Unstable
08 Jan 2026
Karl Loomes, group editor at The Digital Assets Edge, looks at the potential for stablecoins, acting as digital dollars, to exacerbate dollarisation in emerging market economies
Image: nuddss/stock.adobe.com
Cash is king, so they say, and at the top of the royal food chain, the greenback stands above all the rest. For many emerging market economies, the stability and security of the US dollar can so outweigh that of domestic legal tender, that dollars become the de facto currency for individuals and businesses alike.
When this happens informally, as a population loses confidence in their own currency, it is unofficial dollarisation. When a government formally adopts the US dollar as its sole currency, usually to stabilise the economy or combat hyperinflation, it is official dollarisation.
With the emergence of distributed ledger technology (DLT) and the growth of a global digital infrastructure, a new element may be set to propagate dollarisation at greater levels than ever before — stablecoins.
Easy money
Stablecoins are a blockchain-facilitated form of digital currency, similar to broader cryptocurrencies like bitcoin in many respects. Where they differ, however, is that fiat-backed stablecoins aim to hold equivalent assets — typically cash and short-term government securities — for each token in circulation.
As it stands, around 99 per cent of stablecoins are pegged to the US dollar. In most cases this relationship is at a fixed rate, often 1:1, where one stablecoin token (e.g. a Tether USDT) is designed to be worth one dollar. Though stablecoin companies are private firms rather than government agencies or central banks, in essence this relationship makes the token a digitised US dollar, with all the benefits blockchain technology entails.
Stablecoins can offer a more efficient, lower-cost alternative to both physical money and the traditional banking system. In most cases, at the retail level, bank accounts are not even required — a far more important aspect in emerging markets than for developed economies. For those countries that already favour a foreign currency over their own, it can be argued these stablecoins are like the old dollar, but better.
If the US dollar is already a better currency than a domestic one, and the new digitised dollar offering that a stablecoin brings makes it even safer, cheaper, and more convenient to use, what could some of the pain points be?
A medium of exchange
At its most basic, money — whether it is cash, gold coins, sea shells, or digits on a computer screen — is a medium of exchange for goods and services. For anything to function as money, it relies on two key elements. The first is that everybody agrees that the medium of exchange is valid, and everyone agrees on the value of that medium of exchange.
For me to accept a piece of paper in return for giving you a chocolate bar, I have to know that I can take that piece of paper into a shop and exchange it for a chocolate bar’s worth of groceries. The shop has to know that it can take my piece of paper, put it with everybody else’s pieces of paper, and share some of them out with its employees for the time they have worked. Those employees have to accept that if they have exchanged a portion of their time in order to receive pieces of paper, they can use those pieces of paper to pay bills, buy food, go to the cinema, and if they like, come to me to buy another chocolate bar.
The second, often overlooked element for money to function, is the ability to actually facilitate the exchange. In essence, any form of money, even if everybody agrees on its value and believes in it, is worthless if you can not use it, or actually receive the goods and services you have paid for with it.
If I go into my local London pub right now, I can have as many pieces of paper in my wallet as I like, but unless I have a rectangular plastic card with numbers on, that when scanned confirms my bank account has the right threshold of digital numbers, and my bank is able to reduce those numbers by the correct amount as, at the same time, the pub’s bank can increase its numbers by a corresponding amount, I can not buy a pint. In the country pub I was in on holiday recently, that same plastic card was of no use to me at all — I needed pieces of paper.
When it comes to the uptake and use of stablecoins in a country, this second factor could be a bottleneck. However, informal dollarisation usually starts with individuals and small to medium-sized enterprises (SMEs). Here, existing stablecoin infrastructure is largely in place in many countries. People and businesses can earn, save, spend, and receive stablecoins all on a phone app. At the industrial level, proactive effort and investment may be required to make its use practical at scale, but for the average person, it already works.
It seems likely then, that stablecoins will simply act as a facilitator of sorts, when it comes to dollarisation. They certainly make it easier, and will no doubt speed along the process, but it is hard to envision a ‘threshold’ level in an economy where a country would only move to dollarisation because of the extra push from stablecoins.
