IMF Says Stablecoins Threaten Central Bank Control

The International Monetary Fund (IMF) warned that rising stablecoin adoption could weaken central banks’ control over monetary policy and threaten nations’ financial  sovereignty.

While stablecoin adoption makes payments faster and cheaper for people, ”it decreases a country’s central bank ability to control its monetary policy and serve as lender of last resort,” the IMF said in a blog post that highlighted the findings of a 56-page report on the topic. 

The promise that stablecoins offer also comes with risks of “countries losing control over capital flows,” it added.

Stablecoins Can ‘Penetrate An Economy Rapidly’ 

Historically, investors who wanted to hold US dollars, or any other fiat currency besides their country’s own, were required to hold cash or open specific bank accounts.

But stablecoins enable anyone to gain access to the underlying asset that it represents on-chain, something the IMF said enables the cryptos to “penetrate an economy rapidly via the internet and smartphones.” 

“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 IMF said. 

It cited citizens in regions like Africa, the Middle East, Latin America, and the Caribbean, who are increasingly holding their money in stablecoins instead of local foreign-currency bank accounts. That’s often because of worries over financial instability and even survival, it said.

The IMF also said that it is becoming more difficult for central banks to guide their country’s monetary policy since they do not have accurate data from local FX accounts. 

CBDC’s Face Difficulty Competing With Stablecoins

Given the fact that stablecoins operate on a distributed ledger and there is no central third party needed to process and validate transactions, a central bank would have very little control if stablecoin adoption and usage continue to rise.

In an attempt to gain back some of the control lost to stablecoins, many central banks have proposed creating their own central bank digital currencies (CBDCs). These tokens are similar to stablecoins, but are issued and maintained via a central bank. This means that a central bank would also be able to better monitor and restrict transaction activity. 

But the IMF warned that if foreign currency-denominated stablecoins become entrenched through payments services, local alternatives such as a CBDC would find it difficult to compete. 

US Dollar Stablecoins Dominate The Market

The stablecoin market has grown to about $316 billion this year, according to CoinMarketCap. 

It gained momentum after US President Donald Trump signed the GENIUS Act into law, providing regulatory clarity in the US for the first time.

That clarity ignited a stablecoin frenzy, with multiple major traditional financial firms launching their own tokens.

Currently, stablecoins pegged to the US dollar account for over 90% of the market. Leading the sector are Tether’s USDT and Circle’s USDC. Combined, these two stablecoins have a capitalization of more than $250 billion, data from CoinMarketCap shows. 

Top stablecoins by market cap (Source: CoinMarketCap) 

With the rise in stablecoins and the dominance of USD-pegged tokens, the European Central Bank (ECB) recently flagged the potential risks of the continued growth of these cryptos. 

“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.