Cryptocurrencies in emerging markets: A stablecoin solution?

David Murakami and Ganesh Viswanath-Natraj

Journal of International Money and Finance, 2025, vol. 156, issue C

Abstract: We rationalize cryptocurrency adoption in a small open economy model. We show that digital dollarization, where stablecoins pegged to the USD are used for transactions, can improve social welfare. In contrast, the adoption of volatile cryptocurrencies, such as El Salvador’s 2021 decision to make Bitcoin legal tender, results in welfare losses. This outcome aligns with the observed low take-up of Bitcoin as legal tender. The welfare benefits of digital dollarization increase with the magnitude of macroeconomic shocks, providing motivation for the growing use of stablecoins in emerging markets as a safeguard against high inflation and macroeconomic instability.

Keywords: Stablecoins; Digital dollarization; Bitcoin; Cryptocurrency; Monetary policy (search for similar items in EconPapers)
JEL-codes: F31 G14 G15 G18 G23 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jimfin:v:156:y:2025:i:c:s0261560625000798

DOI: 10.1016/j.jimonfin.2025.103344

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