TLDR
- Moody’s warns stablecoin use in emerging markets could erode central bank control.
- Less than a third of countries have comprehensive digital asset regulations.
- Rapid stablecoin adoption in emerging markets is driven by inflation hedging and remittances.
- Europe and the US are making progress with stablecoin regulations amid global concerns.
Stablecoin Boom Risks ‘Cryptoization’ in Emerging Markets
The increasing use of stablecoins in emerging markets is becoming a significant concern for global financial stability. Moody’s Ratings has raised alarms about the growing trend of “cryptoization,” where stablecoins—digital tokens pegged to fiat currencies like the US dollar—are increasingly being used in place of traditional currencies. This phenomenon is seen as a threat to central banks’ control over monetary policies such as interest rates and exchange rates.
According to Moody’s, this trend could further undermine the stability of bank deposits in these regions. With individuals and businesses opting to store their savings in crypto wallets, the traditional banking system may face deposit erosion. The agency notes that this shift could destabilize economies where regulatory frameworks for digital assets are still underdeveloped.
Fragmented Global Regulations Heighten Risks
One of the main risks identified by Moody’s is the lack of unified global regulations for stablecoins. The report states that fewer than a third of countries worldwide have comprehensive regulations in place to manage the growth of digital assets. This fragmented regulatory landscape leaves many emerging economies vulnerable to significant financial instability.
While some countries like the United States, China, and the European Union are moving forward with digital asset regulations, many nations lack the frameworks to effectively monitor and control stablecoin usage. This regulatory gap means that emerging markets are more susceptible to risks such as “runs on reserves,” where users rush to exchange their stablecoins if the pegged assets fail to hold their value. In such scenarios, governments may be forced to intervene with costly bailouts, further straining their economies.
Emerging Markets Driving Adoption through Use Cases
The adoption of stablecoins is growing rapidly in regions like Latin America, Southeast Asia, and Africa. In these areas, the primary drivers of stablecoin adoption include the need for inflation hedging, mobile payments, and the use of remittances. Stablecoins are often viewed as a safer and more efficient way to transfer money across borders, particularly in economies facing high inflation or unstable local currencies.
In these emerging markets, people are turning to stablecoins as an alternative to traditional banking. These regions often face currency devaluation or restrictions on financial transactions, making digital currencies an appealing option for individuals looking to protect their savings or engage in cross-border commerce.
Regional Efforts to Regulate Stablecoins
While global regulation remains fragmented, some regions are making progress in addressing the risks posed by stablecoins. In Europe, the Markets in Crypto-Assets (MiCA) regulation, which came into effect in December 2024, is aimed at providing a unified regulatory framework for digital assets. The regulation standardizes licensing for service providers and sets out clear reserve and disclosure requirements for stablecoins.
Similarly, the United States has introduced the GENIUS Act, which aims to establish enforceable standards for the issuance and backing of stablecoins. In China, after banning cryptocurrency trading and mining in 2021, the government has shifted focus to its digital yuan and is reportedly considering yuan-backed stablecoins. These efforts highlight the growing recognition of the need for comprehensive regulation to prevent the destabilizing effects of unregulated stablecoin use.
However, despite these regional efforts, the regulatory patchwork globally means that many economies remain exposed to the volatility that can come with unregulated stablecoin adoption. Until comprehensive global regulations are established, the risks associated with the rise of stablecoins remain high, particularly in regions with less robust financial oversight.
