In brief
- Stablecoins could make monetary policy less effective in some nations, the IMF said.
- The organization pointed to stablecoins’ ability to “penetrate an economy.”
- So far, an overwhelming majority of stablecoins have been tied to the U.S. dollar.
Stablecoins have the potential to broaden individuals’ access to financial services, but that may come at the cost of central banks, according to the International Monetary Fund.
In a 56-page report published on Thursday, the international organization identified “currency substitution” as a potential risk that stablecoins pose, describing the dynamic as something that could incrementally erode the financial sovereignty of various nations.
Historically, if an individual wanted access to the greenback, they would typically be required to hold physical cash or open a certain type of bank account. However, “stablecoins can penetrate an economy rapidly via the internet and smartphones,” the IMF noted.
“The use of foreign currency-denominated stablecoins, especially in cross-border contexts, could lead to currency substitution and potentially undermine monetary sovereignty, particularly in the presence of unhosted wallets,” the organization added.
A central bank would have less control over domestic liquidity and interest rates if a significant share of economic activity were to transition away from the respective currency, the IMF said.
If foreign currency-denominated stablecoins become entrenched through payment services, local alternatives like a central bank digital currency, or CBDC, could have difficulty competing, the report stated. Unlike privately issued stablecoins, CBDCs are a digital form of sovereign currency that is issued, monitored, and managed by a central bank.
The organization noted that stablecoin holdings in Africa, the Middle East, Latin America, and the Caribbean are rising in relation to FX deposits that help central banks influence monetary policy. However, the IMF acknowledged that currency substitution is often motivated by a sense of survival, including stability for citizens in countries where inflation runs high.
At present, stablecoins denominated in U.S. dollars comprise 97% of the $311 billion sector, according to crypto data provider CoinGecko. Stablecoins denominated in euros, for example, were collectively worth $675 million, while $15 million worth were linked to the Japanese yen.
To safeguard monetary sovereignty, the IMF recommends that nations implement frameworks preventing digital assets from being recognized as official currency or legal tender. That status would prevent people from being able to refuse digital assets as a form of payment.
In November, the European Central Bank highlighted risks associated with dollar-denominated stablecoins, and their potential to soak up valuable resources, in a blog post.
“Significant growth in stablecoins could cause retail deposit outflows, diminishing an important source of funding for banks and leaving them with more volatile funding overall,” the ECB said.
Still, when the U.S. passed stablecoin legislation earlier this year, U.S. Treasury Secretary Scott Bessent was among those who underscored the benefits of heightened demand for government debt, which would go toward backing a new wave of tokens.
“This newfound demand could lower government borrowing costs and help rein in the national debt,” he said. “It could also onramp millions of new users—across the globe—to the dollar-based digital asset economy.”
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