Foreign currency-pegged stablecoins vs. Local currency-pegged stablecoins: A SWOT analysis

by Ndianabasi Tom

Stablecoins are crypto tokens designed to hold a stable value by linking (or “pegging”) to another asset. The most widely known are stablecoins pegged to the US dollar, but an increasing number of stablecoins are pegged to either another cryptocurrency, local currencies, commodities or high-quality assets such as gold etc.

The choice between foreign-currency pegging and local-currency pegging matters for users, issuers, banks, regulators, and global payment systems even as stablecoin adoption rises. Notably, the global stablecoins valuation has surpassed $290 billion as of September 2025, with foreign-currency-pegged stablecoins recording the biggest market share.

In this article, I explain both approaches, then run a focused SWOT (Strengths, Weaknesses, Opportunities, Threats) analysis for each, compare them, and close with practical guidance for policymakers, issuers and corporate treasuries. 

Definitions and market context

• Foreign currency-pegged stablecoins (FCPS): These are stablecoins whose reserves are held in a foreign fiat (most commonly USD) or high-quality foreign assets (U.S. Treasury bills, cash equivalents). Examples: Tether USD (USDT), USD Coin (USDC) and other dollar-pegged tokens. They dominate global stablecoin volumes and infrastructure for cross-border crypto payments and trading. 
• Local currency-pegged stablecoins (LCPS): These are stablecoins pegged to a national or regional currency other than the major global reserve currency, e.g., a token pegged to the Nigerian Naira (cNGN), Brazilian real (BRZ), a Singapore dollar token (XSGD), etc. They can be issued by private firms, FinTechs, or regulated entities. LCPS aim to deliver blockchain-native payments frictionlessly within a local currency unit. 

Why they matter: Stablecoins are metamorphosing from niche trading utilities into broader payment rails and settlement layers. This shift has drawn active regulatory moves (e.g., the EU’s MiCA and new U.S. legislation like the GENIUS Act and STABLE Act) and sparked adoption experiments in several regions where stablecoins interact with local payment systems. At the same time, large dollar-pegged coins exert measurable effects on short-term safe-asset markets.

Read also: Circle’s and Tether’s Holdings of U.S Treasuries: Stablecoins moving the cheese?

Foreign-currency-pegged stablecoins (FCBS) SWOT Analysis

Strengths

1. Deep liquidity and network effects: Dollar-pegged stablecoins benefit from huge market capitalizations, wide exchange listings, deep liquidity, and integration with on- and off-ramps. This makes them ideal for trading, cross-border settlement, and decentralized finance (DeFi).
2. Price stability for global trade: Pegging to a major reserve currency reduces local exchange-rate exposure for counterparties that value payments in a globally accepted unit.
3. Mature infrastructure: Many foreign-currency-pegged stablecoins are built on multiple blockchains, have established reserves, and are supported by compliant entities like banks.

Weaknesses

1. Foreign-exchange risk for locals: For users in countries with volatile local currencies, foreign-currency-pegged stablecoins introduce FX exposure when converting back to local currency. This may deter everyday consumer use for local commerce.
2. Sovereignty and monetary policy concerns: High adoption of dollar-pegged stablecoins can undermine local monetary transmission and reduce demand for domestic liquidity tools, causing regulators to react strongly.
3. Reserve transparency and counterparty risks: High-profile questions about reserve composition and custodian concentration can produce confidence shocks (and runs) if issuers don’t maintain transparent, liquid reserves. Historical episodes and enforcement actions have amplified these concerns. 

Opportunities

1. Cross-border payments and remittances: FCPS can reduce friction and cost for remittances and trade invoicing compared with traditional banking.
2. Institutional adoption and tokenized cash: As regulation clarifies, banks and funds may issue or custody FCPS, integrating them into short-term liquidity management. In essence, new laws can accelerate bank participation. 

