Bolivia

A new International Monetary Fund working paper demonstrates that dollar stablecoins can amplify currency crises in economies with overvalued fixed exchange rates by converting fragmented parallel-market prices into a single, publicly visible signal that coordinates mass withdrawals. For institutional investors holding positions in emerging markets or stablecoin protocols, this research signals that regulatory pressure on dollar-pegged tokens may intensify in vulnerable economies, particularly those defending unsustainable currency pegs.

• IMF modeling shows crisis exposure nearly triples from 3.9% to 12.9% when stablecoins enable both cheaper access and public price discovery in misaligned economies.
• Bolivia’s central bank lifted virtual-asset restrictions in June 2024, leading to a twelvefold surge in crypto transactions and adoption of USDT as the de facto parallel-market reference.
• Stablecoins improve household welfare by 1.2% during stable periods but turn negative beyond a 0.59 misalignment threshold, reaching -6.3% at extreme levels.

• 12x Growth in Bolivian virtual-asset transactions from July 2024 to May 2025.
• 3.9% to 12.9% Crisis exposure range comparing cash-only versus full stablecoin economies.
• 1.2% Peak welfare gain for stablecoins during normal conditions before turning negative.

Researcher Brandon Joel Tan’s IMF working paper isolates a specific mechanism by which stablecoins intensify currency instability: when governments peg their currencies at artificially strong levels, they create shortages of foreign exchange that spill into informal parallel markets.

Normally, these fragmented markets operate at different prices quoted by street dealers, brokers, and banks, preventing any single rate from capturing true scarcity. But when a transparent, blockchain-based stablecoin like Tether (USDT) trades openly on exchanges against the local currency, it becomes an always-visible benchmark that updates in real time.

This kills fragmentation and creates what economists call a coordination device, allowing households to synchronize their exit from a collapsing peg simultaneously rather than gradually.

Bolivia’s Stablecoin Adoption Coincides With Twelvefold Surge in Crypto Activity

Bolivia offers a concrete test case for Tan’s mechanism. In June 2024, the Bolivian central bank lifted longstanding restrictions on virtual-asset transactions, removing regulatory barriers that had previously limited crypto adoption.

Within months, virtual-asset transaction volumes in the financial system multiplied twelvefold between July 2024 and May 2025, a velocity of adoption far steeper than typical fintech rollouts in emerging markets.

The flood of activity reflected both pent-up demand and the practical reality that the Bolivian peso had drifted significantly from market-clearing levels, making dollar-denominated assets increasingly attractive.

As USDT trading volumes accelerated, the dollar-to-boliviano rate on crypto exchanges became the de facto reference for Bolivians seeking to hedge or exit local currency. The parallel market for dollars, once opaque and fragmented, collapsed into a single visible price.

Remarkably, the Bolivian central bank itself began publishing USDT exchange rates on its official website, effectively endorsing the stablecoin as a legitimate price discovery mechanism.

That endorsement also meant the central bank had lost control of the narrative around currency scarcity, the stablecoin network now transmitted information about misalignment faster and more transparently than official channels could.

This shift from fragmentation to transparency had immediate consequences for crisis risk, even if no full-blown run materialized during the observation period.

Tan’s Model Separates Price Discovery from Transaction Costs to Isolate Coordination Risk

To distinguish between stablecoins’ legitimate benefits and their destabilizing amplification, Tan constructed a three-economy simulation. The first baseline model allowed only cash transactions in local and foreign currency, reflecting pre-stablecoin conditions.

The second introduced stablecoins but only as a cost-saving technology, removing the public price visibility that makes them transparent across the network. The third model deployed stablecoins with full price transparency, matching real-world conditions. The results separated the two effects cleanly.

In the baseline cash-only economy, modeled crisis exposure stood at 3.9% during normal times and rose to 4.8% at severe misalignment. When stablecoins added cheaper access but no public signal (the second scenario), crisis exposure barely budged.

But when Tan added the public price mechanism of a real stablecoin, crisis exposure shot to 7.4% during normal periods and 12.9% at extreme misalignment, nearly tripling the baseline risk. Crucially, most of that jump came from the price-transparency effect, not from transaction-cost savings.

This finding directly challenges a common policy assumption: that restricting stablecoins mainly to limit financial dollarization is the wrong lever. The real amplification comes from coordination, not accessibility.

Welfare effects displayed an even sharper state-dependence. During stable conditions, stablecoins improved household welfare by a peak of 1.2%, a modest but measurable gain that reflects the unbanked population’s improved ability to hedge currency risk without bank intermediation. But that benefit evaporated quickly once currency misalignment crossed a threshold of roughly 0.59.

Beyond that threshold, stablecoin access became a liability, worsening welfare by up to 6.3% at extreme misalignment. The crossover revealed a hard tradeoff: the same mechanism that helps ordinary households manage currency risk becomes a megaphone for panic the moment authorities lose macroeconomic control.

Stablecoin Rules Cannot Substitute for Currency Defense, Tan Concludes

Tan’s central policy recommendation cuts against the instinct to ban stablecoins in vulnerable economies. Broad restrictions, he argues, are regressive because they eliminate a low-cost dollar option for unbanked and underbanked populations who have no other way to escape currency decline.

Yet his modeling also shows why central banks and finance ministries have resisted stablecoin adoption: once a peg begins to crack, the stablecoin becomes a accelerant. The implication is subtle but crucial, stablecoin regulation cannot substitute for sound macroeconomic management.

A government defending an unsustainable exchange rate cannot regulate its way out of a crisis; it must adjust the peg or address the underlying fiscal or external imbalance.

The paper’s framing reflects a broader institutional reckoning with stablecoins in emerging markets. Unlike developed economies, where stablecoins operate in deep forex markets and compete against established digital payment systems, stablecoins in developing economies often become the primary price signal for currency scarcity.

They fill a vacuum created by shallow parallel markets and government controls. That role makes them simultaneously more useful and more dangerous. Policy makers face a bind: restrict stablecoins and sacrifice financial inclusion and price efficiency; permit them and risk amplifying crisis dynamics when macroeconomic conditions deteriorate.

Tan does not propose a single regulatory fix, instead signaling that the design of stablecoin rules must account for the specific macroeconomic regime each country operates under.

Institutional Investors Must Monitor Emerging-Market Peg Stability as Stablecoin Adoption Spreads

For institutional crypto investors and stablecoin issuers, the research raises immediate questions about geographic concentration risk. Stablecoins are fastest-growing in emerging markets with the deepest currency misalignments, precisely the jurisdictions where Tan’s coordination mechanism poses the greatest threat.

Large stablecoin positions in vulnerable-peg economies could face sudden regulatory rollback if a currency crisis materializes. Bolivia itself remains stable for now, but the pattern is replicating across Latin America, Africa, and South Asia, where dollar shortages and capital controls create strong demand for unmediated crypto-dollar access.

Issuers like Tether, Circle, and others face a regulatory tightrope. Restricting supply or withdrawing from emerging markets would reinforce Tan’s point about regressivity, harming the unbanked users for whom stablecoins provide critical hedging. But maintaining or expanding supply in misaligned economies means accepting some responsibility for potential crisis amplification. Central banks are beginning to flag this tension