In 2025, as a core institution responsible for coordinating global financial stability issues under the G20 framework, the Financial Stability Board (FSB) rarely focused its annual report on dollar-denominated on-chain token payment tools, and it issued a warning from the perspective of systemic risk for the first time. The report pointed out that these dollar-pegged digital tools are becoming a new channel for cross-border payments, asset storage, and transaction settlement, opening a "side door" for a group of emerging economies with high inflation, high external debt, and fragile financial systems to bypass local currency and financial systems.

The risk cues identified by the FSB are very specific: replacement of local currency, weakening functions of domestic payment and clearing systems, failure of central bank monetary policy transmission, squeezed fiscal financing space, and capital controls easily circumvented by technological means. At a time when global unified regulatory rules remain at the framework and "initiative" level, this report effectively lit a yellow light ahead of the direct collision between digital dollarization and emerging market currency sovereignty. This article will follow the FSB's warnings and discuss how digital dollarization silently approaches the monetary boundaries of emerging markets under significant regulatory lag and immature compliance channels, reshaping the future global monetary game pattern.

Inflow of Digital Dollars: Local Currency Marginalized

In the daily choices of residents and businesses in emerging markets, the strong attractiveness of dollar-denominated on-chain tokens comes primarily from their convenience in cross-border payments, value storage, and transaction settlement. Compared to traditional cross-border remittances that often take several days and incur high costs, peer-to-peer transfers using dollar-pegged on-chain tokens can complete value transfers with just one address, and the rates are often far lower than traditional banking channels. This "24-hour always open" settlement capability makes it naturally an alternative channel for small businesses in cross-border trade, freelancers, and migrant workers.

The FSB explicitly listed "local currency replacement" and "capital control circumvention" as key risks in its annual report. This corresponds to a concrete scenario: when a country's currency faces high inflation or when local banking systems repeatedly collapse, residents are no longer willing to deposit their savings in local banks but instead purchase dollar-pegged on-chain tokens through off-market channels, storing them in mobile wallets to circumvent the uncertainty of local currency devaluation and local deposit insurance. On the corporate side, firms might bypass official foreign exchange registration and settlement systems by "invoice + on-chain settlement," keeping part of their revenue directly in digital dollar assets.

Once trade settlements, savings preferences, and commodity pricing gradually anchor to these digital dollars, the demand for and trust in the local currency will be continuously eroded. Residents are no longer willing to hold local currency deposits, and companies are reluctant to enter into long-term contracts priced in local currency. The declining weight of local currency in asset allocation and pricing systems will reverse exacerbating exchange rate fluctuations and inflation expectations. For emerging economies, which already rely on currency depreciation to stimulate exports and maintain fiscal space, this "downward" digital dollarization is more covert, harder to be captured by regulation, and more sticky compared to traditional offline dollarization.

Monetary Policy Voiceless: Central Bank Interest Rates Ailing

The FSB has placed monetary policy failure and fiscal pressure alongside the spread of digital dollars as systemic risks in its report, aiming to remind that the entire toolkit that central banks rely on to adjust economic cycles may face transmission breaking down in a digital dollar environment. Under traditional frameworks, central banks influence the balance sheets of banks denominated in local currency by adjusting policy interest rates, reserve requirements, and open market operations. However, when a significant portion of residents' and companies' assets begins to migrate to on-chain dollar tools, these regulatory measures only affect the "shrinking local currency economic island."

If residents can exchange local currency deposits for dollar-pegged on-chain tokens and transfer them abroad within minutes, the constraint of local currency interest rate hikes on their asset allocation decisions will significantly decrease. Interest rate adjustments, capital flow management, and foreign exchange controls risk becoming weakened due to the technological aspects of cross-border transfer channels:

● When the central bank raises interest rates in an attempt to stabilize the exchange rate, investors can completely choose to continue holding or increasing their digital dollar tools to hedge against the risk of further depreciation of local currency, filtering the interest rate signals.

● Traditional capital controls rely on banks and payment institutions as gatekeepers, but on-chain wallets and peer-to-peer transfers allow some funds to bypass statistics, making cross-border outflows more hidden and sudden.

