Central bankers and financial regulators have raised concerns about the growing use of US dollar-denominated stablecoins in emerging market economies, warning that their increasing adoption could undermine monetary sovereignty, accelerate dollarisation, and facilitate illicit financial activities. Stablecoins—cryptocurrency assets pegged to fiat currencies—have seen rapid growth, particularly in cross-border payments, prompting calls for stronger regulatory responses.

At a recent event in Japan, Pablo Hernández de Cos, general manager of the Bank for International Settlements (BIS), highlighted the risks stablecoins pose to financial integrity and regulatory frameworks. He cautioned that widespread stablecoin use could enable easier circumvention of capital controls in emerging markets and developing countries, which rely on such controls to manage financial flows. Hernández de Cos emphasized that stablecoins have become key vehicles for illicit transactions within the crypto ecosystem, further complicating regulatory oversight.

The issue was also discussed by global financial policymakers during the International Monetary Fund (IMF) and World Bank meetings in Washington last week. Andrew Bailey, governor of the Bank of England and chair of the Financial Stability Board, noted concerns about stablecoins contributing to currency substitution, potentially weakening domestic currencies in vulnerable economies. Bailey observed that progress on coordinated international regulation of stablecoins has slowed, though he stressed that addressing these risks remains a pressing task.

The expansion of the stablecoin market has been largely driven by US regulatory developments, with legislation such as the Genius Act aiming to bring digital assets into conventional financial oversight. Approximately 98 percent of the global stablecoin market, valued at around $315 billion, is denominated in US dollars.

While some experts recognize the benefits of stablecoins, particularly in reducing the costs and increasing the speed of international payments, they warn of significant challenges. Tobias Adrian, director of the IMF’s monetary and capital markets department, acknowledged stablecoins’ potential to improve cross-border transactions but underscored the threat they pose to central banks’ control over monetary policy due to dollarisation pressures.

Dollar stablecoins have found particular traction in emerging markets with high inflation or currency instability, providing an alternative means for residents to protect savings and bypass restrictions on foreign payments. Analysts at Standard Chartered estimate that holdings of US dollar stablecoins in emerging markets could soar from $173 billion in late 2023 to $1.22 trillion by 2028, particularly in countries facing economic crises or IMF stabilization programs like Egypt, Pakistan, and Bangladesh. Despite this growth, such holdings would still represent a small fraction—about 2 percent—of total bank deposits in these nations.

Some countries have taken steps to tighten regulation of stablecoin activities. Brazil recently amended its laws to require stablecoin providers to adhere to anti-money laundering rules comparable to those for banks, including imposing limits on foreign transfers. Former central bank officials, such as Reza Baqir of Pakistan, have expressed concern that stablecoins could undermine capital controls essential for economic stability.

The BIS, which coordinates between central banks and manages foreign exchange reserves, has remained cautious about stablecoins, asserting that digital assets generally fall short of fulfilling the fundamental attributes of money. The institution is collaborating with central banks and commercial banks to develop “tokenized deposits” as an alternative digital payment system that retains regulatory oversight.

Adding to the caution, the Financial Action Task Force (FATF) issued a report in March warning that stablecoins have become attractive channels for money laundering linked to cybercrimes such as ransomware attacks and phishing scams, elevating concerns over their abuse for criminal purposes.

As stablecoins gain prominence in emerging markets, regulators and central banks face mounting pressure to balance innovation in payments with safeguarding financial stability and enforcing anti-money laundering measures.