Stable-ization

What the death of Ecuador’s sucre can tell us about the future of stablecoins

Tool station, Guayaquil, Ecuador (edited, original: World Bank Archives)

Back in November, Fed Governor Stephen Miran made a speech at the Harvard Club of New York on what he called a “global stablecoin glut.” While most of the speech was about downward pressure on rates and the zero lower bound, he made a passing comment about “incremental dollarization [from stablecoins] may reduce the benefits of floating exchange rates.”

Quick refresher:

When an economy weakens, textbook macro theory holds that three things typically happen in sequence:

• Currency depreciation — That country’s currency loses value relative to other currencies, making its exports cheaper for foreign buyers.

• Rising export demand — Because those goods are now cheaper, importers in other countries buy more of them.

• Economic cushion — Higher exports mean more sales for domestic companies, which protects jobs and provides a boost that softens the downturn.

This is what we mean when we say that the depreciation provides some shock-absorbing effect and helps cushion an economic decline. When a country dollarizes or pegs its currency to another currency, there can be no depreciation and therefore no shock-absorbing effect.

I found this comment a bit casual given that Miran seems to be ignoring the other risks that come with semi-dollarization. This got me thinking about how Ecuador’s experience with a dual-currency system in the 1990s can help us think through the implications of semi-dollarization that might follow broad adoption of dollar-pegged stablecoins.

Ecuador’s cautionary tale

Ecuador’s experiment with semi-dollarization is a caveat emptor for countries looking to “stable-ize” (get it? like dollarize, but with stablecoins?) with USDT, USDC, etc.

While Ecuador battled hyperinflation, FX volatility, and banking failures in the 1980s and ‘90s, Ecuadorian citizens increasingly used U.S. dollars for two reasons:

• Stable unit of account: The social contract around the sucre, Ecuador’s currency, was broken: volatility and chronic depreciation of the sucre eroded domestic purchasing power, so consumers and firms sought a stable unit of account for storing wealth and making transactions. USD was the obvious complement to the sucre for savings and pricing.

• Growing access to dollars: Globalization (trade) brought more USD revenue into Ecuador, which also fueled a natural dollarization process.

Over the ‘90s, Ecuador’s economy became semi-dollarized — slowly at first, but pervasively towards the end of the decade. Dollar-denominated loans were 1.9% in 1989 and over 60% by 1998. The country more or less endured until 1998, when El Niño wrecked infrastructure, oil prices collapsed (not great when oil is 40% of national revenue), and contagion from the Asian Financial Crisis and the Russian and Brazilian defaults battered the economy.

The lingering effects of an economic crisis in the mid-’90s and institutional weakness created a tinderbox. The exchange-rate depreciation and shocks of 1998 were the match. Semi-dollarization was the gasoline. Chaos ensued:

• Borrowers got squeezed. Even though most Ecuadorians earned their wages in sucres, they borrowed in dollars because USD was accessible and more stable than the sucre. However, when the exchange rate depreciated, the sucre cost of paying back the dollar loans shot up. When borrowers couldn’t pay back their dollar loans, non-performing loans piled up on bank balance sheets and reduced bank cash inflows. Worried depositors began withdrawing their deposits, which only intensified systemic liquidity issues.

• The money supply ballooned: Semi-dollarization meant that the money supply in Ecuador had both a dollar and sucre component. When the sucre depreciated sharply, the dollar supply became worth much more in sucres — automatically expanding monetary supply in sucre terms, even though the Central Bank of Ecuador hadn’t lifted a finger. This only made inflation worse.

• The Central Bank lost monetary autonomy: The semi-dollarization of the economy rendered the Central Bank of Ecuador’s crisis-fighting tools ineffective. The country needed dollars, but the central bank could only print sucres. And raising rates enough to defend the currency would have only hurt the economy and pushed even more deposits into dollars, in expectation of more inflation.

Ecuador had little choice but to abandon the sucre in 2000 and fully dollarize. Semi-dollarization had made a mess: the population suffered all the pain of a collapsing local currency, and the government lacked the tools to control the collapse.

Semi-stable-ization vs. semi-dollarization

Ecuador’s experience is a warning for what happens when a monetary system becomes partially anchored to an external store of value while still relying on a domestic currency and local financial institutions to intermediate credit, liquidity, and payments.

