Simply put
- The International Monetary Fund (IMF) has indicated that stablecoins might make monetary policy less effective in certain nations.
- The organization highlighted stablecoins’ capability to “penetrate the economy.”
- Currently, most stablecoins are linked to the US dollar.
The IMF acknowledges that while stablecoins can broaden access to financial services for individuals, this might ultimately challenge the role of central banks.
In a recently released report, the IMF flagged “currency substitution” as a risk associated with stablecoins, suggesting that this could gradually diminish the financial sovereignty of various nations.
Traditionally, if someone wanted access to US dollars, they either needed to hold physical cash or establish a specific type of bank account. The IMF pointed out that stablecoins can swiftly integrate into the economy via the internet and smartphones.
“The use of foreign currency-denominated stablecoins, especially across borders, could lead to currency substitution and compromise monetary sovereignty, particularly with unhosted wallets,” the report stated.
The IMF expressed concern that as more economic activities move away from national currencies, central banks may struggle to manage domestic liquidity and interest rates effectively.
The report also mentioned that as foreign currency-denominated stablecoins gain popularity through local options like payment services and central bank digital currencies (CBDCs), it may become challenging to compete. Unlike stablecoins issued by private entities, CBDCs are sovereign currencies in digital form that are regulated by central banks.
It was noted that the presence of stablecoin holdings is on the rise in regions like Africa, the Middle East, and Latin America, relating to foreign exchange deposits that allow central banks to influence monetary policy. The IMF recognized that this currency substitution often stems from necessity, especially in countries grappling with high inflation rates.
Currently, USD-denominated stablecoins make up 97% of the $311 billion sector, as per crypto data provider CoinGecko. For context, euro-pegged stablecoins total about $675 million, while those linked to the Japanese yen are valued at $15 million.
To maintain monetary sovereignty, the IMF recommends that countries establish regulations to ensure digital assets do not gain official or legal tender status. This action would help prevent the general public from dismissing digital assets as a means of payment.
In a separate note, the European Central Bank recently discussed the risks linked to dollar-denominated stablecoins and how they could drain essential resources.
“A notable rise in stablecoins could lead to a loss of retail deposits, diminishing a critical funding source for banks and making overall banking funding more precarious,” the ECB noted.
Nevertheless, following the US passing stablecoin legislation earlier this year, US Treasury Secretary Scott Bessent highlighted potential benefits, such as increased demand for government bonds, which might support a new wave of token issuance.
“This newfound demand could ease borrowing costs for governments and assist in managing national debt,” he added. “It also has the potential to attract millions of new users into the global dollar-based digital asset market.”
