Stablecoins: A Boost or a Barrier to Inclusive Finance?

Author: Jeff Gapusan

As traditional finance (TradFi) faces challenges in responding to technological innovation and the growing demands of consumers, stablecoins have become one of the most influential and controversial products. The United States (including policymakers and the private sector) has gradually recognized that stablecoins can serve as a powerful tool to provide funding for the world’s largest economy, with U.S. Treasuries being its safest financial instrument. A recent research report from Standard Chartered Bank points out that stablecoins could negatively impact the stability of financial institutions in developing countries, trigger large-scale deposit outflows, and weaken the strength of local central banks.

The story of stablecoins is evolving, and two very different financial outcomes may emerge: the most enthusiastic users (emerging markets) could further undermine their economic infrastructure while trying to protect their wealth, and simultaneously strengthen developed-market corporations.

Digital Dollarization: The Threat to $1 Trillion Stablecoins

In Buenos Aires, a woman walks past an advertisement featuring a $100 bill. Argentinians often exchange pesos for dollars to protect their savings from “hyperinflation.” (Image source: LUIS ROBAYO/AFP via Getty Images)

From Argentina to Africa, converting local currencies into dollars is part of daily life. Stablecoins greatly accelerate this process, providing a convenient digital channel.

For decades, citizens of countries with weak and unstable currencies have chosen to convert their local currency into dollars or dollar-denominated assets. In Zimbabwe, plagued by years of hyperinflation and economic turmoil, approximately 85% of transactions are dollar-denominated. In other countries like Ecuador and El Salvador, the U.S. dollar has become the official currency.

The vast majority of stablecoin usage is concentrated in developing countries. In emerging markets, stablecoins are essential for resisting hyperinflation and unpredictable political crises.

In developed markets, stablecoins have become a gateway to fiat currency for cryptocurrency trading, institutional settlement, or shifting from bank deposits to digital assets. Users can leverage stablecoins for alternative digital payments, finance, and investment options that match traditional financial solutions in speed, efficiency, and cost.

These two use cases form a stark contrast. Some may see this as a trade-off between financial advantages and practical needs.

Standard Chartered Bank, with its extensive business network, local market expertise, and focus on cross-border trade and financial services, has long been a pillar in emerging markets across Asia, Africa, and the Middle East. (Image source: Matthew Lloyd/Getty Images)

Standard Chartered was among the first to warn about the potential negative impacts of the stablecoin economy. According to a research report published in October, current trends suggest that by the end of 2028, up to $1 trillion in deposits could flow from emerging market banks into stablecoins. This wealth transfer is not hypothetical; it could pose a profound threat to the credit systems of many countries.

Growth of Stablecoins in Emerging Markets

The core driver of stablecoin growth in emerging markets is self-protection.

People want to preserve the wealth they have painstakingly earned. According to Standard Chartered, for citizens of countries facing hyperinflation or currency devaluation, “capital return is more important than capital yield.”

Like Germany during hyperinflation in 1923-1924, emerging markets focus more on capital preservation than on returns. (Image source: Global History Archives/Getty Images)

Stablecoins provide a reliable, instant, borderless means of storing wealth linked to the dollar in digital wallets. When citizens cash out their local currencies (such as Turkish lira, Argentine peso, or Nigerian naira) to purchase stablecoins, the liquidity of these local currencies disappears from domestic banking systems. The consequences of this capital outflow are multifaceted and serious for local governments.

Partial Reserve Banking System: The Traditional Financial Operating System

The partial reserve banking system allows financial institutions to hold only a portion of deposits as reserves, facilitating economic expansion. This enables them to issue mortgages and auto loans to consumers. (Image source: Mario Tama/Getty Images)

The partial reserve banking model is the mainstream banking system worldwide. It permits banks to keep a fraction of customer deposits as reserves and lend out the rest. As commercial banks lose their cheapest and most reliable funding source (retail deposits), their ability to extend credit to local businesses and consumers is constrained, raising borrowing costs and suppressing domestic economic growth.

Monetary Policy Management

Central banks craft monetary policies to influence their economies. The Federal Reserve System seal (Image source: MANDEL NGAN/AFP via Getty Images)

Central banks rely on traditional tools (such as raising interest rates) to manage money supply and curb inflation. However, when large amounts of domestic currency are exchanged for offshore dollar tokens, and these exchanges are unregulated by central banks, the traditional transmission mechanism of monetary policy is severely weakened. Regulators cannot grasp the true scale of dollar flows nor assess the effectiveness of their policies.

