“From Capital Flight to Crime and Hacking” — The Dark Side of Stablecoin Expansion

Concerns Over Regulatory Arbitrage Across Countries
Potential Economic Subordination of Multiple Nations
Recurrent Financial Incidents Threatening Stability

Warnings are mounting that stablecoins could undermine national foreign exchange regulations and inflict serious side effects on the financial system. With dollar-based stablecoins overwhelmingly dominating the market, stablecoins pegged to other currencies are expected to remain less competitive, ultimately eroding the effectiveness of national monetary policies. These economic security concerns, combined with technological risks such as hacking, are fueling alarm over broader instability across the financial order.

Workarounds Exist Despite Transaction Restrictions

Shin Hyun-song, Economic Adviser and Head of the Monetary and Economic Department at the Bank for International Settlements (BIS), speaking at the World Congress of the Econometric Society held at COEX in Seoul on the 21st, warned that “stablecoins denominated in domestic currencies such as the won could widen channels for capital flight” and that they could serve as “a shortcut to effectively neutralizing existing foreign exchange regulations.” His remarks directly countered arguments, particularly from Asian countries, that domestic stablecoins pegged to the won should be introduced to safeguard monetary sovereignty against the dominance of dollar-based stablecoins.

Shin projected that in a system dominated by dollar-based stablecoins, the benefits of stablecoins pegged to other currencies would be limited. According to the BIS, dollar-based stablecoins such as Tether (USDT) and Circle (USDC) account for 98.9% of global market share. Even if countries introduce domestic stablecoins, Shin argued, demand for dollar stablecoins will persist. “Domestic stablecoins can become channels for capital outflows by being exchanged on blockchain networks for dollar-denominated cryptocurrencies,” he warned.

He also highlighted that stablecoins have already surpassed Bitcoin in their association with criminal activity. “Because they can move freely across borders, they are widely used as tools to evade controls on financial crimes and capital outflows,” he said, noting that “crimes involving stablecoins overtook Bitcoin in 2022 and now account for 63% of all crypto-related criminal activity.”

The market’s view is largely aligned with Shin’s concerns. With regulations on stablecoins differing drastically from country to country, the system is seen as ripe for exploitation. Even if issuance or trading is restricted domestically, overseas exchanges provide easy bypasses. In decentralized finance (DeFi) ecosystems, transactions can be conducted solely through personal wallets, leaving virtually no room for regulatory oversight. Such structures make it easier for corporations or wealthy individuals to move funds abroad beyond the reach of domestic laws. Market participants see this as a direct and serious vulnerability to financial stability.

Dollar’s Status as Key Currency Strengthened

Experts also warn that stablecoins could exacerbate imbalances in monetary sovereignty. Because most stablecoins are pegged to the dollar, their expanded use in global transactions strengthens the dollar’s influence in the international financial system. This, in turn, further entrenches the dollar’s position as the world’s key currency in the digital environment. Stablecoins not backed by the dollar face inherent disadvantages in competitiveness, deepening the imbalance in monetary sovereignty.

The International Monetary Fund (IMF) has identified “currency substitution” as the principal risk posed by stablecoins. If dollar-based stablecoins become widely used as payment instruments in individual economies, demand for those countries’ own currencies will fall, undermining monetary sovereignty and policy effectiveness. This risk has, paradoxically, spurred discussions around issuing stablecoins pegged to the euro, the yuan, the yen, or the Swiss franc.

These currencies are considered to have sufficient global transaction volume and market influence. Observers believe that issuing stablecoins based on such currencies could partially ease the dollar’s monopoly. However, even these efforts mean that privately issued digital assets would effectively assume the role of legal tender, exerting both direct and indirect influence on monetary policy. As currency-based stablecoins become more active, the traditional bank-centered credit intermediation function is likely to shrink.

The situation is even more severe for smaller economies or those with limited influence in international finance. For such countries, issuing stablecoins pegged to their domestic currencies is often unrealistic. As a result, they are effectively compelled to use dollar-based stablecoins. When a significant portion of financial transactions is conducted through dollar-linked digital assets, these countries lose the tools of monetary policy and cede their economic sovereignty. In practice, this amounts to economic subordination.

Security Breaches Could Trigger Chain Reactions in Financial Markets

Another looming risk of stablecoins lies in the inherent vulnerabilities of digitization. Since digital assets are issued and circulated on network infrastructures, they are inevitably prime targets for hacking and cyberattacks. In February, the stablecoin payment platform Infini suffered an on-chain messaging hack that caused damages of $50 million. In June, Resupply lost $9.5 million in a similar attack.

These incidents illustrate how the integration of stablecoins into mainstream finance could trigger crises that extend far beyond investor losses, threatening overall financial stability. Traditional cryptocurrencies, being largely speculative, have transmitted such shocks more slowly to the broader economy. Stablecoins, however, are pegged one-to-one with legal tender. A serious breach of their systems would directly damage trust in the underlying currencies, unleashing chain reactions across financial markets and potentially spilling over into the real economy.

This is why discussions over the incorporation of stablecoins into the regulated financial system cannot be limited to their technical convenience. Risks such as hacking and system vulnerabilities intersect with broader economic security concerns, including the erosion of monetary sovereignty, to destabilize the financial order as a whole. Even as stablecoins are hailed as a new frontier in monetary innovation, their array of uncontrollable risks demands rigorous safeguards and robust international cooperation.