Adoption of stablecoins could stifle central bank control, warns IMF

Source: PortaldoBitcoin Original Title: Adoption of stablecoins could stifle central banks’ control, warns IMF Original Link: https://portaldobitcoin.uol.com.br/adocao-de-stablecoins-pode-sufocar-o-controle-dos-bancos-centrais-alerta-o-fmi/ Stablecoins have the potential to broaden people’s access to financial services, but this could come at the expense of central banks, according to the International Monetary Fund (IMF).

In a recently published report, the international organization identified “currency substitution” as a potential risk posed by stablecoins, describing the dynamic as something that could gradually erode the financial sovereignty of various nations.

Historically, if someone wanted access to the dollar, they would typically need to hold physical cash or open a certain type of bank account. However, “stablecoins can quickly penetrate an economy through the internet and smartphones,” noted the IMF.

“The use of stablecoins denominated in foreign currency, especially in cross-border contexts, can lead to currency substitution and potentially undermine monetary sovereignty, particularly in the presence of self-custody wallets,” the organization added.

A central bank would have less control over domestic liquidity and interest rates if a significant portion of economic activity migrated away from the respective national currency, the IMF said.

If stablecoins denominated in foreign currency become entrenched through payment services, local alternatives such as a central bank digital currency (CBDC) may struggle to compete, the report stated. Unlike stablecoins issued by private companies, CBDCs are a digital form of sovereign currency 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 increasing relative to foreign currency deposits that help central banks influence monetary policy. However, the IMF acknowledged that currency substitution is often driven by a sense of survival, including the pursuit of stability by citizens in countries where inflation is high.

Currently, US dollar-denominated stablecoins represent 97% of the $311 billion sector, according to market data providers. Euro-denominated stablecoins, for example, were collectively worth $675 million, while $15 million were pegged to the Japanese yen.

To protect monetary sovereignty, the IMF recommends that nations implement frameworks that prevent digital assets from being recognized as official currency or legal tender. This status would prevent people from refusing digital assets as a form of payment.

Recently, the European Central Bank highlighted the risks associated with dollar-denominated stablecoins and their potential to absorb valuable resources.

“The significant growth of stablecoins could cause retail deposit outflows, reducing an important source of bank funding and leaving them with a more volatile funding base,” said the ECB.

Still, when the United States passed stablecoin legislation earlier this year, officials highlighted the benefits of increased demand for government debt, which would serve to back a new wave of tokens.

“This new demand could reduce government borrowing costs and help contain national debt. It could also bring millions of new users worldwide into the dollar-based digital asset economy.”