FSB says global adoption of stablecoins is risky for developing economies

The Financial Stability Board (FSB) has put out a red flag about the global spread of stablecoins, especially concerning their effects on developing economies. 

While stablecoins are praised for their ability to make transactions smoother and provide a stable store of value, the FSB’s report highlights a range of potential problems. 

The collapse of some stablecoins in 2022 has already shown how fragile these assets can be if they’re not well-regulated,. The FSB points to issues like financial instability, risks of illicit activities, and consumer protection concerns. 

These problems are even more pronounced in developing economies, where regulatory systems are not as strong. The report states that stablecoins could disrupt financial systems, particularly in countries where regulatory frameworks are weaker.

For emerging economies, the widespread use of stablecoins pegged to foreign currencies can lead to financial instability. This is because these digital assets can cause capital to flow out of the country, straining fiscal resources.

Another big concern is that emerging markets and developing economies (EMDEs) might not have the tools to properly regulate these stablecoins, especially if they’re issued in other countries. This creates a regulatory gap, leaving these economies vulnerable. 

The report points out that these economies might not even have the legal power to control foreign-issued stablecoins, which could become systemically important without being recognized as such in the issuing country.

The FSB also explains the macro-financial risks linked to stablecoins. In many developing countries, there’s a strong preference for U.S. dollar-pegged stablecoins as a hedge against local currency volatility and inflation. 

This preference can weaken a country’s monetary policy and undermine financial stability. If people start using stablecoins instead of the local currency, it can make it harder for governments to manage their economies.

“Monetary policy transmission might weaken if local firms and households prefer to save and invest in stablecoins that are not pegged to the domestic fiat currency or to use them as a medium of exchange.”

Also, the FSB warns that consumer and investor protections are at risk. In EMDEs, the rapid adoption of stablecoins can lead to financial losses if these assets are not properly regulated. 

The report suggests that these countries need comprehensive regulatory frameworks to tackle these risks. This includes measures for financial integrity, consumer protection, and coordination of macroeconomic policies.

The FSB’s recommendations include implementing high-level guidelines for regulating stablecoins, focusing on financial stability and integrity. 

They also suggest that emerging economies consider additional measures, like improving digital payment infrastructure and offering technical assistance to better manage these assets.

Despite the concerns though, the report acknowledges that its findings are based on preliminary data and that there are still data gaps. 

It found a higher level of interest and activity in stablecoins in EMDEs compared to more developed economies. 

The reasons for this vary, from using stablecoins as a hedge against inflation to speculative trading and cross-border transactions. The FSB emphasizes the need for international cooperation and better information-sharing among regulatory bodies. 

This is especially important between advanced economies and EMDEs to effectively manage the risks associated with stablecoins.