A recent report from the Financial Stability Board (FSB) sheds light on the increased risks and regulatory challenges that come with the adoption of global stablecoins (GSCs) in emerging markets and developing economies (EMDEs).
Released on July 23, the report underscores the financial instability and macro-financial risks associated with the growing popularity of stablecoins pegged to foreign currencies in these regions.
The surge in adoption of GSCs, especially those tied to foreign currencies, in EMDEs can be attributed to factors such as limited access to traditional banking, high remittance flows, and volatility in local currencies. However, this trend has raised concerns among financial regulators, who warn that these digital assets have the potential to disrupt financial systems and strain fiscal resources.
The instability of these digital currencies poses significant risks for EMDEs, where regulatory and supervisory capacities are often lacking. The report highlights key concerns related to the adoption of GSCs in developing nations, including threats to financial integrity, increased potential for illicit finance, data privacy issues, and cybersecurity vulnerabilities, as well as the need for stronger consumer and investor protections.
Despite the challenges that stablecoins present, particularly in emerging nations, they are seen as a viable alternative to local fiat currencies. Limited banking access, the demand for efficient remittance services, and the desire to hedge against local currency fluctuations further bolster the case for stablecoins in EMDEs.
To address the challenges posed by stablecoins in these regions, the report recommends that policymakers and regulators establish robust regulatory frameworks that promote cross-border cooperation and enhance local capacity to oversee GSC activities in order to safeguard financial stability.
The report also provides an overview of the current status of stablecoins, pointing out that leading stablecoins like Tether (USDT), USD Coin (USDC), Dai (DAI), and TrueUSD (TUSD) are predominantly pegged to the US dollar. Additionally, regulatory approvals for new stablecoins like Pax Gold (PAXG) and plans for a Hong Kong dollar-linked stablecoin demonstrate ongoing developments in the stablecoin market.
Lastly, recent regulatory actions in the European Union have led to the delisting of certain noncompliant stablecoins by crypto exchanges, indicating a potential shift toward euro-backed stablecoins in EU markets. As the stablecoin landscape continues to evolve, it is crucial for regulators and industry players to work together to address the challenges and opportunities presented by these digital assets.