FSB Preliminary Conclusions on Risks of Stablecoins in Emerging Economies

The Financial Stability Board (FSB) has issued a report detailing the risks that foreign currency stablecoins pose to emerging economies. In nations plagued by unstable currencies and high inflation, stablecoins offer an alternative to safeguard funds. Data suggests that in some emerging markets, such as Argentina, users rely on dollar-pegged stablecoins for everyday transactions.

The FSB’s analysis, however, takes a broader perspective. In countries with capital controls, stablecoins and cryptocurrencies provide avenues to bypass these restrictions. The FSB acknowledges that its conclusions are preliminary due to challenges in obtaining reliable data and notes that the use of stablecoins for remittances is currently limited.

Stablecoins are overwhelmingly denominated in U.S. dollars (99.6%). If a large portion of a country’s population adopts stablecoins, it could jeopardize the nation’s monetary sovereignty, though the FSB notes this is not yet a widespread issue.

A significant insight from the report is that a stablecoin can become critically important within an emerging market before it is recognized as a global stablecoin in its home market. This poses a unique challenge to the economies of these emerging markets.

One proposed solution is to implement regulations requiring stablecoin issuers to register within the country. Some stablecoins seek to be domiciled in emerging markets, potentially leading jurisdictions to create favorable regulations. The FSB warns of a competitive race to the bottom in regulatory standards.

In Argentina, the dominance of stablecoins in exchange activity highlights the strong interest in these assets. While it might seem Argentinians prefer stablecoins over Bitcoin, data shows that more than half of client holdings are in Bitcoin, with about 26% in stablecoins. In Colombia, stablecoins constitute 17% of holdings, compared to Argentina’s 26%. Brazil and Mexico have smaller percentages at 8% and 5%, respectively.

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