Stablecoin: Financial Inclusion Friend Or Foe – Forbes

Report on the Dual Impact of Stablecoins on Global Economic Stability and Sustainable Development Goals

Introduction: A Financial Paradox

The emergence of stablecoins presents a significant paradox within the global financial system, impacting traditional finance and technological innovation. This report analyzes the dual role of stablecoins, particularly their divergent effects on developed and emerging economies, evaluated through the framework of the United Nations Sustainable Development Goals (SDGs). While offering a shield against economic volatility for individuals, their proliferation poses systemic risks that challenge several core SDGs, including those related to economic growth, inequality, and institutional stability.

Impact on Emerging Markets: A Challenge to Sustainable Development

Digital Dollarization and Individual Financial Security

In emerging markets (EMs), stablecoins are primarily adopted as a tool for wealth preservation against hyperinflation and currency devaluation. This aligns with the fundamental objective of SDG 1 (No Poverty) by enabling citizens to protect their capital from erosion. The frictionless, digital nature of stablecoins has accelerated the long-standing practice of converting unstable local currencies into U.S. dollar-denominated assets, providing a necessary financial lifeline for individuals in countries like Zimbabwe, Argentina, and Nigeria.

Systemic Risks to National Economies and SDGs

Despite individual benefits, the large-scale adoption of stablecoins in EMs creates significant threats to national economic structures, directly undermining key development goals.

• Erosion of Financial Institutions (SDG 16): The conversion of local currency deposits into stablecoins leads to massive capital flight from domestic banking systems. A Standard Chartered report projects a potential exit of $1 trillion from EM banks by 2028. This depletes the cheapest source of funding for commercial banks, weakening the stability of these critical institutions.
• Impediments to Economic Growth (SDG 8): The exodus of deposits constrains the fractional reserve banking system, reducing the ability of local banks to extend credit to businesses and consumers. This throttles domestic investment, raises borrowing costs, and hinders progress toward SDG 8 (Decent Work and Economic Growth).
• Weakened Monetary Policy (SDG 16): As capital moves into offshore digital assets, central banks lose control over the money supply and the effectiveness of traditional monetary policy tools, such as interest rate adjustments. This compromises their ability to manage inflation and maintain economic stability, challenging the goal of building effective and accountable institutions.

Impact on Developed Economies: Reinforcing Financial Strength

Funding U.S. Debt and Strengthening the Dollar

The capital outflow from emerging markets is redirected, in large part, to the United States. The operational model of stablecoins creates a direct and powerful linkage that reinforces the U.S. financial system.

1. Stablecoin issuers must back their tokens with highly liquid, low-risk reserves to maintain their peg.
2. The preferred asset for these reserves is short-dated U.S. Treasuries.
3. Therefore, rising stablecoin adoption in EMs creates an inexorable and growing demand for U.S. government debt.

This mechanism helps the U.S. finance its national debt, potentially keeping borrowing costs lower, and strengthens the U.S. dollar’s status as the world’s primary reserve currency.

Exacerbating Global Inequality (SDG 10)

This dynamic establishes a financial pipeline that transfers wealth from the world’s most vulnerable economies to one of its largest. While citizens in EMs seek personal financial security, the collective effect is the strengthening of a developed economy at the potential expense of their own. This process runs counter to SDG 10 (Reduced Inequalities) by widening the economic gap between developed and developing nations.

Conclusion: A Call for Global Cooperation under SDG 17

The stablecoin paradox presents a critical challenge to the global community. The technology offers financial inclusion and protection that supports SDG 1, yet its current trajectory threatens to undermine SDG 8, SDG 10, and SDG 16. The interconnected nature of this issue highlights the urgent need for international regulatory frameworks and cooperation, as envisioned in SDG 17 (Partnerships for the Goals). Global financial leaders must collaborate to harness the benefits of this financial innovation while mitigating its potential to destabilize emerging economies and deepen global economic disparities.

