Cryptocurrency Regulation and Monetary Policy Trade-Offs in Transition Economies

Transition economies across Eastern Europe, Central Asia, and Latin America face unique macroeconomic structural challenges, including currency substitution, shallow financial markets, and weak monetary policy transmission mechanisms. The rapid global expansion of cryptocurrencies and decentralized finance (DeFi) presents both severe risks and strategic opportunities for central banks in these developing market contexts. This paper explores the core trade-offs between regulatory approaches—ranging from total bans to sovereign regulatory sandboxes—and monetary policy autonomy. It analyzes how the proliferation of unbacked crypto-assets and foreign stablecoins drives digital dollarization, weakens central bank interest rate channels, and threatens capital flow management. Furthermore, the article evaluates counter-policy measures, notably the implementation of Central Bank Digital Currencies (CBDCs) and hybrid regulatory frameworks, as strategic tools for protecting monetary sovereignty in transition states.