Stablecoin adoption greater risk for developing nations

The adoption of global stablecoins (GSC) presents heightened risks and regulatory challenges in emerging markets and developing economies (EMDEs), according to a new report from the Financial Stability Board. 

On July 23, the FSB released a report highlighting the financial instability and macro-financial risks associated with the increasing use of foreign currency-pegged stablecoins in these regions.

Stablecoin adoption risk

The adoption of GSCs, particularly those pegged to foreign currencies, is surging in EMDEs due to factors such as limited access to traditional banking, high remittance flows, and local currency volatility. 

However, this trend is raising alarms 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 instability of these digital currencies poses significant risks for EMDEs, where regulatory and supervisory capacities are often limited.

According to the report there are several key concerns related to the adoption of GSCs in developing nations.

These include threats to financial integrity, increased potential for illicit finance, data privacy issues and cybersecurity vulnerabilities, along with the 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 reportedly face particular challenges that amplify the difficulties of implementing effective regulatory measures.

Emerging nations’ needs

The case for stablecoins as an alternative to local fiat currencies in EMDEs, however, is strong and often due to the limited banking access, the need for efficient remittance services and the desire to hedge against local currency instability.

In order to mitigate the challenges that stablecoins can present to these areas of the world, the report recommends policymakers and regulators establish robust regulatory frameworks that enhance cross-border regulatory cooperation, while also building local capacity to manage and supervise GSC activities to protect financial stability.

Current status of stablecoins

The most prominent stablecoins currently  — Tether (USDT), USD Coin (USDC), Binance USD (BUSD), Dai (DAI), and TrueUSD (TUSD) — are mostly pegged to the US dollar. 

In early July, Paxos, the 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, revealed plans to issue a 1:1 stablecoin linked to the Hong Kong dollar (HKD).

The European Union enacted its first set of laws on June 30.

Due to these laws, the industry saw many crypto exchanges delist certain non-compliant stablecoins or restrict services for EU and European Economic Area (EEA)-based users.

Crypto exchanges including Uphold, Binance, Kraken and OKX have also started to delist stablecoins such as USDT. Bitstamp plans to delist Euro Tether (EURT). Experts started to speculate that there may be a shift toward a euro-backed stablecoins when and if demand picks up in EU markets.