What’s the problem?
Why is dollarisation a problem, you may ask? If hyperinflation has destroyed the value of a domestic currency, or government economic policies have undercut confidence in the system so much, where is the harm in turning to a stronger, more stable currency?
The problem is monetary policy.
There are two main levers a government and/or independent central banks can use to boost economic growth or curb inflation — fiscal policy (taxation and government expenditure) and monetary policy (interest rates and money supply).
At its very simplest, monetary policy, as the name suggests, is heavily reliant on having control over the money in an economy — how much money there is, and how much borrowing that money costs (or saving it earns). A central bank has control over these aspects only in regards to its domestic currency (aside from some small foreign currency operations).
If the dollar and not the domestic currency is dominant in an economy, then monetary policy is at best limited, and at worst irrelevant. If the central bank increases money supply, for example, in order to boost growth, this will only increase the domestic money supply that is not actually being used, and so it will have no effect. They are not able to increase the number of US dollars in global supply.
On the other side of this, it is the Federal Reserve that decides monetary policy for the dollar, on behalf of, and in aim of, its own economic goals.
This leads to a scenario where monetary policy could have the opposite effect for a dollarised country than is needed.
If the Fed were to raise interest rates in order to help fight inflation in the US, the counter effect to this is curbing economic growth. In a dollarised emerging market, it is possible that the country actually needs economic growth.
These higher interest rates would have the intended effect in the US — to increase the cost of borrowing, increase the incentive to save, and thus lower growth and inflation — but would have the same effect in the country that actually needs growth.
Both of these aspects — the inability to use monetary policy to achieve economic goals, and being subject to US monetary policy which may be counter to your domestic economic aims — are likely to exacerbate the problems that lead to dollarisation in the first place.
Public money, private control
One new aspect that stablecoins do bring, and one with yet perhaps unknown consequences, is that despite their interaction with, and potential to overtake, traditional currencies, currently they are almost wholly owned and operated by private companies (though some governments are exploring their own stablecoins).
Private companies create the platforms and issue the stablecoins, all with the intention of earning a profit.
As with other private firms, they can change their terms and conditions at any stage, and have control over how their assets are managed, invested, and redeemed.
Stablecoins function like money, circulate like money, and are used globally like money — but they are issued by private companies whose incentives, governance, and risk frameworks differ fundamentally from those of public institutions.
Though the specifics for each coin and issuer vary — depending on jurisdiction and regulatory oversight — the private nature of stablecoins brings about a number of unique potential issues.
Stablecoin issuers, unless regulated to do so, have no fiduciary duty to coin holders.
Unlike investment firms for example, who are compelled to act in good faith in the best interest of investors, stablecoin companies act in their own interest.
One key area this could cause problems is with the assets underpinning the stablecoins. For USD-backed coins, cash and short term Treasury bonds and notes make up the majority of the assets representing dollars. But this is effectively at the discretion of the firm. These assets are where the company makes its profits, so it is entirely plausible that issuers may find reasons — legitimately and in good faith — to diversify their portfolio to make decent returns.
A shift to highlight rated corporate bonds, for example, may look like a small step on paper, but the risk profiles governing corporate bonds compared to sovereign bonds are entirely different, even if the corporate bonds are AAA rated. Consider, for example, the market conditions and considerations that will impact Johnson & Johnson and Microsoft — two of the highest rated US corporate bonds — compared to those effecting US interest rates and fiscal strength.
What is more likely to go bust, a large company (think Enron or Lehman Brothers), or the entire US economy?
Then consider the other side, what if the private company that issued the stablecoin was to be in trouble? As a private company, it is perfectly possible that market conditions, legislation and regulations, or corporate difficulties could make a stablecoin issuer have to cease operations. If there are billions of its tokens existing as digital dollars, what happens when they are no longer supported?
Once again the disconnect between the US and the dollarised country may have an impact. When the credit crunch and global recession happened in 2008, governments were forced to support the banks with tax pay money.
