A new report from the Financial Stability Board (FSB) warns that the adoption of global stablecoins (GSCs) in emerging markets and developing economies (EMDEs) presents significant financial risks and regulatory challenges.
On July 23, the FSB highlighted the financial instability and macro-financial risks associated with the increasing use of foreign currency-pegged stablecoins in these regions.
Risks of Stablecoin Adoption
The report indicates that GSC adoption, particularly those pegged to foreign currencies, is accelerating in EMDEs due to factors such as limited access to traditional banking, high remittance flows, and local currency volatility. However, this trend raises concerns among financial regulators who caution that these digital assets can destabilize financial systems and strain fiscal resources.
“The collapse and de-peg of certain stablecoins since the outbreak of the crypto-asset market turmoil in 2022 highlights the potential fragility of stablecoins that are not adequately designed and regulated,” the FSB noted.
The instability of these digital currencies poses significant risks for EMDEs, where regulatory and supervisory capacities are often limited.
Key Concerns in Developing Nations
According to the report, there are several key concerns related to the adoption of GSCs in developing nations, including:
- Threats to financial integrity
- Increased potential for illicit finance
- Data privacy issues
- Cybersecurity vulnerabilities
- Need for enhanced consumer and investor protections
Additionally, stablecoins can disrupt market integrity, fiscal stability, and overall macroeconomic stability. While these risks are global, EMDEs face particular challenges that amplify the difficulties of implementing effective regulatory measures.
Benefits and Regulatory Recommendations
Despite the risks, stablecoins offer a strong case as an alternative to local fiat currencies in EMDEs, driven by limited banking access, the need for efficient remittance services, and the desire to hedge against local currency instability.
To mitigate these challenges, the report recommends that policymakers and regulators establish robust regulatory frameworks that enhance cross-border regulatory cooperation. Additionally, it suggests building local capacity to manage and supervise GSC activities to protect financial stability.
Current Status of Stablecoins
The most prominent stablecoins — Tether, USD Coin, Dai, and TrueUSD (TUSD) — are mostly pegged to the United States dollar.
In early July, Paxos, an international blockchain and tokenization platform, received full regulatory approval from the Monetary Authority of Singapore (MAS) to issue its new gold-backed stablecoin, Pax Gold (PAXG). On July 24, Jingdong Coinlink Technology Hong Kong Limited, a subsidiary of JD Technology Group, announced plans to issue a 1:1 stablecoin linked to the Hong Kong dollar (HKD).
Regulatory Changes in the European Union
The European Union enacted its first set of laws on stablecoins on June 30. Due to these laws, the industry saw many crypto exchanges delist certain noncompliant stablecoins or restrict services for EU and European Economic Area (EEA)-based users. Crypto exchanges including Uphold, Binance, Kraken, and OKX have started delisting stablecoins like USDT. Bitstamp plans to delist Euro Tether (EURT). Experts speculate there may be a shift toward euro-backed stablecoins if demand picks up in EU markets.
In conclusion, while stablecoins offer significant benefits for EMDEs, their adoption also brings substantial risks. Robust regulatory frameworks and cross-border cooperation are essential to harness the potential of stablecoins while safeguarding financial stability.
