Stablecoins weaken currency crisis defences, New York Fed finds

Dollar stablecoins flow into wallets linked to countries in financial distress more often than into other wallets, a New York Federal Reserve staff paper found, adding evidence that the assets are eroding traditional capital controls.

Wallets tied to countries experiencing a currency or banking crisis were 1.8% more likely to receive dollar stablecoins during the week a crisis began, researchers Pablo Azar, Maryam Farboodi and Nish Sinha reported in the August paper. Receipt volumes also increased.

The finding gives central banks a new data point on a challenge that has been largely theoretical until now. Governments have relied on banks and regulated intermediaries to enforce foreign-exchange restrictions and cross-border transfer limits. Stablecoins offer households and businesses a route to dollar exposure outside those channels.

The researchers studied nine crisis episodes across eight countries between 2021 and 2025: monetary disruptions, banking restrictions, sanctions and devaluations affecting Argentina, Egypt, Iran, Myanmar, Nigeria, Russia, Turkey and the United Kingdom. They linked Ethereum Name Service registrations carrying country signals, languages, scripts, national identifiers, with transfer histories for 19 major dollar-pegged stablecoins.

During crisis weeks, tagged wallets recorded both a higher probability of receiving stablecoins and larger receipt volumes. A separate specification found no significant increase in the two weeks before the shocks. The probability of receiving stablecoins rose 1.9% during the crisis week. Sending activity increased later, with wallets becoming 1.3% more likely to send stablecoins two weeks after the crisis began.

The sequence supports the researchers' argument that demand for blockchain-based dollars rises when confidence in domestic financial arrangements comes under pressure.

The estimates require qualification, the paper notes. The dataset covers roughly 4.5 million wallet-event-week observations, and the sample focuses on wallet-country pairs that received stablecoins at some point within a 53-week window around each crisis. The result captures a change in behavior among wallets already connected to stablecoin activity rather than showing that stablecoin adoption rose 1.8% across an entire national population.

Monetary-policy constraint

The behavior feeds into a longstanding constraint on monetary policy. Under the Mundell-Fleming framework, countries cannot simultaneously maintain a fixed exchange rate, unrestricted capital mobility and independent control over domestic interest rates. Governments seeking to protect a currency while retaining monetary autonomy can restrict capital movement through banks and other financial institutions.

The New York Fed researchers model stablecoins as weakening that enforcement channel. A household facing restrictions on buying or transferring dollars through its bank may instead receive dollar-denominated tokens into a blockchain wallet. As access to those rails expands, the government must devote more resources to enforcement or allow more pressure to emerge through currency depreciation or domestic interest rates.

The paper does not establish that stablecoins caused particular currencies to weaken during the nine episodes. The observed wallet activity supports the model's central assumption that financial stress encourages stablecoin adoption. Its broader monetary-policy consequences remain theoretical.

Governments retain significant points of control. Major dollar tokens such as USDT and USDC are issued by centralized companies that can freeze addresses. Regulated exchanges can be required to restrict transactions or identify customers. Those powers shift enforcement away from a country's banking system toward a wider network of issuers, exchanges and blockchain addresses.

Transfers between self-custodied wallets can leave governments with fewer immediate domestic chokepoints even when issuers retain the ability to intervene at other stages.

The scaling problem

The policy challenge becomes more consequential as stablecoins expand from a niche crypto product into a global dollar-payment network. The market has already grown beyond $300 billion and is expected to reach trillions of dollars before the end of the decade. Blockchain analysis firm Chainalysis projects adjusted stablecoin transaction volume could reach $719 trillion by 2035 through organic growth alone and approach $1.5 quadrillion if broader macro and adoption trends accelerate usage.

That growth would increase the number of routes available to households seeking dollar exposure during periods of domestic financial stress, but it would not put stablecoins entirely beyond government reach. The largest dollar tokens remain centralized. Issuers such as Circle and Tether can freeze identifiable addresses. Governments can impose requirements on regulated exchanges and other intermediaries even when a transfer initially bypasses the domestic banking system.

Federal Reserve Vice Chair for Supervision Michael Barr warned in June that US stablecoin legislation left an illicit-finance vulnerability around secondary-market transfers involving unhosted wallets. The Bank for International Settlements has identified a similar problem for monetary policy, arguing that stablecoin dollarization can threaten monetary sovereignty while restrictions may prove less effective when bearer-like tokens circulate through self-custodied wallets.

The New York Fed paper suggests that the choice of financial infrastructure is becoming part of the macroeconomic constraint itself. As stablecoin networks grow, effective capital mobility increasingly depends on both the controls governments impose and the blockchain rails households can still access.