This was not altruistic, the phrase ‘too big to fail’ was accurate — if these large financial institutions collapsed, economies around the world would follow.
But governments were not using their tax revenues to support global economies, they were doing it to support their own.
Returning to the stablecoin scenario, the US government may be willing to support a US firm that is about to collapse, if a large portion of its population or its economy was set to be damaged, but would they be willing to do so for an emerging market economy because they happen to use a digitised dollar? Would voters be happy for them to do it?
In this theoretical scenario, the stablecoin would instantly be worthless. Depending on the jurisdiction, coin holders may have no privileged claim on the underlying, pegged assets such as secured creditors might. The fact that the entire economy of an emerging market relies on the coin will not change it. The US government may be willing to artificially prop up a firm whose demise would destroy its economy, but would it do so for another?
On a lesser scale, and as further examples of related firms can also have a dire impact on stablecoins, we can look to the collapse of Silicon Valley Bank (SVB) in March 2023 and its impact on Circle’s USDC coin.
At the time, roughly eight per cent of USDC’s reserves that maintained the 1:1 peg were held at SVB. When there was a run on the bank and depositors temporarily lost access to their funds, in practical terms USDC was no longer backed by dollar assets on a one for one basis. This triggered a sell off of the currency, and at its worst resulted in a 12 per cent depeg. Circle itself never changed the 1:1 peg, but inaccessible reserves achieved the same thing.
If USDC had been a significant digitised dollar in a dollarised economy at the time, in effect the currency of a country would have been devalued by 12 per cent due to the closure of a private bank in a totally different country.
An uncertain conclusion
These examples highlight a fundamental tension. Stablecoins behave like public money, yet they are ultimately private instruments, built atop private balance sheets, dependent on private governance, and exposed to the fragilities of the firms and financial institutions that support them.
In a domestic setting this may be manageable — users can redeem, switch providers, or simply revert to bank deposits. But in an economy that has informally dollarised through stablecoins, the stakes are higher. The ‘currency’ becomes inseparable from the viability of the issuer, the banks holding its reserves, and the operational continuity of the technology itself.
Even without outright insolvency, an issuer’s decisions — or missteps — can have unintended consequences for any country that relies heavily on their digital dollars. A delayed audit, a sudden change in reserve reporting, a shift in custodians, or a regulatory action in the US could undermine confidence in a market thousands of miles away.
Unlike traditional dollarisation, which relies on sovereign-issued cash, stablecoin-led dollarisation introduces a new layer of interdependence: the stability of a foreign private company becomes a proxy for the stability of the currency.
And while regulation is strengthening in parts of the world — notably in the EU under Markets in Crypto-Assets Regulation (MiCA), and in the US with the Guiding and Establishing National Innovation for US Stablecoins (GENIUS) Act — global oversight remains patchy.
Offshore issuers, which dominate emerging market usage, operate with fewer constraints. Stablecoin users often assume a degree of safety that is neither legally guaranteed nor operationally enforced.
The road ahead
Stablecoins have not invented dollarisation, nor have they created the economic pressures that drive it. But they have lowered the barrier to entry so dramatically that in some markets, the dollar is only ever a phone app away.
Where domestic currencies are weak, volatile, or restricted, the appeal is obvious. For individuals and businesses facing daily uncertainty, a digital dollar that settles instantly has real, practical value.
Yet the ease of adoption creates its own risks. A country that dollarises through physical notes or bank deposits is placing its monetary fate in the hands of a foreign central bank. A country that dollarises through stablecoins is placing an additional layer of its financial system in the hands of private issuers, custodians, exchanges, and technology providers whose incentives and lifecycles may not align with national economic stability.
There is no clear path forward. Regulators are racing to catch up, central banks are exploring their own digital alternatives, and stablecoin issuers are positioning themselves as part of the future architecture of global finance.
Emerging markets, meanwhile, are likely to keep using the tools that work — and today, for many, that means digital dollars.
