Dollarization
Dollarization is the use of a foreign currency, usually the US dollar, in place of or alongside a country's own for saving, pricing and payment. It can be official policy or something households and firms do on their own.
Also called: dollarisation · currency substitution · de facto dollarization · official dollarization
Official dollarization means a country adopts the dollar as legal tender and gives up its own currency, as Ecuador did in 2000 and El Salvador in 2001; Panama has used the dollar since 1904. The country imports the anchor's monetary policy and loses the ability to print money or act freely as lender of last resort.
De facto dollarization is far more common. Residents who distrust the local currency keep savings in dollars, quote rents and car prices in dollars, and convert wages as soon as they are paid. Banks may offer dollar deposits, or the dollars may sit in cash and offshore accounts outside the banking system altogether.
Dollar stablecoins are the newest channel. In markets where banks cannot supply dollars, USDT or USDC held in a wallet serves the same purpose as cash under the mattress, with the added ability to move. That brings capital-control, licensing and sanctions questions with it.
In practice
Holding or transacting in foreign currency is restricted in many countries. A product that helps residents dollarize may breach local exchange-control law even if it is lawful where the provider sits.
Commonly confused with
| Term | How it differs |
|---|---|
| Currency peg | A peg keeps a separate local currency at a fixed rate to the anchor. Dollarization removes the local currency from use, in law or in practice. |
See also
- Hard CurrencyA hard currency is one that is widely accepted for international payment, freely convertible and expected to hold its value, such as the US dollar, euro, yen, pound sterling or Swiss franc. Suppliers abroad generally insist on being paid in one.
- Capital FlightCapital flight is the rapid movement of money out of a country by residents and investors who fear devaluation, inflation, confiscation, default or political instability. It drains foreign exchange reserves and often triggers the controls it was trying to escape.
- Currency PegA currency peg is a policy under which a central bank fixes its currency's exchange rate to another currency or a basket and stands ready to buy and sell at that rate. The peg lasts only as long as the reserves and credibility behind it.
- StablecoinA stablecoin is a crypto-asset designed to hold a steady value against a reference, almost always a fiat currency such as the US dollar. How that steadiness is supported differs sharply from one issuer to the next, and so does what a holder can actually redeem.
- Capital ControlsCapital controls are government limits on moving money into or out of a country, or on converting its currency at the official rate. Imposed by a central bank or finance ministry, they determine whether a payment corridor is workable at all, and in which direction.