IMF Warns Against Stablecoins And Their Dangers To Emerging Markets

IMF is warning that stablecoins could worsen currency substitution and weaken central bank control in emerging markets.

The International Monetary Fund (IMF) has warned that stablecoins could affect global money flows. 

It says that Dollar-backed stablecoins like USDT and USDC are rising in popularity, especially in countries with high inflation or weak monetary systems. 

This growth could encourage people and businesses to prefer stablecoins over local currencies, and possibly reduce central banks’ control over capital flows.

Stablecoins and Currency Substitution

Stablecoins are digital currencies designed to maintain a stable value, and are often pegged to the US dollar. The IMF report shows that these kinds of assets are increasingly used across borders.

This is also happening faster than traditional cryptocurrencies like Bitcoin and Ethereum.

The report explains that in economies with weak monetary frameworks, households and businesses may turn to dollar-backed stablecoins instead of local money. This process, known as currency substitution, can reduce the ability of central banks to manage inflation or regulate capital flows.

The IMF notes that countries with high inflation, weak institutions or low trust in local banks are especially vulnerable. Stablecoins can bypass capital controls and allow money to move freely across borders.

Global Growth of Stablecoins

The market for stablecoins has expanded so far and USDT and USDC (the two largest stablecoins) now account for over 90% of total issuance. 

USDT has a circulating supply of $185.5 billion, while USDC stands at $77.6 billion. When combined, their circulation has more than tripled since 2023 and trading volumes reached $23 trillion last year alone.

This stood as a 90% increase from the previous year.

Asia now leads in terms of global stablecoin activity. However, Africa, Latin America and the Middle East are showing the fastest growth relative to GDP. This trend shows the appeal of digital dollars in regions with unstable financial systems.

The IMF also pointed out that mobile-based digital services are helping expand access to financial systems. 

In all, stablecoins could lower payment costs and include more people in digital finance if supported by strong regulation.

Risks to Financial Stability

Despite their benefits, stablecoins carry major risks. If users lose confidence or reserve assets fall in value, issuers might be forced to sell assets quickly.

This could disrupt the general financial markets.

The IMF also warns that pseudonymous stablecoins could complicate the monitoring of capital flows and macroeconomic data. Unknown holders and unhosted wallets make it harder for authorities to respond during crises.

Summarily, the rapid expansion of stablecoins is a major problem for banks in emerging economies.

Notably, Standard Chartered estimates that stablecoins could drain up to $1 trillion from these banks as savers convert their deposits into digital dollars. Countries like South Africa have already pointed out this threat to its financial stability.

Related Reading: Stablecoin Market Tops $280B as ECB Flags Systemic Risk

Regulatory Fragmentation

The IMF says that regulation is uneven across countries. Japan, the EU, the U.S. and the UK have different rules on who can issue stablecoins, reserve custody or control oversight of foreign issuers.

These gaps may encourage regulatory arbitrage, where issuers exploit differences between countries for profit. Weak oversight could also make financial systems more vulnerable to sudden shocks.

So far, the US has passed the GENIUS stablecoin law and is developing regulations, while other major economies are creating frameworks for reserve transparency and issuer supervision. 

However, many emerging markets still lack clear rules and could be indeed at risk of this problem that the IMF outlined.

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