Analysis of Sustainable Development Goals in the Article

1. Which SDGs are addressed or connected to the issues highlighted in the article?

1. SDG 8: Decent Work and Economic Growth
   • The article connects to this goal by discussing how the rise of stablecoins could negatively impact the economic stability and growth of developing nations. It highlights that a massive “deposit flight” from emerging market banks could constrain their ability to “extend credit to local businesses and consumers,” which would in turn be “throttling domestic economic growth.”
2. SDG 10: Reduced Inequalities
   • This goal is central to the article’s main paradox. The text describes how stablecoins could exacerbate inequalities between developed and developing countries. While citizens in emerging markets use stablecoins to protect their savings, this action leads to a capital flight that “may further destabilize the economic infrastructure they seek to protect their fortunes from, while further strengthening developed market enterprise.” The flow of capital from vulnerable economies to purchase U.S. Treasuries to back these stablecoins widens the economic gap.
3. SDG 17: Partnerships for the Goals
   • The article touches upon this goal by emphasizing the need for global financial regulation and policy coherence. It states that the “rapidly growing usage poses a challenge to global financial regulators and banks” and that “Global Financial Leaders must examine ways to leverage stablecoin technology without potentially negatively impacting the economies that rely on stability most.” This points directly to the need for international cooperation to ensure global financial stability, a key aspect of SDG 17.

2. What specific targets under those SDGs can be identified based on the article’s content?

1. Target 8.10: Strengthen the capacity of domestic financial institutions to encourage and expand access to banking, insurance and financial services for all.
   • The article directly addresses a threat to this target. It warns that stablecoins could “triggering massive deposit flight and undermining local central banks.” The potential exit of “$1 trillion in deposits” from emerging market banks would severely weaken these domestic financial institutions, directly opposing the goal of strengthening their capacity.
2. Target 10.5: Improve the regulation and monitoring of global financial markets and institutions and strengthen the implementation of such regulations.
   • The article implies a failure to meet this target and the urgent need to address it. It explains that when local currency is converted into “offshore dollar tokens outside their visibility and control, this traditional monetary transmission mechanism is severely weakened.” This loss of visibility and control for regulators highlights a significant gap in the regulation and monitoring of these new financial instruments.
3. Target 10.c: By 2030, reduce to less than 3 per cent the transaction costs of migrant remittances and eliminate remittance corridors with costs higher than 5 per cent.
   • The article implicitly connects to this target by mentioning that one of the benefits of stablecoin technology is “cheaper cross-border payments.” While the focus is on the negative impacts, this acknowledgment suggests that stablecoins could be a tool to achieve lower remittance costs, a key component of this target, especially for countries “with high reliance on remittances, such as Egypt, Pakistan, Bangladesh, Sri Lanka, and others.”
4. Target 17.13: Enhance global macroeconomic stability, including through policy coordination and policy coherence.
   • The article’s core theme revolves around the threat to global macroeconomic stability. The “direct, instantaneous capital transfer pipeline” created by stablecoins presents a systemic risk that requires a coordinated global response. The text concludes by highlighting the challenge for “global financial regulators” to harness the technology’s benefits “without allowing them to undermine the stability of the most vulnerable economies,” which is the essence of enhancing stability through policy coordination.

3. Are there any indicators mentioned or implied in the article that can be used to measure progress towards the identified targets?

1. Volume of bank deposits in emerging markets
   • The article explicitly mentions a quantifiable indicator of risk: the projection that as much as “$1 trillion in deposits could exit emerging market banks.” Monitoring the flow of retail deposits in and out of the banking systems of developing countries would be a direct indicator of the stability and capacity of their financial institutions (relevant to Target 8.10).
2. Effectiveness of national monetary policy
   • The article implies an indicator by stating that central banks’ traditional tools are “severely weakened” and they “lose sight of the true extent of dollar flows.” An indicator would be the measure of the effectiveness of policy actions (like raising interest rates) on inflation and money supply in economies with high stablecoin adoption (relevant to Target 10.5).
3. Market capitalization of stablecoins and corresponding U.S. Treasury holdings
   • The article points to the growth of the stablecoin market cap “from $300+ billion today into the trillions” as a key metric. This growth, coupled with the corresponding demand for U.S. Treasuries as reserves, serves as an indicator of the scale of capital transfer from the global economy (largely emerging markets) into U.S. debt instruments, which is a measure of the global financial shift that requires policy coordination (relevant to Target 17.13).

4. Summary of SDGs, Targets, and Indicators

Source: forbes.com