Why it matters
Monetary sovereignty is a claim about instruments, not symbolism. A central bank that sets a policy rate influences the economy only to the extent that domestic credit, prices and contracts are denominated in its unit and settled in its liabilities. When a meaningful share of transactions is denominated and settled in a foreign unit, the transmission channel narrows: rate changes affect a smaller part of the economy's balance sheet, lender-of-last-resort capacity does not extend to the foreign unit, and seigniorage accrues to a foreign issuer.
Dollar-referenced stablecoins have moved this from a textbook concern to a policy question, because they distribute foreign-currency balances through smartphones rather than bank branches, and so reach households and small firms that a foreign bank account never would.
How it works
Sovereignty rests on three linked functions. The state defines the unit of account. It supplies the settlement asset, central bank reserves and cash, in which final payment occurs. And it regulates the institutions that create money-like claims in that unit, so those claims remain redeemable at par.
Chapter III of the BIS Annual Economic Report 2026 organises the same idea around the properties money must have: singleness, meaning claims denominated in the unit are redeemable at par with central bank money with finality; a common unit of account in which prices, contracts and balance sheets are expressed; and elasticity of liquidity, the central bank's ability to supply settlement balances so payments do not gridlock.
Foreign stablecoins do not break these functions directly; they erode them at the margin. Each transaction denominated in a foreign stablecoin sits outside the domestic unit, and each balance held in one is a claim on a foreign issuer's reserve portfolio rather than on the domestic banking system.
Economic mechanism
Three channels do the work. First, the unit-of-account channel: if prices, wages and contracts are quoted in a foreign unit, domestic monetary policy loses its grip on the price level. The BIS report notes that widespread adoption could erode the domestic currency's unit-of-account role, and that where domestic and foreign business cycles are misaligned, foreign monetary conditions would exert more influence on the domestic economy.
Second, the balance-sheet channel: deposits shifting from domestic banks into foreign stablecoins reduce the deposit base that funds domestic credit. The IMF's 2025 paper Understanding Stablecoins identifies reduced domestic currency demand, diminished control over liquidity conditions, weaker interest rate transmission and loss of seigniorage as the main consequences, alongside capital flow volatility that can circumvent capital flow management.
Third, the settlement-infrastructure channel, which is about dependence rather than denomination. In a speech on 12 February 2026, ECB Executive Board member Piero Cipollone argued that if European finance came to rely on dollar stablecoins, Europe would depend on settlement infrastructure controlled elsewhere. He cited that dollar-denominated stablecoins account for 99% of the global stablecoin market and are dominated by two non-European issuers, and that international card schemes account for two-thirds of euro area card transactions.
The scale is still small relative to banking systems: the BIS report puts stablecoin market capitalisation at around $320bn as of end-May 2026, with non-dollar issuance a minute fraction of dollar-pegged supply.
Participants
Central banks defend the unit and supply the anchor. Finance ministries and legislatures set the legal tender and payments framework. Foreign stablecoin issuers, overwhelmingly two US-linked firms, supply the competing unit. Domestic banks stand to lose deposits and fee income. The BIS proposes bringing tokenization inside the two-tier system, with central banks providing the anchor and commercial banks the services, as in Project Agorá's prototype involving eight central banks and more than 40 regulated institutions.
Examples
The euro area case is one of infrastructure dependence rather than denomination: the euro is not at risk as a unit of account, but the rails on which euro payments settle are substantially foreign-owned, which is the argument underpinning the digital euro project.
Emerging market cases are the reverse. The IMF reports stablecoin holdings relative to total deposits rising from near zero in 2020 to about 1.5% in Africa and the Middle East by 2024, and 2.7% in Latin America and the Caribbean, against foreign exchange deposits of roughly 20% and 25% in those regions. Foreign-currency substitution is already large; stablecoins are a new channel into an existing pattern.
Risks and limitations
The framing has genuine limits. Monetary sovereignty is not lost to technology; it is lost to inflation, fiscal dominance and capital controls that make holding the domestic currency unattractive. The BIS report itself concedes that competitive pressure from foreign stablecoins could incentivise sound macroeconomic policies and prompt upgrades to domestic payment options. Treating substitution as an external attack obscures the domestic policy failures that create demand for it.
There is also a measurement problem. Stablecoin balances are not reliably attributable to a jurisdiction, gross volumes overstate economic activity, and holdings-to-deposits ratios depend on assumptions about wallet geography. Policy built on these numbers should carry wide error bars.
The defensive instruments also carry costs. Restricting foreign stablecoin access reduces the payment options available to households and firms, and issuing a domestic digital currency does not by itself create demand for the domestic unit if the incentive to hold foreign currency persists.
Key metrics
Track the share of domestic transactions and deposits denominated in foreign units; stablecoin holdings as a share of bank deposits (1.5% in Africa and the Middle East, 2.7% in Latin America and the Caribbean, 2024, per the IMF); dollar stablecoin share of total supply (99%, per the ECB, February 2026); total stablecoin market capitalisation (around $320bn at end-May 2026, per the BIS); and the share of domestic retail payments cleared through domestically owned infrastructure.
Related research
Chapter III of the BIS Annual Economic Report 2026 and the release of 23 June 2026 are the primary institutional statement. The IMF's Understanding Stablecoins (2025) supplies the transmission analysis and deposit-share data. Cipollone's speech of 12 February 2026 is the clearest articulation of the infrastructure-dependence argument.