Dollarisation has always been a symptom of deeper problems. Stablecoins do not change that. But they do change the speed, scale, and structure of how dollarisation unfolds.
And for policymakers in vulnerable economies, the challenge now is not whether people will adopt digital dollars — they already have — but what happens when the private infrastructure behind them is tested.
When this happens informally, as a population loses confidence in their own currency, it is unofficial dollarisation. When a government formally adopts the US dollar as its sole currency, usually to stabilise the economy or combat hyperinflation, it is official dollarisation.
With the emergence of distributed ledger technology (DLT) and the growth of a global digital infrastructure, a new element may be set to propagate dollarisation at greater levels than ever before — stablecoins.
Easy money
Stablecoins are a blockchain-facilitated form of digital currency, similar to broader cryptocurrencies like bitcoin in many respects. Where they differ, however, is that fiat-backed stablecoins aim to hold equivalent assets — typically cash and short-term government securities — for each token in circulation.
As it stands, around 99 per cent of stablecoins are pegged to the US dollar. In most cases this relationship is at a fixed rate, often 1:1, where one stablecoin token (e.g. a Tether USDT) is designed to be worth one dollar. Though stablecoin companies are private firms rather than government agencies or central banks, in essence this relationship makes the token a digitised US dollar, with all the benefits blockchain technology entails.
Stablecoins can offer a more efficient, lower-cost alternative to both physical money and the traditional banking system. In most cases, at the retail level, bank accounts are not even required — a far more important aspect in emerging markets than for developed economies. For those countries that already favour a foreign currency over their own, it can be argued these stablecoins are like the old dollar, but better.
If the US dollar is already a better currency than a domestic one, and the new digitised dollar offering that a stablecoin brings makes it even safer, cheaper, and more convenient to use, what could some of the pain points be?
A medium of exchange
At its most basic, money — whether it is cash, gold coins, sea shells, or digits on a computer screen — is a medium of exchange for goods and services. For anything to function as money, it relies on two key elements. The first is that everybody agrees that the medium of exchange is valid, and everyone agrees on the value of that medium of exchange.
For me to accept a piece of paper in return for giving you a chocolate bar, I have to know that I can take that piece of paper into a shop and exchange it for a chocolate bar’s worth of groceries. The shop has to know that it can take my piece of paper, put it with everybody else’s pieces of paper, and share some of them out with its employees for the time they have worked. Those employees have to accept that if they have exchanged a portion of their time in order to receive pieces of paper, they can use those pieces of paper to pay bills, buy food, go to the cinema, and if they like, come to me to buy another chocolate bar.
The second, often overlooked element for money to function, is the ability to actually facilitate the exchange. In essence, any form of money, even if everybody agrees on its value and believes in it, is worthless if you can not use it, or actually receive the goods and services you have paid for with it.
If I go into my local London pub right now, I can have as many pieces of paper in my wallet as I like, but unless I have a rectangular plastic card with numbers on, that when scanned confirms my bank account has the right threshold of digital numbers, and my bank is able to reduce those numbers by the correct amount as, at the same time, the pub’s bank can increase its numbers by a corresponding amount, I can not buy a pint. In the country pub I was in on holiday recently, that same plastic card was of no use to me at all — I needed pieces of paper.
When it comes to the uptake and use of stablecoins in a country, this second factor could be a bottleneck. However, informal dollarisation usually starts with individuals and small to medium-sized enterprises (SMEs). Here, existing stablecoin infrastructure is largely in place in many countries. People and businesses can earn, save, spend, and receive stablecoins all on a phone app. At the industrial level, proactive effort and investment may be required to make its use practical at scale, but for the average person, it already works.
It seems likely then, that stablecoins will simply act as a facilitator of sorts, when it comes to dollarisation. They certainly make it easier, and will no doubt speed along the process, but it is hard to envision a ‘threshold’ level in an economy where a country would only move to dollarisation because of the extra push from stablecoins.
What’s the problem?
Why is dollarisation a problem, you may ask? If hyperinflation has destroyed the value of a domestic currency, or government economic policies have undercut confidence in the system so much, where is the harm in turning to a stronger, more stable currency?
