Fiat Money is in Flux, Stablecoins will Transform the Banking and Money Landscape: IMF

“The world of fiat money is in flux, and innovation will transform the landscape of banking and money. You can bet your bottom dollar on it,” read the IMF's latest blog “From Stablecoins to Central Bank Digital Currencies.”

Reiterating its previous blog where they introduced stablecoins, authors Tobias Adrian and Tommaso Mancini-Griffoli say consumers might quickly adopt these new, cheaper, and faster alternatives into their social media platforms.

But, these fiat-backed cryptocurrencies come with their own risks that are being addressed in the latest write up. The risks are if the underlying assets of stablecoins are safe and liquid and whether those assets fully back the coins in circulation. Regulation, the author says must eliminate these risks.

Enhancing the Attractiveness of Stablecoins as a Store of Value,

One option requires stablecoins providers to hold safe and liquid assets along with sufficient equity to protect the holders from losses. Though not an easy task, it’s a call to regulate stablecoin providers despite them not being traditional banks. Another regulatory path, they say, is to:

“give stablecoin providers access to central bank reserves.”

A similar approach has already been taken by the People's Bank of China with payment providers WeChat Pay and AliPay.

A Public-Private Partnership

Central banks around the world are considering giving fintech companies access to their reserves, though only after they satisfy the requirements related to security, data protection, anti-money laundering, and connectivity between different coin platforms.

“Doing so would enhance the attractiveness of stablecoins as a store of value,” the blog reads.

This would further transform stablecoin providers into narrow banks while offering other benefits in terms of stability, regulatory clarity, and enhancing competition among stablecoin provider.

Additional solutions would involve domestic payment solutions and better monetary policy transmission. As stablecoin providers held client assets at the central bank, clients would indirectly hold and transact in central bank liabilities, basically a central bank digital currency.

This synthetic central bank digital currency—or “sCBDC” would push central banks into the territory of app development, customer interaction, technology selection, and brand management.

While central banks would focus on providing trust and efficiency in this partnership, stablecoin providers would work on innovation and interacting with clients. But whether central banks would jump on board the sCBDC is another matter altogether.

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