Threats

1. Regulatory actions and fragmentation: Laws that restrict foreign currency-pegged stablecoins in certain jurisdictions, or require strenuous licensing, can reduce reach or force onshore reserve models (e.g., dual-issuance problems under MiCA). 
2. Macro financial flows: Large shifts into or out of FCPS can influence demand for short-term government paper and money market conditions. A recent study shows stablecoin flows can affect short-term yields.
3. Systemic failure risk: FCPS are typically pegged 1:1 with fiat deposits held in banks or financial institutions. This structure creates a systemic failure risk i.e. if the banks holding these reserves collapse due to bank runs, liquidity shortages, or economic meltdowns, the stablecoin’s peg could instantly break.

On the flip side, stablecoins themselves can trigger stress in traditional banks. A sudden wave of redemptions during crypto market panic could force banks to liquidate assets quickly, straining their balance sheets. We saw this dynamic during the collapse of Signature Bank and other institutions in 2023, where heavy crypto exposure and withdrawal pressure contributed to their downfall. In short, the health of FCPS and their backing banks are deeply interlinked. In essence, failure in one can destabilize the other, magnifying systemic risks across both the crypto and traditional financial systems.

Read also: MiCA is Very Dangerous for Stablecoins, warns Tether CEO

Local-currency-pegged stablecoins (LCPS): SWOT Analysis

Strengths

1. Alignment with local payments and pricing: Local-currency-pegged stablecoins allow merchants and consumers to transact in the currency they actually use, removing FX conversion frictions and making pricing easy for everyday commerce.
2. Support for financial inclusion: Local stablecoins can plug into domestic rails, allow programmable payments in local units, and serve underbanked populations if distribution and custody are designed for accessibility.
3. Lower currency mismatch for local firms: Businesses that earn and spend in local currency avoid hedging costs and FX exposure when using an LCPS for settlement.

Weaknesses

1. Smaller liquidity pools: Local-currency tokens tend to have thin liquidity, making large transfers or on-chain market-making more expensive. This can restrict use cases such as making them less attractive for global trading.
2. Operational and reserve complexity: Issuers must manage local reserve accounts, local banking relationships, and sometimes multiple back-office relationships across jurisdictions, increasing operational risk and cost.
3. Regulatory uncertainty and overlap: Domestic rules can be unclear, and LCPS may be treated as e-money, requiring licenses beyond crypto-asset registration. This raises compliance and capital requirements, especially where regulators treat e-money separately from crypto tokens. 
4. High Currency volatility: Although it is called stablecoin, LCPS (as well as FCPS) do not necessarily protect against the volatilities that the fiat they mirror may suffer from time to time. While this is an inherent feature of stablecoins pegged to the fiat, it may be considered a weakness by (potential) holders of LCPS with high or relatively high volatility and therefore may experience limited adoption. However, it is worth noting that it is not a function of a stablecoin to protect the value of the fiat it mirrors.

Read also: Stablecoin adoption in Nigeria grows beyond Bitcoin-Naira pair; Resurge in Use of Centralized Exchanges in 2024

Opportunities

1. Domestic payment system modernization: LCPS can be used to integrate blockchain rails with instant domestic payment systems and CBDCs, supporting remittances, payroll, micropayments, and merchant settlement. Examples in Argentina and Brazil show an appetite for local solutions layered on global stablecoins and payment rails. 
2. Public-private collaboration: Central banks exploring CBDCs may partner with regulated issuers to pilot LCPS as complementary instruments or bridges, easing adoption if safeguards are in place.

Threats

1. Runs and bank-reserve risks in stressed markets: In economies with fragile banking sectors or capital controls, LCPS could face rapid redemptions that stress small issuer reserves and local banks’ liquidity.
2. Fragmentation and interoperability issues: If every country issues its own LCPS without common standards, cross-border flows will again require FX and bridging, limiting network benefits.

Comparative lens: When one model wins over the other

For global liquidity and crypto-native finance, foreign-currency-pegged stablecoins win. This is so because crypto traders, DeFi users and cross-border firms favor dollar-pegged tokens because of liquidity and interoperability.