● In emerging economies with strict foreign exchange controls, once local currency assets lose their appeal, large exchange demands will break down into many small transactions through on-chain over-the-counter markets, weakening official limits and approval mechanisms.

Furthermore, fiscal financing and local currency bond markets will also be caught in the chain reaction. When institutional investors and high-net-worth individuals can choose to hold on-chain products pegged to US Treasury bonds or high-grade dollar assets instead of local currency-denominated government bonds, demand for local currency bonds diminishes, and government financing costs rise passively. Rising yields not only increase existing debt rollover costs but can also easily trigger concerns over "debt sustainability," driving up risk premiums. For some emerging markets with high debt and low reserves, this asset substitution magnified through digital dollar channels will directly challenge their macroeconomic stability foundation.

Regulatory Gaps Widen: Cross-Border Stablecoins Roaming in Gray Areas

In this annual report, the FSB specifically cited the expression "peer assessments indicate significant regulatory gaps in stablecoin regulation" (based on a single source), highlighting the practical concerns of ineffective regulation. As early as 2023, the FSB proposed a global regulatory framework, but from the current implementation progress, many jurisdictions still remain at the stage of principled guidance and consultation documents, with concrete implementation, unified standards, and cross-border coordination significantly lagging.

On one hand, some developed economies are embroiled in debates over how to define the legal attributes of such digital dollar tools and how to delineate regulatory boundaries between securities, payment tools, or fund shares, resulting in fragmented regulatory rules; on the other hand, emerging markets, due to their limited regulatory resources and weak financial infrastructure, often find it difficult to timely complete local legislation and enforcement capability construction even when referencing the FSB framework. This discrepancy in pace allows issuers of cross-border products and wallet service providers to strategically choose locations across multiple regions, focusing their business in areas with looser regulations or lax enforcement.

The gray area formed around cross-border issuance and wallet services is amplifying a series of traditional risks:

● Regarding circumvention of capital controls, enterprises and individuals can issue or purchase dollar-pegged on-chain tokens through platforms registered overseas, with local unlicensed wallets providing access to bypass official foreign exchange reporting and quota restrictions.

● In terms of anti-money laundering and combating the financing of terrorism, if key wallets and custody nodes are deployed in jurisdictions with inconsistent regulatory standards, information sharing and client identification may have loopholes, providing a technological vehicle for cross-border money laundering.

● The risk of market manipulation is reflected in that these digital dollar tools often establish asset support relationships with core financial markets (such as short-term dollar money market instruments), and once on-chain prices are manipulated or face a run, the impact may be transmitted along the asset backing chain to the traditional financial system.

In the current context of unresolved regulatory gaps, the fragile financial systems of emerging markets are rapidly building more and more invisible pipelines to these cross-border issued digital dollar tools.

The Paradox of Limited Real Application Yet Rising Threats

Interestingly, the FSB also clearly pointed out in the same report that the real payments and commercial applications of these dollar-denominated on-chain tokens in the real economy remain limited, currently mostly confined to internal exchange settlements, transfers within the crypto ecosystem, and some cross-border individual remittance scenarios. This means that in terms of traditional currency substitution and payment tools, they have not yet fully penetrated mainstream retail payment and large-scale commercial trade processes.

This creates an apparent paradox: why, despite limited penetration, does the FSB issue high-profile warnings in advance? The answer lies in the fact that its focus is not on the absolute scale of current transaction volumes but rather on the structural and forward-looking systemic risks behind it. The FSB is concerned that if these digital dollar tools continue to expand in the absence of regulation, with the popularization of technological infrastructure, enhancement of wallet experiences, and more assets being "on-chain," they might complete a leap from "marginal payment tools" to a "shadow currency system" in a very short time, and by that time, retroactive regulation would come at an exponentially higher cost.

The report also specifically warns, "be cautious of the associated risks between stablecoins and core financial markets" (source: A/C), indicating that the issue is not with the price volatility of a single token, but with its deep connections to traditional assets like bank assets, short-term bonds, and money market funds. Once these digital dollar products hold substantial amounts of bank deposits, short-term government bonds, or commercial paper as collateral, the redemption pressure on on-chain tokens will directly translate into shocks to bank liquidity and the bond market. In other words, once on-chain digital dollars become deeply coupled with traditional finance through asset backing, their role shifts from a seemingly independent crypto tool to a "booster" that amplifies traditional financial shocks.