The problem is monetary policy.
There are two main levers a government and/or independent central banks can use to boost economic growth or curb inflation — fiscal policy (taxation and government expenditure) and monetary policy (interest rates and money supply).
At its very simplest, monetary policy, as the name suggests, is heavily reliant on having control over the money in an economy — how much money there is, and how much borrowing that money costs (or saving it earns). A central bank has control over these aspects only in regards to its domestic currency (aside from some small foreign currency operations).
If the dollar and not the domestic currency is dominant in an economy, then monetary policy is at best limited, and at worst irrelevant. If the central bank increases money supply, for example, in order to boost growth, this will only increase the domestic money supply that is not actually being used, and so it will have no effect. They are not able to increase the number of US dollars in global supply.
On the other side of this, it is the Federal Reserve that decides monetary policy for the dollar, on behalf of, and in aim of, its own economic goals.
This leads to a scenario where monetary policy could have the opposite effect for a dollarised country than is needed.
If the Fed were to raise interest rates in order to help fight inflation in the US, the counter effect to this is curbing economic growth. In a dollarised emerging market, it is possible that the country actually needs economic growth.
These higher interest rates would have the intended effect in the US — to increase the cost of borrowing, increase the incentive to save, and thus lower growth and inflation — but would have the same effect in the country that actually needs growth.
Both of these aspects — the inability to use monetary policy to achieve economic goals, and being subject to US monetary policy which may be counter to your domestic economic aims — are likely to exacerbate the problems that lead to dollarisation in the first place.
Public money, private control
One new aspect that stablecoins do bring, and one with yet perhaps unknown consequences, is that despite their interaction with, and potential to overtake, traditional currencies, currently they are almost wholly owned and operated by private companies (though some governments are exploring their own stablecoins).
Private companies create the platforms and issue the stablecoins, all with the intention of earning a profit.
As with other private firms, they can change their terms and conditions at any stage, and have control over how their assets are managed, invested, and redeemed.
Stablecoins function like money, circulate like money, and are used globally like money — but they are issued by private companies whose incentives, governance, and risk frameworks differ fundamentally from those of public institutions.
Though the specifics for each coin and issuer vary — depending on jurisdiction and regulatory oversight — the private nature of stablecoins brings about a number of unique potential issues.
Stablecoin issuers, unless regulated to do so, have no fiduciary duty to coin holders.
Unlike investment firms for example, who are compelled to act in good faith in the best interest of investors, stablecoin companies act in their own interest.
One key area this could cause problems is with the assets underpinning the stablecoins. For USD-backed coins, cash and short term Treasury bonds and notes make up the majority of the assets representing dollars. But this is effectively at the discretion of the firm. These assets are where the company makes its profits, so it is entirely plausible that issuers may find reasons — legitimately and in good faith — to diversify their portfolio to make decent returns.
A shift to highlight rated corporate bonds, for example, may look like a small step on paper, but the risk profiles governing corporate bonds compared to sovereign bonds are entirely different, even if the corporate bonds are AAA rated. Consider, for example, the market conditions and considerations that will impact Johnson & Johnson and Microsoft — two of the highest rated US corporate bonds — compared to those effecting US interest rates and fiscal strength.
What is more likely to go bust, a large company (think Enron or Lehman Brothers), or the entire US economy?
Then consider the other side, what if the private company that issued the stablecoin was to be in trouble? As a private company, it is perfectly possible that market conditions, legislation and regulations, or corporate difficulties could make a stablecoin issuer have to cease operations. If there are billions of its tokens existing as digital dollars, what happens when they are no longer supported?
Once again the disconnect between the US and the dollarised country may have an impact. When the credit crunch and global recession happened in 2008, governments were forced to support the banks with tax pay money.
This was not altruistic, the phrase ‘too big to fail’ was accurate — if these large financial institutions collapsed, economies around the world would follow.
But governments were not using their tax revenues to support global economies, they were doing it to support their own.
