The Geopolitical and Monetary Risks of Dollar-Denominated Stablecoins in Emerging Markets

The rise of dollar-denominated stablecoins has ignited a quiet revolution in global finance, particularly in emerging markets. These digital assets, pegged to the U.S. dollar, offer unprecedented efficiency in cross-border payments and a hedge against inflation. However, their rapid adoption raises profound questions about central bank sovereignty and investment stability in developing economies. As stablecoins increasingly displace local currencies, they threaten to erode the policy autonomy of central banks while reshaping the geopolitical landscape of global finance.

The Erosion of Central Bank Sovereignty

Dollar-backed stablecoins are not merely tools for financial inclusion-they are instruments of monetary substitution. In countries like Argentina, Nigeria, and Turkey, where inflation rates routinely exceed double digits, stablecoins have become de facto alternatives to unstable local currencies. According to a report by the Bank for International Settlements, this shift undermines the ability of central banks to implement monetary policy, as citizens and businesses bypass domestic financial systems entirely. For instance, in Nigeria, stablecoin transactions reached $22 billion in 2025 alone, with 99% of Yellow Card's transactions involving these tokens.

Such trends signal a broader pattern: as stablecoins gain traction, they reduce the demand for local currencies, weakening their value and destabilizing exchange rates.

The BIS has warned that stablecoins fail to meet the criteria for sound money, including "singleness, elasticity, and integrity" according to BIS research. This creates a paradox: while stablecoins promise stability, their unregulated proliferation could trigger systemic risks, such as fire sales of safe assets or sudden liquidity crises. The U.S. GENIUS Act, which mandates 1:1 reserves for stablecoin issuers, attempts to mitigate these risks but also inadvertently legitimizes dollar-backed stablecoins as a global standard. This, in turn, amplifies their role in emerging markets, where they are increasingly used to circumvent capital controls and access dollar-denominated assets.

Investment Stability and the Shadow of Arbitrage

For investors, the dual-edged nature of stablecoins is evident. On one hand, they enable faster, cheaper cross-border transactions and provide a lifeline for economies with weak banking infrastructure. In Sub-Saharan Africa, stablecoins accounted for 43% of crypto transaction volume in 2024, while Latin America processed $47.9 billion in crypto volume by mid-2025, with stablecoins dominating the landscape. These efficiencies are transformative, particularly for remittances and small businesses.

Yet, the risks are equally stark. The reliance on private issuers for reserve management exposes users to counterparty and collateral risks. A "run" on stablecoins-triggered by a loss of confidence in their peg to the dollar-could destabilize entire financial systems in emerging markets. The International Monetary Fund has highlighted this vulnerability, noting that stablecoins could exacerbate capital flow volatility and reduce the effectiveness of central banks in managing crises. For example, in Argentina, where stablecoins are widely used to hedge against inflation, a sudden de-pegging event could trigger panic, leading to capital flight and a collapse in local currency value.

Regulatory Responses and the Path Forward

Emerging market central banks are grappling with how to regulate stablecoins without stifling innovation. Brazil's 2022 Crypto Assets Law and South Africa's regulatory clarity have enabled fintechs to integrate stablecoins rapidly, but these frameworks remain fragmented. The BIS emphasizes the need for international cooperation to address regulatory arbitrage, where stablecoin issuers exploit weaker jurisdictions to expand their influence. The European Union's Markets in Crypto Assets (MICA) regulations and the U.S. GENIUS Act represent steps toward a coordinated approach, but gaps persist.

The long-term implications are clear: without a unified global framework, dollar-backed stablecoins could further erode the role of national currencies and complicate financial stability in emerging markets. The IMF has urged policymakers to balance innovation with systemic risk mitigation, advocating for real-time data sharing and cross-border regulatory alignment. For investors, this means navigating a landscape where stablecoins offer both opportunities and existential threats.

Conclusion

Dollar-denominated stablecoins are reshaping the financial architecture of emerging markets, offering efficiency and stability while posing unprecedented challenges to central bank sovereignty. As these digital assets become entrenched in economies with weak currencies, their geopolitical and monetary risks will only intensify. The path forward requires a delicate balance: fostering innovation while safeguarding against systemic instability. For investors, the key lies in understanding the dual nature of stablecoins-both as a tool for financial inclusion and a potential catalyst for crisis.