FSB warns dollar stablecoins could undermine emerging market stability
The Financial Stability Board (FSB) has issued a renewed warning that the rapid expansion of US dollar-denominated stablecoins could put mounting pressure on emerging and developing economies, weakening their policy tools, payment systems and capital controls.
In its 2025 annual report, the global watchdog argued that foreign currency stablecoins used for cross‑border payments pose “potentially more acute” risks for markets that already face structural vulnerabilities. As dollar stablecoins flow through multiple jurisdictions, the FSB says, they can disrupt how local financial ecosystems function and reduce the effectiveness of domestic economic management.
According to the report, one of the central concerns is currency substitution. When households and businesses increasingly adopt a foreign currency stablecoin instead of the domestic currency, it can erode trust in the national unit of account and medium of exchange. This partial “dollarization” via stablecoins may occur even in countries that have not historically relied heavily on the US dollar, amplifying exchange-rate volatility and complicating macroeconomic planning.
The FSB also highlighted the risk that dollar stablecoins could sideline local payment networks. If individuals and firms prefer cheap, fast, borderless payments in stablecoins, usage of domestic payment rails may decline. Over time, this could weaken the business case for investing in local infrastructure, potentially leaving central banks and payment providers with higher per‑transaction costs and fewer tools to support financial inclusion at the national level.
Monetary policy is another area where the FSB sees danger. Widespread use of foreign stablecoins can blunt the impact of interest‑rate decisions and other policy actions because a larger share of financial transactions may happen outside the domestic currency system. When central banks raise or cut rates, the behavioral response of consumers and firms could be smaller if they store value and conduct payments in dollar‑pegged tokens rather than in local money.
Fiscal authorities may also come under strain. The report notes that rising demand for foreign stablecoins can reduce the demand for domestic government securities and limit the state’s capacity to fund itself at predictable costs. In extreme scenarios, sudden shifts into or out of stablecoins could trigger capital flow volatility, forcing governments to deploy scarce reserves or emergency measures to stabilize their financial systems.
While the FSB acknowledges that some jurisdictions have started to respond, it stresses that regulatory authorities still lack a complete picture of how the stablecoin sector is evolving. Supervisors, it says, must better understand liquidity risks, operational vulnerabilities and the complex links between stablecoins and the broader financial system, including banks, payment processors and capital markets.
The board revisited its 2023 global framework for crypto‑asset activities and stablecoin arrangements and concluded that implementation across countries remains uneven. Despite having common high‑level principles, many jurisdictions interpret and apply them differently. This patchwork approach creates regulatory gaps and opportunities for regulatory arbitrage, where issuers and service providers gravitate toward weaker regimes while still serving users worldwide.
At the same time, the report tempers fears of immediate systemic disruption by pointing out that crypto assets and stablecoins still play only a marginal role in real-economy activity. Their use in day‑to‑day commerce, mainstream financial services and large‑value payments remains limited compared with traditional instruments. In the FSB’s view, the hype and market capitalization of these assets do not yet translate into proportionate influence over core economic functions.
Nonetheless, the board warns that the situation is changing as the ties between stablecoin infrastructure and traditional finance deepen. Banks exploring tokenized deposits, payment companies integrating stablecoin rails and institutional investors gaining exposure to digital assets all increase the probability that a shock in the stablecoin universe could spill over into the conventional financial system.
The FSB accepts that stablecoins can deliver certain advantages, particularly for cross‑border remittances and wholesale settlement. Lower transaction costs, faster settlement times and programmability are all cited as meaningful innovations. Yet the report insists these benefits must be weighed against the vulnerabilities they introduce, especially in jurisdictions where financial stability is already fragile.
Looking ahead, the board plans to continue closely monitoring digital innovations tied to crypto assets and stablecoins through 2026. Priority will be given to questions of market structure-who issues, controls and profits from these instruments-and to assessing their resilience under stress. The FSB wants to understand how stablecoin issuers would cope with large‑scale redemptions, operational outages or sharp movements in the underlying reserve assets.
Beyond stablecoins, the FSB outlines a broader agenda for the coming year. It will focus on the rapid growth of private credit markets, risks in non‑bank financial intermediation, improvements to cross‑border payments, crisis preparedness, and the modernization of regulatory frameworks to keep pace with financial innovation. Stablecoins, however, remain a recurring theme in these discussions, because they sit at the intersection of payments, capital flows and financial infrastructure.
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Why dollar stablecoins hit emerging markets harder
The FSB’s emphasis on emerging and developing economies reflects structural differences between these markets and advanced economies. Many emerging countries have a history of high inflation, weaker institutions or shallow domestic capital markets. In such environments, a convenient, easily accessible dollar substitute can quickly gain traction, especially among younger, digitally savvy populations.
