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Cryptocurrencies in emerging markets: A stablecoin solution?

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  • Murakami, David
  • Viswanath-Natraj, Ganesh

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.

Suggested Citation

  • Murakami, David & Viswanath-Natraj, Ganesh, 2025. "Cryptocurrencies in emerging markets: A stablecoin solution?," Journal of International Money and Finance, Elsevier, vol. 156(C).
    • Handle: RePEc:eee:jimfin:v:156:y:2025:i:c:s0261560625000798
    DOI: 10.1016/j.jimonfin.2025.103344
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    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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