IMF Elaborates on the Six Main Stablecoin Risks for Traditional Financial System
The International Monetary Fund (IMF) published a blog post on Sept 19 titled, “Digital Currencies: Rise of stable coins”, explaining the rise and rise of these asset backed digital currencies and their potential risks to financial markets across the globe.
The post acknowledges the adoption of stable coins and crypto as a whole has been on the rise in the past few years. More and more investors are adopting digital currencies as a form of safe haven as well as a mode of payment which is expected to spike the adoption rates even higher. Stable coins such as Tether (USDT) and Facebook’s Libra, in particular, are taking off due to
“their attractiveness as a means of payment”.
The article further states,
“But the strongest attraction comes from the networks that promise to make transacting as easy as using social media. Stable coins offer the potential for better integration into our digital lives and are designed by firms that thrive on user-centric design.”
Despite the growth of the industry, there remains challenges and risks that stable digital currencies pose to the traditional financial system.
The six risks Stable Coins pose for the Financial System
- Increased competition to banks: Cryptocurrencies were created to replace banks’ function as intermediaries offering a peer to peer connection between users. However, banks are expected to evolve and innovate new methods in order to survive.
- Data ownership by large tech companies with their stable coins may cause a rise in monopolies with large transaction data. The IMF proposes new regulations to be put in place to control data ownership, protection, portability and control.
- The third is the over reported risk –promoting illicit and illegal activities.
- The fourth is the replacing of weaker currencies (exactly what crypto is aiming to do). As seen in the past few months in Venezuela, a country facing hyperinflation, the use of crypto is gaining pace pushing the government to release a national stable coin, Petro.
- As stable coins gain more adoption across countries, central banks may lose “seigniorage.” To prevent this, governments should promote competition between the issuers of stable coins to ensure they pay an interest equal to the currency backing them.
- The final risk posed by stable coins is the security of consumers’ funds. Regulations to prevent bank runs on issuers should be enforced to protect users’ funds. The report states,
“One approach would be to regulate stable coins like money market funds that guarantee fixed nominal returns, requiring providers to maintain sufficient liquidity and capital.”