The lion’s share of cross-border stablecoin transactions now flow from advanced economies into emerging nations—a shift that may be undermining those nations’ local currencies. New data from the IMF warns that the growing embrace of stablecoins comes with under-acknowledged risks.
According to the IMF, stablecoins have revolutionized cross-border payments by reducing friction and making transactions more seamless, particularly in poorer countries. Total stablecoin total volume has more than doubled over the past two years to roughly $312 billion. The passage of the GENIUS Act accelerated this trend: U.S. stablecoin usage rose from $6 billion in February to $10 billion in August.
But the surge in adoption is having an outsized effect on developing economies. The IMF found that stablecoin flows between emerging market and developing economies now account for the largest share of the market by value—a stark departure from traditional cross-border transfers routed through systems such as SWIFT, where most activity occurs between advanced economies.
Warning Signs
The use of dollar-backed stablecoins—which constitute roughly 97% of all stablecoins in circulation—has surged especially in countries facing high inflation, such as Lebanon, Nigeria, Turkey, and Argentina. This currency substitution, in which businesses and individuals forego their national currency in favor of a foreign one, is a rational response for those operating in an environment of inflation or broader economic instability.
However, the influx of U.S. dollar-denominated digital currencies has had the unintended result of further weakening local currencies. In the past, so-called dollarization required physical cash or bank accounts denominated in U.S. Today, foreign currency can enter an economy instantly via the internet and smartphones. This shift also reduces a country’s central bank ability to conduct effective monetary policy, per the IMF.
Cooperative Regulatory Efforts
Overall, there is pressing need for more cooperative global regulation of stablecoin usage. The issue extends beyond just safeguarding the ability of weaker nations to control their currencies. Without international standards, issuers have begun exploiting arbitrage opportunities, digging into the gaps between jurisdictions by domiciling their stablecoins in regions with weaker oversight.
The European Union has already taken steps in this direction, implementing the Markets in Crypto Assets (MICA) regulations earlier this year. The EU has expressed increasingly concern that the growing dominance of dollar-backed stablecoins could heighten the region’s dependence on foreign currencies and companies.
