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Home BREAKING NEWS

Stablecoins are at Risk in Developing Markets: Here is Why

by Matoy
July 26, 2024
in BREAKING NEWS, CRYPTO
Reading Time: 3 mins read
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  • Global stablecoins pose heightened risks in emerging markets, exacerbating financial instability and regulatory challenges.
  • Concerns include threats to financial integrity, potential for illicit finance, and increased market and fiscal instability.
  • The FSB recommends robust regulatory frameworks and enhanced cross-border cooperation to mitigate risks.

A recent report from the Financial Stability Board (FSB) has raised concerns about the adoption of global stablecoins (GSCs) in emerging markets and developing economies (EMDEs), citing several financial stability and regulatory challenges. Released on July 23, the report details the increasing use of stablecoins pegged to foreign currencies in these regions and the potential risks they bring.

Widespread Adoption and Associated Risks

The adoption of GSCs is gaining momentum in EMDEs, driven by factors like limited access to conventional banking services, high remittance flows, and local currency volatility. Despite their benefits, the FSB warns that these digital assets could undermine financial systems and overstrain fiscal resources, particularly in markets where regulatory and supervisory capacities are still developing.

The report points out that the instability seen in some stablecoins, highlighted by their failure to maintain pegs during the crypto market turmoil of 2022, underscores the potential fragility of these digital currencies if not properly regulated.

Challenges and Regulatory Implications

EMDEs face unique challenges that intensify the risks associated with GSCs. These include threats to financial integrity, the potential for increased illicit financial activities, concerns over data privacy, and vulnerabilities to cyber threats. Moreover, stablecoins could disrupt market integrity and fiscal stability, threatening overall macroeconomic balance.

To address these risks, the FSB underscores the need for comprehensive regulatory frameworks that enhance cross-border regulatory cooperation and bolster local capacities to oversee and manage GSC activities effectively. Such measures are crucial to maintaining financial stability and safeguarding against the misuse of these technologies.

Global Developments and Future Directions

Globally, stablecoins like Tether, USD Coin, Dai, and TrueUSD, which are primarily pegged to the U.S. dollar, dominate the market. Recent regulatory approvals, such as Paxos receiving authorization from the Monetary Authority of Singapore to issue a gold-backed stablecoin, highlight the evolving landscape of stablecoin oversight.

Moreover, developments in Hong Kong with plans to issue a stablecoin pegged to the Hong Kong dollar signal increasing global interest in anchored digital currencies. The European Union’s recent legislation on stablecoins marks a significant step towards formalizing the operational and regulatory environment for these assets within the EU.

Tags: Stablecoins
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