Returning to the stablecoin scenario, the US government may be willing to support a US firm that is about to collapse, if a large portion of its population or its economy was set to be damaged, but would they be willing to do so for an emerging market economy because they happen to use a digitised dollar? Would voters be happy for them to do it?
In this theoretical scenario, the stablecoin would instantly be worthless. Depending on the jurisdiction, coin holders may have no privileged claim on the underlying, pegged assets such as secured creditors might. The fact that the entire economy of an emerging market relies on the coin will not change it. The US government may be willing to artificially prop up a firm whose demise would destroy its economy, but would it do so for another?
On a lesser scale, and as further examples of related firms can also have a dire impact on stablecoins, we can look to the collapse of Silicon Valley Bank (SVB) in March 2023 and its impact on Circle’s USDC coin.
At the time, roughly eight per cent of USDC’s reserves that maintained the 1:1 peg were held at SVB. When there was a run on the bank and depositors temporarily lost access to their funds, in practical terms USDC was no longer backed by dollar assets on a one for one basis. This triggered a sell off of the currency, and at its worst resulted in a 12 per cent depeg. Circle itself never changed the 1:1 peg, but inaccessible reserves achieved the same thing.
If USDC had been a significant digitised dollar in a dollarised economy at the time, in effect the currency of a country would have been devalued by 12 per cent due to the closure of a private bank in a totally different country.
An uncertain conclusion
These examples highlight a fundamental tension. Stablecoins behave like public money, yet they are ultimately private instruments, built atop private balance sheets, dependent on private governance, and exposed to the fragilities of the firms and financial institutions that support them.
In a domestic setting this may be manageable — users can redeem, switch providers, or simply revert to bank deposits. But in an economy that has informally dollarised through stablecoins, the stakes are higher. The ‘currency’ becomes inseparable from the viability of the issuer, the banks holding its reserves, and the operational continuity of the technology itself.
Even without outright insolvency, an issuer’s decisions — or missteps — can have unintended consequences for any country that relies heavily on their digital dollars. A delayed audit, a sudden change in reserve reporting, a shift in custodians, or a regulatory action in the US could undermine confidence in a market thousands of miles away.
Unlike traditional dollarisation, which relies on sovereign-issued cash, stablecoin-led dollarisation introduces a new layer of interdependence: the stability of a foreign private company becomes a proxy for the stability of the currency.
And while regulation is strengthening in parts of the world — notably in the EU under Markets in Crypto-Assets Regulation (MiCA), and in the US with the Guiding and Establishing National Innovation for US Stablecoins (GENIUS) Act — global oversight remains patchy.
Offshore issuers, which dominate emerging market usage, operate with fewer constraints. Stablecoin users often assume a degree of safety that is neither legally guaranteed nor operationally enforced.
The road ahead
Stablecoins have not invented dollarisation, nor have they created the economic pressures that drive it. But they have lowered the barrier to entry so dramatically that in some markets, the dollar is only ever a phone app away.
Where domestic currencies are weak, volatile, or restricted, the appeal is obvious. For individuals and businesses facing daily uncertainty, a digital dollar that settles instantly has real, practical value.
Yet the ease of adoption creates its own risks. A country that dollarises through physical notes or bank deposits is placing its monetary fate in the hands of a foreign central bank. A country that dollarises through stablecoins is placing an additional layer of its financial system in the hands of private issuers, custodians, exchanges, and technology providers whose incentives and lifecycles may not align with national economic stability.
There is no clear path forward. Regulators are racing to catch up, central banks are exploring their own digital alternatives, and stablecoin issuers are positioning themselves as part of the future architecture of global finance.
Emerging markets, meanwhile, are likely to keep using the tools that work — and today, for many, that means digital dollars.
Dollarisation has always been a symptom of deeper problems. Stablecoins do not change that. But they do change the speed, scale, and structure of how dollarisation unfolds.
And for policymakers in vulnerable economies, the challenge now is not whether people will adopt digital dollars — they already have — but what happens when the private infrastructure behind them is tested.
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