The Bank for International Settlements has issued a stark warning: U.S. dollar-pegged stablecoins are punching holes in the capital controls that countries have relied on for decades. In a working paper published this month, three BIS economists argue that the rise of these digital tokens is accelerating dollarization in ways that traditional regulatory tools can no longer stop.
What the BIS paper says
The paper, released in July 2026, was written by Boris Hofmann, Aaron Mehrotra, and Jan Paulick. They compare the current stablecoin trend to patterns central banks have observed for years — but with a critical difference. The old playbook for managing capital flows, the authors state, simply doesn't apply to stablecoins. These tokens move across borders without going through the banking system, making it nearly impossible for regulators to track or restrict them.
Why stablecoins are different
Traditional capital controls work by monitoring and limiting transactions through banks and other financial intermediaries. Stablecoins bypass that entirely. A user in a country with strict currency controls can buy a dollar-pegged token on a foreign exchange, hold it in a private wallet, and spend it anywhere that accepts crypto. The BIS paper notes that this is not a hypothetical risk — it's already happening as dollarization picks up speed in several emerging economies.
The economists don't name specific countries in the paper, but the warning is clear. The more people turn to stablecoins as a store of value or medium of exchange, the less effective a government's capital controls become. That undermines monetary policy and can fuel financial instability.
Decades of patterns, now broken
Hofmann, Mehrotra, and Paulick draw on decades of central bank experience with dollarization — the process where a foreign currency, usually the U.S. dollar, replaces the local currency in everyday use. In the past, authorities could slow that process by restricting bank deposits in dollars or limiting foreign exchange access. Stablecoins make those restrictions irrelevant. A person doesn't need a bank account to hold or transfer stablecoins.
The BIS paper doesn't offer a new regulatory fix. It simply states that the tools that used to work no longer apply. That leaves central banks and finance ministries in a bind. They can try to ban stablecoins outright, but enforcement is tough when the technology is decentralized and global. They could launch their own digital currencies, but that takes time and doesn't address the appeal of a dollar-backed token.
The warning comes as stablecoin market capitalization has grown sharply in 2026, driven largely by Tether and USD Coin. The BIS does not provide specific figures in this paper, but the trend is well documented in other industry reports.
For now, the paper serves as a red flag. Regulators who thought they had capital flows under control may need to rethink their entire approach. The BIS has not scheduled a follow-up or policy proposal, but the message is already circulating among central bankers worldwide.
