Recent passage of the GENIUS Act has accelerated the adoption of U.S. dollar stablecoins. If widely accepted, U.S. dollar tokens could fundamentally impact emerging markets’ payment systems and monetary policies. Stablecoin adoption carries potential benefits, such as cheaper international payments and greater remittance transfers. However, it could also make EM local financial conditions more dependent on the U.S. dollar and U.S. short-term rates, reversing years of effort to boost monetary policy independence and local market depth. Increased demand for U.S. dollar-denominated assets could also weaken monetary policy transmission from EM central banks and bank intermediation, thereby putting downward pressure on capital flows. So, while we do see efficiency gains from the spread of U.S. dollar-linked stablecoins in the least developed markets, the risks for more developed EM economies are quite significant.
One positive impact is that emerging markets—particularly the least developed ones—could benefit from cheaper international payments and greater remittance inflows. Of the US$818 billion global remittance flows in 2023, US$656 billion went to low- and medium-income countries in what is a notoriously inefficient system (Fig 1). The cost of sending US$200 (a typical remittance transaction size) averages 6.5%, while some corridors, such as Sub-Saharan Africa, average nearly 9%. Cutting transaction fees by 5% could save up to US$16 billion per year, according to the World Bank. The use of stablecoins has increased in recent years, with the average supply of stablecoins in circulation increasing by 28% in each of the past two years (Fig 2).
Figure 1
Remittance Inflows by Region to Low- and Middle-Income Countries
By compressing end-to-end costs and settlement times, increased use has the potential to be an impactful source of savings. Lower transaction inefficiencies may also encourage more frequent inflows.1 This means more disposable income to support consumption and real economic activity—especially if the country is less developed and more reliant on remittances.
Figure 2
Average Supply of Stablecoins in Circulation
If the destination country has a developed payment system, locals would likely convert stablecoins into the domestic currency. In a less sophisticated domestic banking and regulatory system, stablecoins may start to replace the local currency as more foreign inflows are “trapped” as stablecoins or are adopted as a parallel system to the domestic architecture.
Currency Substitution
Although remittance efficiencies would likely increase inflows, currency substitution could reduce overall demand for local currency. For example, friction stemming from dated or underinvested local banking infrastructure could discourage conversion (Fig 3). If remittances denominated in stablecoin are not converted into local currency, weaker demand would weigh on the exchange rate. Persistent depreciation could have an inflationary effect or further undermine confidence in local currencies, necessitating tighter monetary policy or FX intervention to stabilize the currency.
Figure 3
Stylised Matrix of Stablecoin Adoption Likelihood
Broad-based substitution into U.S. dollar-denominated token resembles dollarization, however, and could undermine the independence of monetary policy. Inflation spikes or doubts about policy credibility may drive residents to adopt stablecoins as a medium of exchange and store of value, bypassing banks and traditional substitutes such as FX or gold. This would shift a growing share of money outside of central bank control, making inflation harder to manage and requiring higher policy rates in adverse conditions. Such dynamics risk a vicious cycle of currency substitution and ineffective policy that are similar to past experiences in Türkiye or Argentina.
A Competitor to Local Markets
Broader stablecoin use could also make monetary conditions more procyclical. While legislation bans interest on U.S stablecoins, some offer indirect incentives, and there are tokenized T-bill funds which issue shares that retail holders can trade using blockchain technology.2 Easy conversion from local currency into these instruments could make the front-end of the U.S. yield curve a competitor to local deposits, forcing EM central banks to maintain positive real rate differentials versus the Fed. If U.S. front-end yields rise, narrowing differentials could make stablecoins attractive during stress, amplifying outflows from the local currency and undermining accommodative policy when it would be needed most.
Lower demand for local currency also risks bank disintermediation and tighter credit. Depositors shifting to stablecoins represent de facto capital outflows and liquidity drains. Of course, this depends on the degree of sophistication of retail customers and the banking infrastructure. Credit would tighten as money velocity slows and its multiplier falls. Banks may raise deposit rates to retain customers, increasing their funding costs. Marginal lending would probably fall, and local currency credit would tighten further. Shallower local markets due to disintermediation would also hurt domestic investment and government financing.
Conversion into stablecoins constitutes capital outflows, requiring adjustment via narrower current accounts, reserve drawdowns, or external borrowing. Financing deficits becomes harder as outflows divert domestic funding and investment out of the economy. Therefore, authorities may resort to higher policy rates, costly external financing, FX reserve use, or fiscal tightening to close gaps.
Run Risks
Stablecoin holdings may also lack deposit insurance. Although the GENIUS Act mandates 1:1 reserve backing, parallels with the 19th-century Free Banking era warrant caution.3 Despite more sophisticated regulation today, token proliferation could expose non-U.S. holders to fraud or mismanagement. A run on issuers could inflict losses on EM residents heavily invested in stablecoins while a mass exit could trigger rapid local currency appreciation.4 Both the loss of wealth and heightened exchange rate volatility stemming from uncertainty around new stablecoin issuers would dampen aggregate demand.
Implications for Central Bank Reserves
Given the considerations above, implications for central bank reserves are context dependent. If residents already access dollar-denominated stablecoins, reserve managers may feel less need to hold large U.S. dollar buffers for FX stability, prompting diversification into other assets, such as gold or RMB for strategic reasons. Conversely, widespread adoption of U.S. Treasury-backed stablecoins (especially where conversion back to local currency is difficult) could reinforce dollar dominance and make Treasuries even more central to reserve management. In this case, growing liquid U.S. dollar allocations would complement efforts to maintain currency stability.
As central banks respond to stablecoin proliferation, investors should stay alert to evolving regulatory, monetary, and economic policies in emerging markets. Economic instability, high inflation, and low-cost remittances will increase stablecoin appeal among residents. This shift poses challenges for central banks, including FX volatility, risk of capital flight, and shallower local markets. Policy rates may rise to maintain credibility and widen differentials with the Fed. Central banks must therefore remain committed to transparent and credible monetary policymaking. If managed effectively, local rates could converge toward Fed levels, creating opportunities in local markets.
Credit and local investors should therefore be aware of how stablecoin adoption and subsequent policy responses affect assumptions on monetary policy assertiveness, fiscal capacity, FX pressures, reserve drawdowns, and financing costs.
1 A stablecoin is a type of cryptocurrency engineered to maintain a stable price by pegging its value to a real-world asset, such as the U.S. dollar or gold.
2 Wired, “The Loophole Turning Stablecoins into a Trillion-Dollar Fight,” September 3, 2025.
3 Gary B. Gorton & Jeffrey Y. Zhang, Taming Wildcat Stablecoins, University of Chicago Law Review (2023)
4 BIS Annual Economic Report, “The Next-Generation Monetary and Financial System,” June 24, 2025.
Source(s) of data (unless otherwise noted): PGIM Fixed Income, as of December 2025.
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