This adoption dynamic can accelerate a cycle that policymakers are keen to avoid. As more people opt for dollar stablecoins to protect their savings or facilitate cross‑border trade, confidence in the local currency can fall further. That, in turn, may push up borrowing costs for governments and businesses, prompting additional demand for foreign assets. Unlike traditional bank deposits, which are more visible and easier to regulate, stablecoin flows can move rapidly through global platforms and wallets.
Emerging markets also worry about the balance of power between domestic regulators and foreign stablecoin issuers. A token pegged to the US dollar but widely used in another country effectively imports the monetary stance and regulatory environment of the issuer’s home jurisdiction. Local authorities, however, have limited influence over how reserves are managed, what disclosures are made, or how redemptions are handled in times of stress.
Capital controls are another sensitive issue. Some developing economies rely on restrictions to reduce volatile capital flows and protect their external positions. Dollar stablecoins can undermine these controls if individuals can bypass banking channels and move value across borders with a smartphone and an internet connection. Even if regulators place limits on local crypto exchanges, peer‑to‑peer markets and offshore platforms may remain outside their direct reach.
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The regulatory puzzle: closing global gaps
The FSB’s call for more consistent oversight underscores one of the thorniest problems in regulating stablecoins: they are inherently cross‑border, while regulation is largely national. A stablecoin issued in one country may be held, traded and used for payments in dozens of others. Without coordination, each jurisdiction may apply different rules on licensing, reserve requirements, disclosure standards and consumer protection.
This uneven landscape creates two main dangers. First, user protection can vary dramatically depending on where they access a stablecoin, increasing the chance of losses or fraud in weaker regimes. Second, systemic risk can build up in jurisdictions that offer light‑touch oversight but host major parts of the global stablecoin ecosystem, from custodians and wallet providers to market‑making firms.
The FSB’s framework pushes for clear rules on reserve composition, segregation of client assets, redemption rights and operational resilience. For emerging markets, robust transparency around reserves-what assets back the stablecoin, where they are held, under what legal structure-matters especially, because a sudden loss of confidence could trigger capital flight or pressure on local currencies.
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Stablecoins versus CBDCs and local innovations
The report’s concerns also intersect with broader debates over central bank digital currencies (CBDCs) and modernized payment systems. Many emerging economies are exploring CBDCs or upgrading fast‑payment networks to offer a digital alternative that can compete with foreign stablecoins on convenience and cost, while keeping transactions inside the regulated perimeter.
A well‑designed CBDC or instant payment system could reduce the appeal of foreign stablecoins for domestic transactions by offering low‑fee, 24/7 transfers in local currency. However, these projects are complex, expensive and politically sensitive. Until they are implemented at scale, private dollar stablecoins may fill the gap, especially for remittances and cross‑border commerce where existing options are slow or overpriced.
Some policymakers see an opportunity in harnessing stablecoin technology while anchoring it in local currencies. This could take the form of regulated, domestic‑currency stablecoins or tokenized bank deposits that mimic some of the functionality of global stablecoins but remain fully integrated into the domestic financial system. The FSB’s work suggests that any such solution would need strong prudential and conduct rules from the outset.
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What the FSB’s warning means for market participants
For stablecoin issuers, the FSB’s message is that global scrutiny will intensify, especially around their footprint in emerging markets. Issuers may face tougher requirements on reserve management, jurisdictional licensing, anti‑money laundering controls and stress testing. Those hoping to operate at scale across borders will likely need to demonstrate that they can withstand large redemption waves without destabilizing underlying markets.
Institutional investors and payment providers experimenting with stablecoins will need to factor in regulatory risk as well as liquidity and counterparty risk. Changes in national rules-such as caps on stablecoin usage, special taxes or reporting obligations-could affect business models that depend on unfettered cross‑border flows.
For emerging market regulators, the report underlines the urgency of developing a clear national stance. Authorities that ignore the trend risk a shadow system developing outside their oversight. Yet excessively restrictive measures may drive activity underground or offshore, reducing transparency without reducing usage. The FSB appears to advocate a middle course: proactive regulation, international cooperation and investment in domestic digital payment alternatives.
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Balancing innovation and stability
Underlying the entire discussion is a tension that runs through modern finance: how to embrace innovation without sacrificing stability and monetary sovereignty. Stablecoins illustrate this tension vividly. They promise faster, cheaper and more programmable money, but when that money is tied to a foreign currency and governed by private entities, the trade‑offs become acute for vulnerable economies.
The FSB’s 2025 report does not call for a blanket ban on stablecoins. Instead, it urges governments to recognize that the risks are not evenly distributed and that emerging and developing markets may bear a disproportionate share of the downside if oversight fails to keep pace. As digital finance continues to evolve into 2026 and beyond, the debate over dollar stablecoins is likely to remain at the center of how the world rethinks cross‑border money.