The IMF warns that the USD-pegged neo stablecoin is penetrating deeply into emerging markets, posing a risk of weakening central banks' control over liquidity, interest rates, and exchange rate stability, thereby threatening national monetary sovereignty.
The explosion of stablecoins amid high inflation in many emerging economies compels the IMF to call for the establishment of a strict legal framework to prevent them from becoming legal tender while still harnessing the benefits of cross-border payments and financial inclusion.
MAIN CONTENT
The IMF points out that USD-pegged stablecoins can weaken monetary policy and local currencies in emerging markets.
The fund proposes a clear legal framework to prevent stablecoins from achieving fiat currency status and to limit systemic risks.
The benefits of cross-border payments come with financial stability risks if oversight, management, and crisis handling are weak.
How are stablecoins affecting monetary policy in emerging markets?
The IMF believes that USD-pegged stablecoins are deeply penetrating emerging economies, especially where inflation is high, posing a risk of diminishing the effectiveness of central banks' interest rate and money supply management, similar to the phenomenon of dollarization but in digital form.
According to the IMF, the flow of capital into stablecoins reduces people's dependence on local currency for payments and savings. As the money supply contracts, traditional tools like policy interest rates, reserve requirements, or liquidity regulation through the banking system become less effective.
For countries already vulnerable to exchange rate shocks, a large-scale shift to stablecoins could exacerbate pressure on the local currency, increase the risk of macroeconomic instability, and force central banks to intervene more aggressively and at greater cost.
The risk of replacing local currency in the context of high inflation
The IMF emphasizes that in places with prolonged inflation, people tend to seek assets pegged to strong foreign currencies, and stablecoins become a convenient option due to their digital nature. This could accelerate the process of 'dollarization' and undermine the foundations of monetary policy.
Why is the IMF calling for the establishment of a legal framework for stablecoins?
The IMF recommends that countries establish clear legal standards to ensure that stablecoins do not achieve fiat currency status, while tightening criteria on reserves, governance, and disclosure of information to mitigate risks of contagion to the traditional financial system.
The IMF calls for the establishment of a legal framework that clearly distinguishes stablecoins, fiat money, and other cryptocurrency assets. The goal is to avoid treating stablecoins equivalently to local currency in payment obligations while creating a basis for applying appropriate capital, reserve, and risk management requirements.
Reflecting this concern, Joyston Faisal, a senior economist at the IMF, emphasizes the importance of strengthening the domestic financial system before new technological shocks. He notes that countries need to proactively enhance oversight, conduct stress tests, and establish intervention mechanisms for significant fluctuations related to stablecoins.
“While stablecoins can improve cross-border payments and financial inclusion, these benefits come with increased macro-financial risks if regulatory, supervisory, and resolution regimes are weak.”
– Christine Lagarde, Former Managing Director of the International Monetary Fund
Strengthening oversight, management, and crisis handling mechanisms
The IMF emphasizes that regulation is just the starting point; countries need near-real-time monitoring systems, early intervention processes, and frameworks for handling liquidity crises with stablecoins. If these pillars are weak, shocks from stablecoins can quickly spread to banks and capital markets.
Stablecoin, cross-border payments, and financial stability risks
The IMF acknowledges that stablecoins can improve the speed, cost, and access of cross-border payments, but warns that these benefits come with higher risks to financial stability if regulatory, supervisory, and crisis management frameworks are not fully designed.
In reality, the rush of people in emerging economies to hold stablecoins is not much different from the wave of shifting to holding physical foreign currency during previous periods of high inflation. This trend could weaken demand for currency-denominated assets, complicating public debt management and stabilizing the banking system.
On the positive side, if well-managed, stablecoins can provide a foundation for cheaper, faster, and more accessible cross-border payment solutions for low-income individuals. The challenge lies in designing the legal framework and infrastructure to leverage technology while protecting monetary sovereignty.
Market context: crypto volatility and Bitcoin's position
According to CoinMarketCap, Bitcoin (BTC) is trading around $92,139.34 with a market capitalization of approximately $1.84 trillion and holds 58.73% market share, despite a 1.42% decrease in 24 hours, with a 24-hour trading volume down by 16.41%, and a maximum supply still capped at 21 million BTC.
In the context of Bitcoin dominating in market capitalization, stablecoins stand out as a bridge of value linked to fiat money. The combination of a highly volatile asset like BTC and an expanding layer of stablecoins is reshaping the structure of the crypto market, forcing regulators to update risk assessment methods.
The process of completing the legal framework and space for innovation
A study shows that the process of building regulations for stablecoins will be complex and time-consuming, but it also opens up opportunities to upgrade financial infrastructure. As the legal framework gradually improves, new technological innovations may emerge, balancing innovation and protecting national interests.
Frequently Asked Questions
Why is the IMF concerned about stablecoins in emerging markets?
The IMF is concerned that USD-pegged stablecoins could weaken the central bank's ability to manage interest rates, liquidity, and exchange rates, especially in high-inflation countries, thereby threatening monetary sovereignty and macroeconomic stability.
What does the IMF propose regarding the legal framework for stablecoins?
The IMF recommends that countries build a clear legal framework, not recognizing stablecoins as fiat currency, applying standards on reserves, governance, and information disclosure, and establishing mechanisms for oversight, intervention, and crisis management when systemic risks arise.
What benefits do stablecoins bring for cross-border payments?
Stablecoins can help cross-border payments be faster, cheaper, and more accessible, supporting financial inclusion. However, without strict regulation and oversight, they could increase macro-financial risks and destabilize the banking system.
Source: https://tintucbitcoin.com/imf-canh-bao-stablecoin-de-doa-tien-te-nen-kinh-te-moi-noi/
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