Crypto's Shadow Dollarization Threatens Emerging Market Stability

Moody’s Investors Service has warned that the growing adoption of cryptocurrencies in emerging markets poses significant risks to monetary sovereignty and financial resilience, particularly as stablecoins and decentralized finance (DeFi) tools increasingly bypass traditional monetary systems. In a report published on September 26, 2025, the credit ratings agency highlighted that the use of dollar-pegged stablecoins in pricing and settlement activities threatens to undermine domestic currency control, creating a scenario akin to unofficial dollarization. This dynamic reduces regulatory visibility and exacerbates vulnerabilities in markets already grappling with inflation, weak banking infrastructure, and capital flight risks.

The report notes that cryptocurrency adoption has surged in emerging markets, with over 562 million users globally by 2024—a 33% increase from 2023. In Southeast Asia, Africa, and parts of Latin America, crypto is often adopted as a hedge against inflation, a tool for cross-border remittances, and a substitute for underdeveloped banking systems. Moody’s emphasized that while stablecoins offer efficiency, their proliferation creates "cryptoization" pressures, where transactions increasingly occur outside central banks’ oversight. This could erode the effectiveness of monetary policy and amplify exchange rate volatility.

A key concern for Moody’s is the role of pseudonymous wallets and offshore exchanges in facilitating capital flight. The agency warned that individuals in high-risk markets could exploit crypto’s pseudonymity to move wealth abroad discreetly, undermining domestic currency stability and fiscal policy. This trend is particularly acute in regions where trust in local currencies is low, and regulatory frameworks remain fragmented.

The report also underscored the asymmetry in adoption drivers between emerging and advanced economies. While emerging markets are drawn to crypto for its utility in remittances and inflation hedging, developed economies focus on institutional integration and regulatory clarity. This divergence creates a two-tiered global crypto landscape, with emerging markets bearing disproportionate systemic risks. Moody’s cited Southeast Asia and Africa as examples where crypto adoption is concentrated in informal sectors, contrasting with the more structured institutional adoption seen in North America and Europe.

Financial resilience is further strained by the lack of robust regulatory frameworks in many emerging markets. The agency noted that governments often lack the tools to monitor or mitigate crypto-related risks, such as stablecoin collapses or DeFi-based fraud. This regulatory gap could amplify contagion risks, particularly in markets with high exposure to dollar-pegged stablecoins. For instance, a sudden loss of confidence in a major stablecoin could trigger liquidity crunches and force central banks into costly interventions to stabilize domestic currencies.

Moody’s also highlighted the macroeconomic implications of crypto-driven capital outflows. In markets with weak foreign exchange reserves, the ability to manage capital controls is compromised, increasing vulnerability to external shocks. The agency cited Latin American and African economies as cases where crypto adoption could exacerbate existing vulnerabilities, such as high public debt and reliance on commodity exports.

The findings align with broader trends in global crypto adoption. By 2024, stablecoin usage in cross-border transactions had surged, with estimates suggesting that the sector could handle $4 trillion in annual volume post-GENIUS Act reforms. However, Moody’s cautioned that this growth could come at the cost of financial stability in regions unprepared for the complexities of decentralized systems.