Semi-dollarization didn’t cause the meltdown, but it certainly contributed. In a country that semi-stable-izes, the experience will likely be worse for several reasons:

There is no lender of last resort for privately issued currencies. Tether and Circle aren’t designed to provide emergency lending — they have no mandate to supply unlimited liquidity. Yes, Tether has minted billions since the crypto crash in October 2025, suggesting they can print quickly. But the lack of established emergency facilities, the cost of massive safe-asset purchases, and pure discretion could all limit a stablecoin issuer’s willingness or ability to backstop a crisis. And if the issuer can’t or won’t help, which multilateral institutions would be willing or able to provide stablecoin liquidity? In 1999, Ecuador got an IMF package to provide dollar liquidity. What institution backstops a stablecoin shortage?

Central banks may have no way to intervene. In a stable-ization event, will central banks even have stablecoin reserves to sell in defense of their local currencies? I would imagine that legislation or central bank regulation would have to be amended to allow reserves denominated in privately issued money. In practice, this probably means that commercial and retail sectors will adopt stablecoins faster than a central bank can adjust its reserve accumulation rules — leaving central banks without the stablecoins they’d need to intervene.

Nonbank financial institutions (NBFI) lack a strong crisis-support system. A couple of issues here. Consider a scenario where 40–60% of a country’s deposits shift to stablecoins held in non-bank wallets. In most countries, those deposits are not eligible for deposit insurance, which would lead to enormous loss of wealth in a crisis, similar to the Celsius blow up but at a much larger scale. Also, NBFIs don’t have access to central bank emergency lending facilities like the discount window, TARP, or SRF. If fintechs or their customers face currency mismatches on their balance sheets, there’s no backstop to prevent runs or keep intermediaries solvent. And fintechs intermediating stablecoins aren’t subject to the same capital requirements as banks, which could be a problem in a crisis.

Full stable-ization is not an option: Ecuador ended its crisis by fully adopting the dollar and abandoning the sucre. This is likely impossible with a stablecoin. The dollar is a sovereign currency issued by the Federal Reserve, which has an implicit mandate to maintain stability and can supply unlimited liquidity if needed. Stablecoins like USDT or USDC are privately issued with supply tied to reserves — there is no central bank to create infinite units in a crisis. Stablecoin issuers also have no obligation or capacity to rescue a foreign adopter’s financial system. Declaring a private stablecoin as sole legal tender would lack credibility without a backstop, likely leading to failed adoption (see: Bitcoin experiments) or rapid reversion amid runs.

So, what now?

History doesn’t repeat, but it rhymes. We know that semi-dollarization can cause real problems in a crisis and we have good reason to believe semi-stable-ization would be even worse. We need to think ahead. There is a probable future in which an emerging market semi-stable-izes. Instead of scrambling to install a safety net in the middle of a crisis, the U.S. government should bring the major players together — stablecoin issuers, G7 central bank heads, multilateral financial institutions, and GSIBs — to at least start talking about what such a safety net might look like.

In the apocryphal words of that fiat fanatic, Benjamin Franklin, “By failing to prepare, you are preparing to fail.”

Sources:

Andrea Bonilla-Bolaños and Diego Villacreses, “Full Dollarization versus Monetary Union: The Case of Ecuador,” CEPAL Review, no. 140 (August 2023).

International Monetary Fund, Monetary Policy in Dollarized Economies, IMF Occasional Paper no. 171 (Washington, DC: IMF, 1999).

Paul Beckerman, “Dollarization and Semi-Dollarization in Ecuador,” World Bank Policy Research Working Paper no. 2643 (Washington, DC: World Bank, July 2001).

Luis I. Jácome H., “The Late 1990s Financial Crisis in Ecuador: Institutional Weaknesses, Fiscal Rigidities, and Financial Dollarization at Work,” IMF Working Paper (Washington, DC: IMF, January 2004).

Bailey Decker, “Ecuador: National Bank Holiday, 1999,” Journal of Financial Crises 7, no. 2 (2025): 108–142.¹

1. Upon submitting material for prepublication review by the government, I was directed to add the following (and extremely obvious) disclaimer: All statements of fact, opinion, or analysis expressed are those of the author and do not reflect the official positions or views of the US Government. Nothing in the contents should be construed as asserting or implying US Government authentication of information or endorsement of the author’s views.