Meanwhile, for everyday local commerce, micropayments and inclusion, local-currency-pegged stablecoins are preferable because they remove FX friction, integrate with domestic pricing, and can be tailored to local compliance and settlement needs.

However, from a macroprudential standpoint, LCPS may be easier to monitor domestically, but both models carry systemic implications if adoption scales. Moreover, FCPS can influence foreign-asset demand and short-term yields, while LCPS can stress local liquidity in runs.

Read also: US Dollar Stablecoins hit $230 Billion, dominated by professional flow

Practical recommendations

For policymakers and regulators:

1. Adopt a technology-neutral, risk-based approach. Considering the unique characteristics of stablecoins, it may not be suitable to simply apply existing currency laws to them. Determine typologies and tailor rules for foreign currency-pegged stablecoins and local currency-pegged stablecoins according to their unique risks.  Likewise, demand from issuers robust reserves, transparent audits, and contingency planning for cases of de-pegging or massive sell-offs. 
2. Mandate interoperability and custody standards. Encourage issuers to use regulated custodians, and require clear settlement arrangements, especially where stablecoins interact with local payment systems. 
3. Coordinate internationally given that cross-border stablecoin flows require cooperation across supervisors to avoid regulatory arbitrage and to manage spillovers to money markets.
4. Consider the role of central bank digital currencies (CBDCs)—whether compatible or complementary to LCPS. Since LCPS are pegged by local currencies, the same fiat currencies that CBDCs primarily digitize, it is worth considering the pros and cons of operationalizing this dual system.

 Read also: Stablecoins gain traction, threatening bitcoin’s dominance

For issuers and FinTechs:

1. Design for reserve transparency: Publish regular, credible attestation/audit reports and hold diversified, liquid reserves appropriate for local redemption patterns. 
2. Match product to user needs: Offer FCPS for trading and cross-border settlement while developing LCPS for local merchant acceptance and payroll. In essence, consider dual-product strategies with clear rails for on/off ramping and FX hedging.

3. Plan for stress scenarios by maintaining liquidity buffers (or extra reserves), predefined redemption limits, and escalation paths with banking partners.

For corporate treasuries and merchants:

1. Choose by use case: Use FCPS as a dollar cash-like instrument for cross-border settlement. Accordingly, stick with LCPS for local supplier payments and payroll.
2. Manage counterparty and FX risk: Keep appropriate reserves, hedge exposures, and evaluate issuer transparency and licensing before initiating large allocations.

Conclusion

Both foreign-currency-pegged and local-currency-pegged stablecoins have clear roles to play. While FCPS currently rule global liquidity and crypto finance, LCPS hold promise for domestic and cross-border payments, inclusion, and programmability. However, each model comes with its own tradeoffs, with FCPS concentrating liquidity and FX risk offshore, while LCPS reduce FX friction but raises local operational and run-risk concerns.

Therefore, the smart path forward is not a one-size-fits all affair. Instead, a calculated mix supported by robust regulation, reserve transparency, and interoperable standards will deliver the benefits of tokenized money while containing systemic risks. Additionally, policymakers should prioritize regulatory clarity; issuers should prioritize transparent reserves and strong liquidity policies; corporations and merchants should match these financial instruments to the economic purpose, while managing FX and counterparty risk actively.

While institutional adoption of stablecoin especially for professional flow comprises up to 90% of stablecoin transactions today, retail adoption is bound to grow significantly. This calls for proactiveness, not reactionary measures. Are you ready?

Read also: “Nigeria is Open for Stablecoin Business”, says SEC Nigeria. But reality points otherwise.  

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Ndianabasi Tom A Petroleum Engineering degree holder, Ndianabasi’s interest since 2018 has been study ing the ever-growing field of blockchain and cryptocurrency, keenly evaluating the innovation, exploration, and expansion of this field locally and globally. The founder of Nitadel a media platform, Ndianabasi has been a Writer at Crypto Asset Buyer (CAB) since 2021. When he is not drilling resources in the blockchain and cryptocurrency field, Ndianabasi is singing, reading, watching crime movies, or playing football.