The stablecoin has emerged as one of the most powerful and paradoxical products as TradFi grapples with technological innovation and their rising consumer demand. The US (policy and private sector) have pivoted to the realization that they may be leveraged as a powerful instrument to fund the worldâs largest economy with its safest financial instrument, U.S. Treasuries. Standard Chartered recently released a research piece theorizing that stablecoins could negatively impact the stability of financial institutions in developing economies, triggering massive deposit flight and undermining local central banks.
The stablecoin story is evolving with two distinct financial outcomes possible as the most ardent users (Emerging Markets) may further destabilize the economic infrastructure they seek to protect their fortunes from, while further strengthening developed market enterprise.
The Digital Dollarization: $1 Trillion In Stablecoin At Stake
From Argentina to Africa, currency conversion into USD is a facet of everyday life. Stablecoins have turbo-charged this process, giving it a frictionless, digital pathway.
For decades, citizens of countries with weak, unstable currencies have opted to exchange their local currencies into U.S. dollars or dollar-denominated assets. In Zimbabwe, a country plagued by years of hyperinflation and economic instability, approximately 85% of transactions are USD-denominated. In other countries like Ecuador and El Salvador have made the US dollar their official currency.
The overwhelming majority of stablecoin usage is concentrated in the developing world. In Emerging Markets, stablecoins are a necessity, offering protection against hyperinflation and unpredictable political crises.
In Developed Markets, stablecoins have been a fiat on-ramp for crypto trading, institutional settlement, or a flight from bank deposits into the digital asset world. Users access alternative digital means of payment, finance, and investing that compete with myriad TradFi options on speed, efficiency and cost.
The two use-cases stand in stark contrast. One could argue the two positions pose a question of financial niceties vs necessities.
Standard Chartered has raised the first alarm bells with respect to potential negative impacts posed by the stablecoin economy.. According to an October research report, current trends suggest that as much as $1 trillion in deposits could exit emerging market banks and move into stablecoins by the end of 2028. Much more than a theoretical threat, this transfer of wealth could be a profound risk to the foundation of many national credit systems.
Emerging Market Stablecoin Growth
The core motivation behind stablecoin growth in Emerging Markets is self-prese
rvationâ people want to preserve the wealth theyâve worked so hard for. According to Standard Chartered, for citizens in countries facing hyperinflation or currency devaluation, the âreturn of capital matters more than return on capital.â
Stablecoins offer a reliable, instant, and borderless means to store wealth pegged to the US Dollar in a digital wallet. When a citizen liquidates their local currency (Turkish Lira, Argentine Pesos, or Nigerian Naira, for example) deposit to acquire a stablecoin, that local currency liquidity vanishes from the domestic banking system.The consequences of this exodus are multifaceted and dire for local authorities.
Fractional Reserve Banking: The TradFi OS
Fractional reserve banking is the dominant banking model worldwide. It allows banks to keep a certain percentage of customer deposits in reserve, while lending the remainder to borrowers.As commercial banks lose their cheapest and most reliable source of funding (retail deposits), their ability to extend credit to local businesses and consumers is constrained, raising the cost of borrowing and throttling domestic economic growth.
Managing Monetary Policy
Central banks rely on traditional toolsâlike raising interest ratesâto manage the money supply and combat inflation. When vast sums of local currency are converted into offshore dollar tokens outside their visibility and control, this traditional monetary transmission mechanism is severely weakened. Regulators lose sight of the true extent of dollar flows or the effectiveness of their policy actions.
Accelerating The Flight Of Capital: Stablecoin Vs. ATM
In July 2015, the world watched the Greek Debt Crisis unfold as photographs and video of Greek citizens lining up at ATMs throughout Greece to withdraw their hard-earned savings streamed across the globe.
Like the Greek Debt Crisis, the 1997 Asian Financial Crisis, or even the Silvergate or SVB banking collapses, a flight of capital is usually the canary in the coalmine of an impending liquidity crisis. Stablecoins provide a seamless, 24/7 path for capital to flee a local currency, potentially accelerating exchange rate volatility and a banking collapse. They could potentially enable an instantaneous, digital capital flight, which traditional controls were not designed to manage.
Countries flagged as most vulnerable include those with weak fiscal positions and high reliance on remittances, such as Egypt, Pakistan, Bangladesh, Sri Lanka, and others.
Funding the U.S. Debt Via Stablecoin
If a trillion dollars is potentially drained from the developing world, where would that capital ultimately land?
The demand for stablecoins in emerging markets creates an inexorable demand for the safest possible collateral to back them: U.S. Treasuries. This mechanism is the crucial second half of the stablecoin paradox, one that actively strengthens the financial core of the United States.
Stablecoins, particularly those aiming for regulatory compliance and a 1:1 peg, must hold highly liquid, low-risk reserves. These reserves are predominantly made up of cash, cash equivalents, and short-dated U.S. Treasuries.
Research from institutions like the Federal Reserve Bank of Kansas City highlights this crucial financial linkage. As the stablecoin research & development continues, it is projected that the total market cap will grow from $300+ billion today into the trillions in three short years, boosting the appetite for U.S. short-term government debt.
In its analysis, the Kansas City Fed notes that while stablecoins may displace demand for other short-term instruments like money market funds and drive a non-trivial, incremental demand for U.S. debt.
A New Anchor of Stability
At a time when Fiscal and Monetary Policy are in sharp focus, the growing demand for Treasuries would serve the U.S. well. The Fed research validates the idea that stablecoins are not just a crypto phenomenon, but a critical new piece of the U.S. government funding puzzle.
At $38 trillion and growing (rapidly!), increased treasury demand would absorb the enormous issuance of U.S. government debt, while potentially helping to keep borrowing costs lower than they otherwise might be.
Ironically, the embrace of stablecoins enables the proliferation of a four-letter word in banking circles: Shadow Banking. By mandating that reserve assets are overwhelmingly high-quality and liquid, regulation effectively turns the digital assets industry into a captive investor for U.S. debt.
Stablecoin Promotes Strong Dollar Policy
Every USD-denominated stablecoin issued ostensibly becomes a vote of confidence in the U.S. dollar, reinforcing its status as the worldâs reserve currency. The digital infrastructure created by stablecoins simply makes it easier for the rest of the world to transact and save in dollars, cementing its global financial dominance during a precarious time in modern global finance.
Stablecoinâs Global Interconnection and Regulatory Challenge
The stablecoin market has created a direct, instantaneous capital transfer pipeline: risk avoidance in the developing world fuels an insatiable demand for safe assets collateralized by U.S. Treasuries around the world, none more so than in Emerging Markets.
As citizens convert local currencies to protect themselves from the risk of inflation and economic instability, the converted capital ultimately reinforces the financial position of the United States. USD-denominated stablecoins could perform a capital function that the global financial system accomplished over days in a matter of seconds.
While opening doors for people negatively impacted by hyperinflation and economic instability, rapidly growing usage poses a challenge to global financial regulators and banks as they find ways to harness the benefits of stablecoin technology (cheaper cross-border payments and financial inclusion) without allowing them to undermine the stability of the most vulnerable economies they are serving.