Stablecoins and the Erosion of Monetary Policy in Emerging Markets

The rise of U.S. dollar-backed stablecoins in emerging markets has ignited a quiet revolution in global finance. Over the past three years, these digital assets have become a lifeline for populations in high-inflation economies, offering a hedge against currency devaluation and a faster, cheaper alternative to traditional remittance systems. However, this rapid adoption is not without consequence. As stablecoins increasingly displace local currencies in transactions and savings, they threaten to erode the autonomy of central banks, complicate monetary policy, and destabilize fragile financial systems. This article examines the dual-edged sword of stablecoin adoption-its potential to democratize access to stable value while its capacity to undermine sovereign monetary control-and evaluates how emerging market central banks are responding to these challenges.

The Currency Substitution Conundrum

Currency substitution-the replacement of a domestic currency with a foreign one-has long been a concern for central banks in unstable economies. Historically, this phenomenon manifested through physical dollarization, as seen in countries like Argentina and Venezuela. Today, stablecoins are accelerating this process in a digital form. In Nigeria, where the naira has lost over 70% of its value against the U.S. dollar since 2022, stablecoins like USDT and USDC now account for 40% of crypto transaction volume. Similarly, in Argentina, where inflation hit 161% in 2023, over 50% of property transactions are conducted in U.S. dollars, and stablecoins have become a primary tool for circumventing strict currency controls.

The implications for monetary policy are profound. When citizens and businesses shift to stablecoins, demand for local currency declines, weakening the central bank's ability to manage inflation or stabilize exchange rates. For instance, the Central Bank of Nigeria (CBN) has warned that dollar-based stablecoins could undermine its monetary sovereignty, particularly as the naira's devaluation in 2023 drove citizens to seek alternatives. In Argentina, the proliferation of stablecoins has exacerbated capital flight, forcing the government to implement stricter crypto transaction reporting requirements and explore a digital peso to reassert control.

Central Bank Responses: From Caution to Innovation

Emerging market central banks are grappling with the challenge of balancing innovation with stability. Some, like the CBN, have adopted a cautious approach, forming working groups to study stablecoin risks and develop regulatory frameworks. In February 2025, Nigeria launched cNGN, a regulated stablecoin, pegged to the naira, aiming to create a sovereign digital alternative while mitigating the risks of foreign-backed stablecoins. This hybrid model reflects a broader trend: central banks are increasingly exploring Central Bank Digital Currencies (CBDCs) as a counterweight to private stablecoins. Research using New Keynesian-Dynamic Stochastic General Equilibrium models suggests that well-designed CBDCs can generate welfare gains by restoring trust in local currencies and providing a tool for monetary intervention.

In contrast, Argentina's response has been more fragmented. While the government has introduced anti-money laundering (AML) regulations for virtual asset service providers (VASPs), President Javier Milei's pro-crypto stance has left policy coherence in question. His rejection of a CBDC in favor of stablecoin adoption highlights the tension between embracing decentralized finance and preserving central bank authority. Meanwhile, the Comisión Nacional de Valores (CNV) has mandated VASP registration, signaling a move toward formalization, albeit with regulatory uncertainty persisting.

The Global Systemic Risks

Beyond individual economies, the rise of stablecoins is reshaping global financial dynamics. The growing demand for U.S. dollar-backed stablecoins has increased pressure on short-term U.S. Treasury markets, as issuers hold significant reserves in these instruments. This development could amplify systemic risks, particularly if stablecoin collapses-like the 2022 TerraUSD incident-trigger liquidity crises. Moreover, the cross-border nature of stablecoins complicates international regulatory oversight, as highlighted by the IMF's warnings about fragmentation and volatility.

The Bank for International Settlements (BIS) has proposed a next-generation monetary system centered on tokenized central bank reserves and commercial bank money, arguing that stablecoins fall short of meeting critical requirements like "singleness" and "integrity" as outlined in their report. This vision underscores the need for a coordinated global approach to mitigate the risks of currency substitution while harnessing the efficiency gains of digital assets.

Conclusion: A Delicate Balancing Act

The stablecoin boom in emerging markets is a testament to the power of decentralized finance to address real-world pain points. Yet, it also exposes the fragility of traditional monetary systems in the face of technological disruption. For central banks, the challenge lies in crafting policies that foster innovation without sacrificing sovereignty. Nigeria's cNGN experiment and Argentina's regulatory trials offer valuable lessons, but broader success will depend on international collaboration and adaptive frameworks.

As the GENIUS Act continues to fuel stablecoin growth, the stakes have never been higher. Emerging markets must navigate this new era with both caution and creativity, ensuring that the digital revolution in money serves as a tool for empowerment rather than a catalyst for instability.