Stablecoin risks are becoming increasingly prominent as the global adoption of cryptocurrencies continues to surge. This trend, known as cryptoization, poses significant threats to monetary sovereignty and financial stability, particularly in emerging markets, according to a recent report by Moody’s Ratings.
Stablecoins, which are typically pegged 1:1 to a fiat currency like the US dollar, have the potential to disrupt central banks’ control over interest rates and exchange rate stability. The widespread use of stablecoins could lead to “deposit erosion,” where individuals move their savings from traditional bank deposits to stablecoins or crypto wallets, thereby weakening the banking sector.
Understanding the Stablecoin Risks
Moody’s report highlights the fragmented nature of digital asset regulations worldwide. With fewer than one-third of countries implementing comprehensive rules, many economies remain vulnerable to volatility and systemic shocks. While advanced economies often experience increased adoption due to regulatory clarity and improved investment channels, emerging markets are witnessing the fastest growth. Regions like Latin America, Southeast Asia, and Africa are seeing stablecoin usage rise due to remittances, mobile payments, and as a hedge against inflation.
The rapid growth of stablecoins introduces systemic vulnerabilities. Moody’s warns that insufficient oversight could lead to runs on reserves, potentially resulting in costly government bailouts if the currency pegs were to collapse. This divergence underscores not only the potential for financial inclusion but also the increasing risks of financial instability if regulatory measures fail to keep pace with the rapid evolution of digital assets.
Regulatory Developments in Key Regions
By 2024, global digital asset ownership reached an estimated 562 million people, indicating a 33% increase from the previous year. In response to the burgeoning crypto market, regions like Europe, the United States, and China have been advancing regulatory frameworks. The EU’s Markets in Crypto-Assets (MiCA) regime, fully implemented by the end of 2024, standardizes licensing and sets reserve and disclosure requirements for stablecoins.
In the US, the GENIUS Act, which became law in mid-2024, establishes enforceable standards for stablecoin issuance and backing. Meanwhile, China, after initially banning crypto trading and mining in 2021, has expanded its digital yuan pilots and is considering tightly controlled yuan-backed stablecoins.
The People’s Bank of China (PBOC) has opened a new operations center in Shanghai, focusing on blockchain services and cross-border payments, further signaling the nation’s strategic shift towards stablecoin development.
As stablecoin adoption continues to expand, the challenge remains for global policymakers to establish cohesive and comprehensive regulations that address these emerging stablecoin risks and mitigate the potential for cryptoization of economies.
