Why America’s new Crypto regime makes South Asia nervous

The U.S. may be giving tax evaders and illicit networks across developing economies a powerful new tool.

- by C. A. Saliya [e-mail] www.researcher.lk

In his influential analysis of the macroeconomic and financial stability risks posed by US dollar-backed stablecoins, Professor Kenneth Rogoff cautions that their widespread adoption in emerging markets could undermine monetary sovereignty, erode tax bases, and facilitate capital flight.

While his work primarily addresses global vulnerabilities, the implications for South Asia—where financial systems are unevenly developed, and external sector pressures are recurrent—are particularly acute. For India, with its growing fintech ecosystem and global capital linkages, and Sri Lanka, with its fragile reserves position and ongoing macroeconomic adjustments, Rogoff's warning underscores the urgent need for coordinated regulatory frameworks, robust technological monitoring tools, and cross-border cooperation to safeguard policy autonomy and financial stability.

The United States' landmark cryptocurrency legislation has been hailed domestically as a bold step towards bringing order to the "wild west" of digital finance. But for South Asia - a region grappling with vast informal economies, volatile currencies, and regulatory capacity gaps—Washington's move could unleash far-reaching consequences that policymakers are not yet ready to contain.

The Stablecoin Dilemma for Developing Economies

The law's centerpiece is the formal recognition and regulation of dollar-backed stablecoins — cryptocurrencies pegged one-to-one to the US dollar, supposedly backed by safe, liquid assets such as US Treasury bills and insured bank deposits. While the framework includes safeguards to limit instability, it leaves open a critical vulnerability: stablecoin transactions will remain far less traceable than credit or debit card payments.