Emerging markets and developing economies face heightened risks and regulatory challenges from the adoption of global stablecoins (GSCs) according to a new report from the Financial Stability Board (FSB).
The report, dubbed Cross-border Regulatory and Supervisory Issues of Global Stablecoin Arrangements in Emerging Markets and Developing Economies (EMDEs), says that stablecoins, particularly those pegged to foreign currencies, are surging in developing and emerging markets due to factors such as limited access to traditional banking, high remittance flows and local currency volatility.
In countries with unstable currencies and rampant inflation, stablecoins provide an option to park funds elsewhere.
To add to that, countries that impose capital controls, stablecoins and crypto provide a way to circumvent these control.
Since stablecoins are predominantly (99.6%) in U.S. dollars, if a sufficient proportion of the population uses stablecoins, this could threaten the country’s monetary sovereignty, although the FSB doesn’t see that happening yet.
The report also points that the instability of these digital currencies poses significant risks for EMDEs, where regulatory and supervisory capacities are often limited.
“The collapse and de-peg of certain stablecoins since the outbreak of the crypto asset market turmoil in 2022 highlights the potential fragility of stablecoins that are not adequately designed and regulated.”
Generally, the report notes issues such as a heightened risk of illicit financial activities, data privacy concerns, and cybersecurity threats, as well as the need for stronger protections for consumers and investors.
Don’t forget that stablecoins have now become the preferred choice for the majority of illicit transactions for cybercriminals, replacing bitcoin, according to the blockchain analytics firm, Chainalysis.
REPORT | Stablecoins Now Account for the Majority of Illicit Transactions in Crypto, Says Chainalysis
In its recent crypto crime report, blockchain analytics firm, Chainalysis, underscores that between 2018 and 2021, Bitcoin held the position as the favored ‘cryptocurrency of… pic.twitter.com/s4XSEDANHO
— BitKE (@BitcoinKE) January 20, 2024
Although the risks mentioned by the report are present worldwide, emerging markets and developing economies (EMDEs) are said to encounter specific challenges that exacerbate the difficulties of enforcing effective regulatory measures.
FSB still contends that stablecoins present a compelling case as an alternative to local fiat currencies in emerging markets and developing economies (EMDEs). Some of the reasons for this include:
- Restricted access to banking services
- The need for effective remittance solutions, and
- The need to protect against instability in local currencies
To address the challenges that stablecoins might pose in these regions, the report suggests that policymakers and regulators develop strong regulatory frameworks. This includes improving international regulatory cooperation and enhancing local capabilities to oversee and manage global stablecoin (GSC) activities to safeguard financial stability.
The FSB high-level recommendations encourage authorities to cooperate and coordinate with each other, both domestically and internationally, and to foster efficient and effective communication and information sharing to support each other in fulfilling their mandates.
Authorities may choose to leverage existing cooperation and information sharing arrangements, such as supervisory colleges, fora, networks, memoranda of understanding (MoUs), or other adhoc arrangements. They may also consider flexible arrangements in response to the crosssectoral issues related to stablecoins and other related activities. Such ad hoc meetings or arrangements might assist in combating regulatory arbitrage.
The report highlighted the challenges common to all types of jurisdictions as follows:
- Data gaps – Many stablecoin activities involve intermediaries that conduct a portion of transactions off-chain, which makes it more difficult for public authorities to obtain data. The preliminary stage of regulation and supervision, and the non-compliance of many service providers, exacerbates data gap challenges.
- Cross-border cooperation and information sharing – Stablecoin activities and the broader crypto-asset ecosystem are inherently cross-border, as users can potentially access most crypto-asset service providers included in stablecoin arrangements from any jurisdiction with an internet connection. Given likely different jurisdictional approaches to the regulation, supervision, and oversight of stablecoin arrangements, participating authorities would benefit from cooperation and information sharing to fulfil their respective regulatory, supervisory and oversight mandates.
- Inconsistent implementation progress – When jurisdictions lag in implementation, or some jurisdictions are reluctant to regulate stablecoins, or face challenges to enforce applicable laws, issuers and service providers may be tempted to incorporate their activities in and operate from ‘lightly’ regulated places, often in emerging markets and developing economies, which will raise additional challenges for other jurisdictions with a robust regulatory framework. Currently, many stablecoin activities are not adequately regulated or are in noncompliance with existing regulations
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