Regulating Stablecoins in Developing Countries and Emerging Economies to Protect Local Currencies

Stablecoins are gaining traction as a viable alternative to traditional payment systems, with the potential to transform the global payments landscape. According to a recent McKinsey report, 2025 could be a pivotal year for stablecoins, driven by their growing adoption and favorable regulatory developments. Noticeably, the most popular stablecoins today are stablecoins pegged to the United States dollars. This, understandably, raises concerns about the potential dollarization of local economies and the negative impact this adoption may have on the value and stability of local currencies in both emerging economies and developing countries.

Here, I share my personal thoughts on how governments and regulators in both emerging economies and developing countries may start reacting, in the near future—if not already—through policy and regulation. Though it is not certain or clear what the policy and regulatory approaches will be exactly, I sense that the need to protect local or domestic currencies from the wind of foreign currency-pegged stablecoin adoption will be a primary goal for governments and regulators in these emerging economies and developing countries. What follows are my speculations. But first, let’s look at the key trends of stablecoin adoption.

Stablecoin Adoption and Key Trends:

1. Rapid Growth: The circulation of stablecoins has doubled in the past 18 months, reaching $250 billion, and is forecasted to reach $400 billion by the end of 2025 and $2 trillion by 2028.
2. Increasing Adoption: Stablecoins currently facilitate $20–30 billion in daily on-chain payment transactions, including remittances and settlements, which is less than 1% of global money transfer volume.
3. Legacy Payment Systems: Global legacy payment systems process $5–7 trillion in daily transfers, but stablecoins offer a faster, cheaper, and more efficient alternative.

Considering the key trends above and monetary policy factors, governments in developing countries and emerging economies will most likely consider new regulations to manage the growing adoption of foreign-currency-pegged stablecoins. This is a crucial area of focus as these digital currencies, while offering benefits like faster and cheaper payments, could also pose risks to a country’s monetary sovereignty and financial stability. 

To address this, I see governments in these developing countries and emerging economies introducing a multi-pronged regulatory approach that focuses on restricting certain uses of foreign stablecoins, promoting their own digital currencies, and creating a framework for local alternatives.

Restricting Foreign Currency-Pegged Stablecoins to Cross-Border Payments

One of the most immediate and likely actions is to restrict the use of foreign currency-pegged stablecoins like USDT, USDC, and EURC to cross-border payments and remittances. These stablecoins have proven immensely useful in these corridors, providing a fast and low-cost alternative to legacy systems. Their utility in this area is undeniable, and governments will likely want to harness this efficiency without allowing them to become a dominant form of domestic currency. 

Tightly Regulating Stablecoin Use as a Hedge Against Inflation

Another critical area of regulation may be supervising the use of foreign currency-pegged stablecoins as a hedge against local inflation. In many developing countries, citizens face high inflation and currency devaluation. Foreign currency-pegged stablecoins offer a way to protect their savings by converting them into a more stable asset like the US dollar.  

Governments are likely to address this by implementing supervisory rails on regulated centralized exchanges and over the counter (OTC) platforms. This means requiring these exchanges to report transactions, apply strict Know Your Customer (KYC) and Anti-Money Laundering (AML) checks, and potentially even impose limits on how much a person can convert from local currency into stablecoins. The goal isn’t to eliminate this use case entirely but to bring it under a controlled, transparent framework that prevents massive capital flight and its potential destabilizing effects on the local economy.

Rejigging CBDCs to Cover Cross-Border Payments

To fill the void I believe may have been created by restricting foreign stablecoins to cross-border use, central banks in developing countries will likely start revisiting their central bank digital currency (CBDC) projects with a focus on cross-border payments. While initial CBDC efforts were often aimed at improving domestic payments, the growing threat of “dollarization” via stablecoins may most likely prompt a strategic shift. 

Central banks will likely accelerate the development of CBDC frameworks that are interoperable with those of other nations, enabling seamless and low-cost international transactions. This allows them to offer a state-backed digital alternative that provides the same benefits as stablecoins—speed, cost-effectiveness, and transparency—but under the full control of the national monetary authority. From a public-interest angle, this may be considered as helping central banks ensure that a nation’s monetary infrastructure remains sovereign and robust.

Introducing Regulatory Frameworks for Local Stablecoins

Finally, governments will likely introduce and improve registration and licensing frameworks for privately-owned local stablecoins. These are stablecoins pegged to the local fiat currency, such as a Nigerian Naira stablecoin (like the cNGN for example), a Kenyan Shilling stablecoin, or a South African Rand stablecoin, etc. With a robust stablecoin regulation, I see local innovators building local currency-pegged stablecoin solutions. Also, existing foreign stablecoin issuers like Tether and Circle may even see a business case for either localizing their stablecoin solutions or partnering with local issuers or platforms for integration. 

By creating a clear regulatory path, with the central bank as the chief regulator, governments can encourage the development of a trusted and compliant domestic stablecoin ecosystem. This provides the efficiency of blockchain technology for local payments without the risk of foreign currency dominance. These frameworks will likely focus on strict reserve requirements, regular audits, consumer protection, and integration with the existing financial system, ensuring that these new digital assets are safe, sound, and supportive of the national currency.

Regulation by Enforcement Should be Discouraged and Avoided

More often than not, I perceive that some governments and regulators in developing countries tend to regulate through enforcement. This should be discouraged.

Regulation by enforcement refers to a regulatory approach where authorities primarily use enforcement actions, such as fines, penalties, and lawsuits, to shape the behavior of industries or companies, rather than through clear, pre-defined rules or guidelines. 

Governments should encourage relevant regulatory bodies to adopt a more proactive and responsive approach. Regulation by enforcement can lead to uncertainty and inconsistency, as operators and users may not always know what is expected of them until after enforcement actions are taken. In the context of cryptocurrencies and stablecoins, regulation by enforcement can create challenges for businesses, as they may struggle to comply with unclear or evolving regulatory expectations.

Engaging Early with Governments and Regulators

Given the profound impact this regulation will have on the stablecoin space in emerging economies and developing countries, I wholeheartedly agree with McKinsey’s recommendation that operators proactively engage with regulators to shape safe and effective frameworks. Leaving the development of these regulations solely to governments and regulators could pose significant risks, underscoring the importance of industry collaboration in this process.

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