pools following the implementation of the GENIUS Act. This separation, documented by CertiK, confirms the “balkanization” of stablecoins markets. IMF’s report says this trend will intensify without coordinated legal definitions, uniform redemption rules, and cross-border supervisory colleges.

IMF Calls for Stronger Policies and Global Coordination of the Stablecoins Market

International coordination and stronger policies remains the IMF’s central recommendation. The IMF urges governments to align reserve standards, AML rules, and redemption rights to prevent the build-up of shadow-banking risks. Failure to act exposes the world to fast-moving financial shocks transmitted through dollar stablecoins, especially in vulnerable economies.

According to the IMF, the Stablecoins sector has reached a scale where global monetary and financial stability are at stake. It calls on regulators to close jurisdictional gaps now, warning that the window for coordinated action is narrowing as adoption continues to surge.