Stablecoins: The New Dollarization of Latin America?

Stablecoins: The New Dollarization of Latin America?

The recent scandal involving Argentine President Javier Milei and the $Libra cryptocurrency, which turned out to be a scam, has highlighted the complex relationship between politics and digital assets in the region. Meanwhile, in El Salvador, the stablecoin issuer Tether has decided to move its headquarters to the Central American country after obtaining a license as a digital asset service provider. This trend suggests a possible digital dollarization in Latin America through stablecoins, with significant economic and geopolitical implications.

Tether and Digital Dollarization in El Salvador

Tether, known for issuing the USDT stablecoin, announced in January 2025 its intention to relocate its headquarters and subsidiaries to El Salvador. This decision came after the company obtained a local license to operate as a digital asset service provider and stablecoin issuer. Paolo Ardoino, CEO of Tether, emphasized that this move is a natural progression for the company, allowing it to establish a new home in a favorable regulatory environment. Unlike Bitcoin, whose price is volatile, stablecoins are designed to maintain a 1:1 peg with fiat currencies, in this case, the US dollar. In the case of USDT, its value is backed by a combination of US Treasury bonds, cash reserves, and other financial assets. This has made USDT a key tool in economies with high inflation and foreign exchange restrictions, such as Venezuela, Argentina, and now El Salvador.

Tether's arrival in the country could also provide an alternative to traditional banking intermediation. Salvadoran citizens can use USDT to make payments without having to rely on banks or traditional remittances, which often entail high fees. In fact, more than 60% of cryptocurrency transfers in Latin America are already made in stablecoins, indicating a growing adoption of these assets as a digital substitute for the dollar.

Stablecoins: The Future of Dollarization in Latin America?

Stablecoins like USDT and USDC are transforming the way Latin Americans access dollars. Countries experiencing recurring economic crises, exchange controls, or runaway inflation find in these cryptocurrencies a way to safeguard the value of their money without relying on traditional banking infrastructure.

Argentina is a paradigmatic case: while the government seeks to advance formal dollarization, citizens have already opted for de facto digital dollarization. USDT and USDC are the most traded assets in the country, used for both savings and commerce. A similar phenomenon is occurring in Venezuela, where nearly 40% of digital transactions in the country already involve stablecoins.

This phenomenon raises a crucial question: can an economy be dollarized without an official government decision? In practice, this is already happening. The growing adoption of stablecoins indicates that Latin American economies can become increasingly dependent on the digital dollar without needing to formally adopt the greenback as their official currency.

The United States and the Control of the Digital Dollar

Despite the growth of stablecoins, the United States is unwilling to relinquish control of its currency in the digital world. The Federal Reserve and Congress have stepped up efforts to regulate companies like Tether, requiring stablecoin issuers to comply with audits, transparent reserves, and banking regulations.

Paradoxically, while the US attempts to restrict some cryptocurrencies, stablecoins are strengthening the dollar's dominance in the digital ecosystem. A Treasury Department report revealed that more than 80% of cryptocurrency transactions are conducted in stablecoin pairs pegged to the dollar, reinforcing their influence in the global economy.

However, if the US tightens regulations too much, stablecoin issuers could choose to operate outside their jurisdiction, as Tether is doing by moving to El Salvador. These types of maneuvers highlight an unprecedented regulatory challenge: if the digital dollar grows outside the control of the Federal Reserve, will it remain a strategic asset for the US or will it become an uncontrollable phenomenon?

Will Latin America Adopt the Digital Dollar?

Stablecoins have opened the door to a new form of dollarization in Latin America. Unlike historical dollarization processes, driven by economic crises and government decisions, this transformation is driven by technology and market demand. Countries with unstable economies are already migrating to a parallel financial system based on digital dollars, without waiting for their governments' authorization.

The case of El Salvador and the arrival of Tether set a precedent. If the trend continues, Latin America could digitize its access to the dollar before the central banks themselves make a decision. The question is not if this will happen, but when and under what regulations.

Sources

• Reuters. "El Salvador attracts Tether while relaxing its crypto regulations." Reuters, February 10, 2025.

• Bloomberg. "Stablecoins and Digital Dollarization in Latin America." Bloomberg, February 5, 2025.

• The New York Times. "US Seeks to Regulate Stablecoins as Use Grows Globally." The New York Times, February 15, 2025.

• Financial Times. "Tether and Its Expansion in Emerging Markets: A Risk or an Opportunity?" Financial Times, February 8, 2025.