Stablecoins denominated in local currencies rather than the U.S. dollar could open the door to capital outflows and undermine existing foreign exchange regulations, a senior Bank for International Settlements official warned.

Speaking on Thursday at the World Congress of the Econometric Society (ESWC) in Seoul, BIS economic adviser and head of the Monetary and Economic Department Shin Hyun-song said demand for dollar-based stablecoins would remain strong even if countries launched their own currency-backed versions.

U.S. dollar stablecoins dominate the market, accounting for about 99 percent of global stablecoin capitalization. Shin attributed this to the dollar’s central role in the global economy and strong network effects. He cautioned that local currency stablecoins could facilitate capital flight by enabling direct swaps with dollar-denominated digital assets on blockchain networks.

His remarks contrast sharply with calls in South Korea’s political circles to issue a won-based stablecoin as a way to protect monetary sovereignty, as efforts to pass dedicated legislation continue.

Shin also highlighted the risk of misuse in unregulated stablecoin markets. He noted that cross-border transactions using stablecoins are estimated at a minimum of $1.6 trillion annually and are rising rapidly. Their ability to move freely across borders, he warned, makes them a tool for evading financial crime detection and capital controls.

According to blockchain analytics firm Chainalysis, stablecoins have surpassed bitcoin in criminal use since 2022 and now constitute around 63 percent of illicit activity involving digital assets.

Shin stressed that in countries with volatile exchange rates and susceptibility to capital flight, stablecoins pose a serious threat to monetary sovereignty and financial stability. Even jurisdictions with foreign exchange laws struggle to curb illegal stablecoin transactions, he said.

He called for tailored regulation, suggesting that blockchain’s traceability could be used to measure the legitimacy of stablecoin transactions. By tracking the history of wallets a coin passes through, regulators could assign a “legitimacy score,” he said. Stablecoins linked to illicit wallets would trade at a discount, creating market pressure and a “duty of care” among users to avoid unlawful dealings.

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