Brazil's Central Bank Warns of Stablecoin Threats to Capital Controls

Brazil’s central bank has expressed concerns over the increasing use of US dollar-backed stablecoins for cross-border money transfers, citing potential threats to capital controls and increased volatility in capital flows. Deputy Governor Renato Gomes highlighted that the rising popularity of stablecoins, digital assets pegged to fiat currencies like the US dollar, poses challenges to traditional currency conversion and international transfer processes.

In Brazil, the adoption of cryptocurrencies has surged in the past two to three years, with stablecoins accounting for nearly 90% of crypto-linked financial flows. These digital assets are favored for their ability to facilitate quick and low-cost transfers between local currencies and dollars, bypassing the delays and fees associated with traditional banking. Stablecoins are frequently used for remittances, and their accessibility is evident with the presence of ATMs in parts of the US that allow users to withdraw cash directly from select stablecoin wallets.

The central bank also noted that stablecoins provide a means to circumvent Brazil’s regulations on foreign exchange and cross-border fund movements. Gomes emphasized that these digital currencies enable individuals to bypass formal routes for exchanging reals for dollars, effectively creating a dollar account without adhering to normal regulations. This circumvention is heavily used for remittances, making capital flight more challenging to track and increasingly erratic.

The challenges extend beyond domestic oversight. Several stablecoin issuers active in Brazil’s currency space are based overseas, creating regulatory blind spots. The main issuer of real-backed stablecoins, for example, is based in Switzerland, outside the regulatory jurisdiction of Brazil’s central bank. This lack of direct control over foreign-based issuers necessitates strong international cooperation to address the threats posed by stablecoins. Gomes stressed that national regulators alone cannot adequately minimize the risks associated with these decentralized and cross-border assets.

Brazil’s experience reflects a broader global trend where central banks and regulators are grappling with the rapid expansion of digital money. While stablecoins offer benefits such as increased financial access and lower remittance costs, they also introduce new vulnerabilities. Unchecked use of stablecoins could undermine the effectiveness of national capital restrictions, complicate monetary policy implementation, and expose economies to unexpected shifts in cross-border fund flows. As Brazil navigates these issues, its central bank is advocating for coordinated solutions with counterparts worldwide. The challenges faced by Brazil may offer an early glimpse into the complex trade-offs central banks must address as they transition to a more digital and decentralized financial system.