Local Currency Stablecoins: Revolution? Not Yet!

The current financial system runs on fiat money channeled through traditional financial intermediaries such as banks. However, the current system faces two challenges – today, it is not inclusive enough, leaving 1.3 billion adults unserved and many more underserved and  in the future, the system may not be well-suited to an economy that dominantly hinges on digital interactions. Assuming that tokenization is an infrastructure backbone of such a digital world, tokenized money, including local currency stablecoins would become necessary.

However, today most stablecoin activity is denominated in USD. USDT and USDC account for roughly 90% of global stablecoin supply. Local currency stablecoins (LCS) – privately issued digital tokens pegged 1:1 to a single sovereign currency other than the USD and backed by reserves denominated in that same currency – remain a niche. Examples include BRZ (Brazilian real), TRYB (Turkish lira), cNGN (Nigerian naira), and XSGD (Singapore dollar).

This is not surprising. Digital money tends to mirror the existing hierarchy of the underlying currencies: instruments denominated in dominant reserve currencies attract deeper liquidity, broader acceptance, and stronger infrastructure, reinforcing the advantages they already hold. This helps explain why USD stablecoins dominate today – and why the various use cases for LCS are structurally narrower and differ significantly around the world. This blog explores where LCS could potentially add value to financial inclusion efforts, drawing on small scale or early-stage examples, and highlights some of the current challenges that could prevent large scale use.

Where local stablecoins may offer value

Here are four emerging use cases that operate in live environments and may scale over time:

1. Cross-border remittances and trade settlements. In an introductory CGAP webinar, we explored the impact stablecoins could have in cross-border payments using stablecoin rails to bypass correspondent banking networks, reduce pre-funding needs, and lower overall costs where on- and off-ramp infrastructure is mature. Could LCS potentially reduce the costs of sending remittances within regions or between collaborating countries? In the prevalent stablecoin-bridged model today, a USD-denominated stablecoin serves as the cross-border bridge due to its deep liquidity that otherwise does not exist for many remittance corridors. For instance, Bitso offers a USDC-bridged solution via PIX and SPEI serving the Brazil – Mexico corridor, with local currency to USDC on- and off-ramps provided by domestic instant payment systems. An LCS could serve the payout leg — converting USD stablecoins into BRL/MXN tokens. Unless the local currency liquidity deepens and/or a broader LCS ecosystem emerges in which recipients can use their LCS in daily life, the value of LCS for cross-border payments remains limited.  
2. SME trade payments and domestic merchant payments. There are experiments of using LCS and attempting to bypass card networks in domestic merchant payments, reducing overall costs by eliminating interchange and scheme fees while keeping network fees negligible. However, where instant payment systems are well developed, such as PIX and UPI, the incremental value of LCS for domestic payments is limited because fast payment systems already deliver real-time, low-cost transfers in bank money.
3. Exchange liquidity for crypto trading. BRZ in Brazil and XSGD in Singapore provide BRL and SGD trading pairs and DeFi liquidity, serving crypto market participants rather than the mass-market. Strong fast payment systems, such as PIX and FAST, already handle retail payments efficiently and cost-effectively. LCS add value for crypto exchange infrastructure in markets  with active crypto trading, but not necessarily for everyday transactions.
4. Settlement of tokenized assets. LCS are being explored as a settlement mechanism for tokenized assets such as bonds and mutual funds — enabling on-chain delivery-versus-payment in domestic currency. For instance, MAS Project Guardian has explored this use case with XSGD, though the solution has not scaled beyond the sandbox pilot.

Practical considerations

LCS are in early stages, and their future direction is hard to predict. On their own, they do not solve persistent financial inclusion barriers such as extreme poverty. But if the challenges outlined in this blog are addressed, they may improve the cross-border movement of funds and support economic growth. And if the world moves toward a token-based digital economy, their importance could grow significantly. For authorities considering a local stablecoin regulatory framework, three questions should be answered first to inform policy decisions:

1. What problem do LCS solve that existing rails and solutions do not? While there is evidence that stablecoins can bypass legacy correspondent banking in cross-border payments, the uptake of LCS in cross-border payments, let alone national payments, is not yet evident.
2. Beyond potential use cases, what evidence exists of actual usage? Relevant metrics include listed products, wallet sign-ups, exchange availability, issuer-reported circulation, and verified transactions.
3. Is sufficient support infrastructure in place? Without functioning on- and off-ramp infrastructure or independently verifiable reserve management, introducing LCS could create significant stability and market conduct risks.

(Non-)Conclusion

As with tokenization in general, stablecoins can change how value is represented and transferred, providing efficiency gains and new functionalities such as smart contracts. However, it does not, by itself, address a variety of constraints preventing people from using financial services – the lack of money, documentation, trust, and the infrastructure to reach remote areas. 

Importantly, stablecoins represent just one of several emerging solutions with potential to improve the way financial system works. Solutions such as tokenized deposits and central bank digital currencies are being tested, and relatedly, the merits and risks of stablecoins are being debated (see e.g., BIS Annual Economic Report). Where policymakers find a compelling need for LCS, implementing a regulatory framework can follow similar general principles as in the case of global stablecoins, with relevant considerations specific to EMDE contexts. These policymakers are likely to benefit from the recent paper “Stablecoins in Africa: Translating Global Principles into Local Regulatory Practice.”