## Crypto’s Conservative Coins

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**Canonical URL:** [Crypto’s Conservative Coins](https://www.imf.org/-/media/files/publications/fandd/article/2022/september/back2basics-crypto.pdf)

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### Origins and original vision
- Crypto revolution launched in 2009 aimed to decentralize and democratize financial services, placing "power ... in the hands of the people."
- Speculation shifted use from payments to hoarding; thousands of volatile "alt-coins" emerged, undermining crypto as a stable payment instrument.

### What stablecoins are and how they work
- A stablecoin is a crypto asset that aims to maintain a stable value relative to a specified asset, or a pool of assets, such as:
  - a monetary unit of account such as the dollar or euro,
  - a currency basket,
  - a commodity such as gold,
  - or unbacked crypto assets.
- Stability requires centralized issuance (minting) and redemption (burning) and a custodian holding corresponding reserves (typically fiat currency issued by governments) that back issued units.

### Centralization versus decentralization
- Many stablecoins reintroduce centralizing features contrary to the original vision:
  - stablecoin issuers hold user data;
  - reserve managers are usually commercial banks;
  - network administrators can change network rules;
  - exchanges and wallets can block transactions.
- Due to blockchain transparency and anti-money-laundering compliance needs, stablecoins may offer less privacy than existing payment rails.

### Primary uses and economic implications
- Stablecoins permit users to remain in the crypto universe without having to cash out into fiat currency.
- Main uses:
  - purchasing unbacked crypto assets;
  - accessing and operating in decentralized finance (DeFi).
- In some emerging market and developing economies, dollar-denominated stablecoins could become popular as a store of value and a hedge against inflation and currency depreciation, providing an avenue to protect financial interests amid macroeconomic pressures and weak financial institutions.
- Unregulated stablecoins can:
  - circumvent controls on free capital movement;
  - complicate macroeconomic management by central banks.

### Stability and contagion risks
- Most stablecoins fluctuate around their desired value rather than sticking rigidly to it; some can deviate significantly.
- Algorithmic stablecoins aim to stabilize via issuance algorithms and sometimes backing with unbacked crypto assets but are extremely risky and susceptible to de-pegging from shocks.
- TerraUSD experience:
  - suffered a peg failure in mid-2022 after bank-like runs by users;
  - was then the third-largest stablecoin;
  - its collapse triggered significant ripple effects across the entire crypto market.
- Contagion risk extends beyond crypto markets because many stablecoins hold reserves in traditional financial instruments and exposure to crypto assets among traditional financial market participants has increased.

### Technology, scale, and financial inclusion
- Distributed ledger technology underpinning stablecoins has not been tested at scale for payments.
- Potential benefits: increased speed and lower costs for cross-border remittances and wholesale payments.
- Limitations:
  - may not offer sizable advantages over domestic payment systems, especially in advanced economies.
  - financial inclusion benefits are mixed: most stablecoin users are educated, relatively young, and already have bank accounts.
  - when transactions remain on-chain, costs can be higher than alternatives such as mobile or electronic money.
- Example of non-crypto alternatives: financial inclusion in Kenya rose from 14 percent to 83 percent between 2006 and 2019 through mobile/electronic money.

### Regulatory challenges and proposals
- Domestic payment system regulators may not permit stablecoins as a payment instrument for purchases of goods and services or to integrate with domestic payment systems.
- Stablecoins and the wider crypto universe are not yet regulated for conduct and prudential purposes in many jurisdictions; some anti-money-laundering rules might apply, but users lack comprehensive protections.
- User risks without regulation include:
  - large losses with no compensation if fraudulent stablecoins are issued;
  - issuers falsely claiming reserves;
  - theft of stablecoins;
  - inability to access stablecoins or redeem at par.
- Regulatory approaches under consideration:
  - adjust payment regulations where stablecoins are not issued by banks and used for small-scale payments;
  - apply requirements similar to securities regulation where stablecoins have less liquid reserve assets and are used for investment purposes;
  - apply bank-like regulations if stablecoins become widely used for payments, recognizing that doing so would make stablecoins functionally similar to banks.

### Conclusions and policy implications
- Stablecoins diverge from crypto’s revolutionary ideals by reintroducing centralized intermediaries and reliance on fiat reserves.
- With appropriate regulation tailored to business models, economic risks, and functions, stablecoins could play a valuable role in expanding choices and access to financial services.
- However, stablecoins are not a standalone solution and are far from the original revolutionary vision of crypto’s creators.

*Parma Bains and Ranjit Singh, Finance & Development, September 2022*

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_Source: https://www.imf.org/-/media/files/publications/fandd/article/2022/september/back2basics-crypto.pdf_