The International Monetary Fund (IMF) has outlined the promises and risks of stablecoins in its recent blog by Tobias Adrian and Tommaso Mancini-Griffol.
The blog assumes that policymakers would be wise to envision far-sighted regulatory regimes that will meet the challenge as new entrants like stablecoins present as many headaches as they do potential benefits.
The blog, Digital Currencies: The Rise of Stablecoin points out that the acceptance of new form of money could bring significant benefits to customers and society, but it could invite risks as well.
It stated: “While many stablecoins continue to be claims on the issuing institution or its underlying assets, and many also offer redemption guarantees at face value (a coin bought for 10 euros can be exchanged back for a 10-euro note, like a bank account), government-backing is absent. Trust must be generated privately by backing coin issuance with safe and liquid assets. And the settlement technology is usually decentralized, based on the blockchain model.”
Stablecoins are a new class of cryptocurrencies that attempt to peg their market value to some external reference. The most popular stablecoins use the U.S. dollar as a benchmark and maintain a price very close to $1 if they are functioning as intended. Of course, there are also stablecoins pegged to other currencies such as the euro or the Japanese yen.
Attractiveness as a means of payment and easy transacting
The blog states that stablecoins are significantly different from the popular incumbents: cash or bank deposits. Their adoption will rest on their attractiveness as a store of value and a means of payment.
Stablecoins are taking wings based on low costs, global reach, and speed as potential benefits.
The blog added: “Moreover, stablecoins could allow seamless payments of blockchain-based assets, and can be embedded into digital applications thanks to their open architecture, as opposed to the proprietary legacy systems of banks.
“But the strongest attraction comes from the networks that promise to make transacting as easy as using social media. Payments are more than the mere act of transferring money. They are a fundamentally social experience linking people. Stablecoins offer the potential for better integration into our digital lives and are designed by firms that thrive on user-centric design. Large technology firms with enormous global user bases offer a ready-made network over which new payment services can quickly spread.”
Maximises benefits and minimises risks
The blog lists the following risks of stablecoins from observations of the authors:
- Banks may lose their place as intermediaries if they lose deposits to stablecoin providers.
- New monopolies could arise.
- Weaker currencies could face threats.
- Stablecoins could promote illicit activities.
- Stablecoins could provoke the loss of “seigniorage”.
- Policymakers must reinforce consumer protection and financial stability
Digital Currencies: The Rise of Stablecoins is the first in a 2-part series on IMFBlog covering digital currencies, and draws from content published earlier by the authors on VoxEU.
Some central banks are on the brink of piloting central bank digital currencies (CBDCs), while some have already began on a limited scale, according to another paper by IMF.