Accelerating Capital Outflows: Stablecoins vs. ATMs

In July 2015, the world witnessed Greek citizens lining up at ATMs across the country to withdraw their savings. To prevent capital flight, the Greek government imposed capital controls. (Image source: Getty Images)

In July 2015, during Greece’s debt crisis, photos and videos of Greek citizens queuing at ATMs to withdraw their hard-earned savings circulated globally, marking the outbreak of the crisis.

Like the Greek debt crisis, the 1997 Asian financial crisis, the Bank Run events, or the Silicon Valley Bank collapse, capital flight is often a precursor to a liquidity crisis. Stablecoins provide a seamless, 24/7 avenue for capital to escape local currencies, potentially accelerating exchange rate volatility and bank failures. They can facilitate instantaneous digital capital flight, which traditional regulatory mechanisms are ill-equipped to handle.

The most vulnerable countries include those with weak fiscal positions and high remittance dependence, such as Egypt, Pakistan, Bangladesh, and Sri Lanka.

Using Stablecoins to Finance U.S. Debt

If $1 trillion potentially flows out of the developing world, where will this capital ultimately go?

The demand for stablecoins in emerging markets will inevitably increase the demand for the safest collateral—U.S. Treasuries. This is the key to the stablecoin paradox, effectively reinforcing the U.S. financial core.

Stablecoins, especially those designed to be compliant and 1:1 pegged, must hold high-liquidity, low-risk reserves. These reserves mainly consist of cash, cash equivalents, and short-term U.S. Treasuries.

Research from institutions like the Kansas City Federal Reserve highlights this vital financial link. As stablecoin development accelerates, its total market cap is expected to grow from over $300 billion today to several trillion dollars within three years, boosting demand for short-term U.S. government bonds.

The Kansas City Fed’s analysis indicates that while stablecoins may replace demand for other short-term instruments like money market funds, they will generate an undeniable incremental demand for U.S. debt.

A New Anchor of Stability

Amid fiscal and monetary policy debates, the increasing demand for U.S. Treasuries will benefit the U.S. significantly. Fed research confirms that stablecoins are not just a cryptocurrency phenomenon but a crucial new component of the U.S. government’s financing system.

The U.S. National Debt Clock, which tracks U.S. debt and its proportion among American households in real-time, starkly reminds us of the country’s growing fiscal burden. (Image source: Selcuk Acar/Anadolu via Getty Images)

U.S. debt has reached $38 trillion and continues to grow rapidly! The rising demand for U.S. debt issuance could absorb large amounts of government borrowing and potentially help lower borrowing costs.

Shadow banking, often a pejorative term, may further proliferate as financial institutions develop stablecoins. (Image source: Ernst Haas/Getty Images)

Ironically, the widespread adoption of stablecoins may foster the expansion of a term that regulators often avoid—shadow banking. By mandating that reserve assets be of the highest quality and liquidity, regulation effectively turns the digital asset industry into a “captive investor” of U.S. debt.

Stablecoins Promote a Strong Dollar Policy

As people worldwide choose dollar-pegged stablecoins, the strength and importance of the dollar will be further reinforced. (Image source: Matias Baglietto/NurPhoto via Getty Images)

Every issuance of a dollar-pegged stablecoin is essentially a vote of confidence in the dollar, solidifying its role as the world’s reserve currency. The digital infrastructure built by stablecoins makes it easier for people globally to transact and save in dollars, further cementing the dollar’s dominance in the current era of global financial turbulence.

Global Interconnection and Regulatory Challenges of Stablecoins

Global financial leaders must examine ways to leverage stablecoin technology while avoiding potential negative impacts on the most dependent economies. (Image source: Andrew Harnik/Getty Images)

The stablecoin market creates a direct, instant channel for capital transfer: the risk-avoidance mindset of developing countries fuels an insatiable global demand for safe assets collateralized by U.S. Treasuries, especially in emerging markets.

When citizens convert their local currencies into dollars to hedge against inflation and economic instability, these funds ultimately bolster U.S. financial strength. Dollar-denominated stablecoins can facilitate cross-border capital movements within seconds—something that would take days through traditional channels.

While opening doors for those affected by hyperinflation and economic instability, the rapid growth of stablecoins also presents challenges for global financial regulators and banks. They must find ways to harness the advantages of stablecoin technology—such as cheaper cross-border payments and inclusive finance—without undermining the stability of the most vulnerable economies they serve.