From FSB to the 2026 Work Plan: Accelerating the Regulatory Race

Looking ahead, the FSB has earmarked 2026 as a focus for monitoring crypto innovation and cross-border payment loopholes, a move that itself extends and responds to the warnings of the current annual report. On one hand, dollar-pegged digital payment and storage tools are rapidly spreading in emerging markets; on the other hand, cross-border clearing, data disclosure, and risk assessment remain in a state of fragmentation and post-event tracking, necessitating regulatory bodies to identify weak points through systematic monitoring and scenario simulations.

However, achieving truly globally coordinated regulation faces significant practical resistance. Cross-border data sharing involves privacy protection and national security considerations, and there is no consensus among countries on risk thresholds and regulatory intensity; moreover, at the execution level, the asymmetric distribution of resources and technical capabilities makes it difficult for emerging markets to compete on the same starting line as developed economies. For economies that rely on the dollar system for external financing, their voice in rule-making is limited but they bear relatively higher spillover impacts, and this asymmetry in demands itself increases the difficulty of reaching uniform rules.

Meanwhile, traditional finance is accelerating its "on-chain" transition, further heightening regulatory urgency. Research briefs mention that traditional asset management firms, Invesco, have taken over a tokenized treasury bond fund sized at approximately 900 million USD (according to a single source), indicating that core sovereign debt representing the "risk-free rate" is directly entering the on-chain world in tokenized form. When token products based on US Treasury bonds form a closed loop on-chain with dollar-pegged payment tokens, residents in emerging markets can, outside their local banking systems, complete a whole financial loop of "holding US treasuries—earning dollar-denominated income—conducting global payments."

For the FSB, this trend means that regulation can no longer view the crypto world as a marginal experimental ground but must see it as a new extension of the global dollar system. How to fill cross-border regulatory loopholes without stifling technological innovation and efficiency improvements and ensure these new tools do not become amplifiers of risk in times of crisis will be a core challenge in the work plans for the coming years.

The Dilemma for Emerging Markets: Block or Reconstruct

Returning to emerging markets themselves, within the framework of the FSB's warnings, they face an increasingly hard-to-avoid dilemma. On one hand, these economies are worried that dollar-denominated on-chain payment and storage tools will spread in their countries, quietly eroding the status of local currency in savings, pricing, and payments, weakening the effectiveness of monetary policy and fiscal autonomy; on the other hand, in the reality of high costs of traditional cross-border payments and limited foreign currency financing channels, the cheaper and more efficient digital dollar channels can objectively alleviate foreign exchange tensions and trade settlement frictions.

Simple blocking is not a long-term solution; merely using administrative orders to restrict the use of relevant tools can easily push demand toward more concealed and harder-to-regulate underground markets. Therefore, a more realistic response direction may lie in "reconstructing rather than rejecting":

● Promoting the digitalization of local currency by issuing central bank digital currencies or locally recognized digital payment tools to enhance the competitiveness of local currency in terms of efficiency and convenience.

● Strengthening local payment and clearing infrastructure to lower cross-border and domestic payment costs, so that residents and enterprises do not feel compelled to flock to inadequately regulated digital dollar channels for "cheaper and faster" solutions.

● Quickly aligning with international standards such as the FSB in regulatory terms, introducing a risk-based regulatory framework, and setting transparent disclosure and capital requirements for relevant cross-border products, managing risks through "conditional acceptance" rather than "one-size-fits-all blocking."

The next few years will be a "critical window of whether regulation can keep up with innovation." The path of digital dollarization may evolve into a new system of coexistence and interconnectedness of multiple currencies under reasonable regulation and local currency digitalization, or it may deepen the monetary gap between emerging markets and developed economies amid regulatory absences and misaligned interests. Whichever path materializes, the position of emerging markets in this large-scale reshaping of currency and capital landscapes will largely depend on how they respond to this difficult question today.

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