The Shift in Stablecoin Flows
A significant portion of cross-border stablecoin transactions now flows from advanced economies into emerging nations, signaling a notable shift that could potentially undermine the local currencies of these recipient countries. According to new data from the International Monetary Fund (IMF), the increasing adoption of stablecoins comes with unforeseen risks.
Revolutionizing Cross-Border Payments
Stablecoins have significantly transformed cross-border payments by easing transactions and reducing friction, especially in developing economies. The total volume of stablecoin transactions has more than doubled over the past two years to around $312 billion. The passage of the GENIUS Act further accelerated this trend: U.S. stablecoin usage increased from $6 billion in February to $10 billion by August.
Emerging Economies Under Threat
The surge in adoption of stablecoins has had an outsized impact on developing economies. The IMF reports that flows between emerging markets and developing nations now account for the largest share of transactions by value—a marked departure from traditional cross-border transfers through systems like SWIFT, where most activity still occurs between advanced economies.
Warning Signs of Currency Substitution
The use of dollar-backed stablecoins, which make up approximately 97% of all stablecoins in circulation, has surged particularly in countries facing high inflation, such as Lebanon, Nigeria, Turkey, and Argentina. This currency substitution is a rational choice for those operating in environments characterized by economic instability or inflation.
However, the influx of U.S. dollar-denominated digital currencies has inadvertently led to further weakening of local currencies. Historically, dollarization involved the physical presence of cash or bank accounts denominated in dollars. Today, foreign currency can enter an economy almost instantaneously via the internet and smartphones, reducing a country’s central bank’s ability to effectively implement monetary policy.
The Need for Regulation
There is an urgent need for more collaborative global regulation of stablecoin usage. Beyond safeguarding the autonomy of weaker nations over their currencies, international standards are necessary to prevent issuers from exploiting regulatory gaps and arbitrage opportunities.
The European Union has taken steps in this direction with the implementation of the Markets in Crypto Assets (MICA) regulations earlier this year. The EU expresses increasing concern that the growing dominance of dollar-backed stablecoins could deepen regional dependence on foreign currencies and companies.
