## The Stablecoin Paradox

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### Failed promise of crypto decentralization
- Original ambition: cut out central banks and large commercial lenders; democratize finance; connect parties directly via Bitcoin and blockchain.
- Outcome: decentralized crypto assets like Bitcoin became speculative financial assets due to volatile values and limited transaction throughput.
- Stablecoins emerged to fill the medium-of-exchange void by maintaining stable value through one-to-one backing with reserves of central bank currencies or government bonds.

### How stablecoins operate and governance
- Stablecoins use blockchain technology but rely on trust in issuing institutions rather than decentralized trust mediated by code.
- Governance is centralized: the issuing firm decides who can use the stablecoin and how; the issuer validates transactions rather than an algorithm.
- Stablecoin transactions are posted to digital ledgers maintained on decentralized networks of computer nodes, the same as Bitcoin.

### Payment benefits and real-world uses
- Lowered costs and removed frictions in payments, particularly cross-border payments.
- Enabled cheaper and faster remittances for economic migrants.
- Facilitated instantaneous transactions for importers and exporters versus multi-day processes.

### Limits and harms beyond payments
- Decentralized finance has spawned complex speculative products with dubious value outside speculation.
- Less sophisticated retail investors may be harmed by exposure to risk in these products.
- Stablecoins can lubricate illicit financial activities, complicating anti–money laundering and counterterrorism financing efforts.
- Stablecoins threaten the integrity of payment systems by creating a disparate set of systems managed by private corporations.

### Concentration of financial power and implications
- US legislation permitting a broad range of corporations to issue stablecoins could concentrate power in large corporations (example: Amazon, Meta) rather than increase competition.
- Large commercial banks may tokenize deposits and could issue their own stablecoins, entrenching big players and undercutting smaller regional and community lenders.
- Stablecoins risk reinforcing existing international monetary structures:
  - Dollar-backed stablecoins are in greatest demand and most widely used globally, potentially boosting dollar dominance.
  - Issuers’ attempts at non-dollar pegs have seen little demand (example noted: Circle’s USDC versus its other currency-pegged stablecoins).
- Stablecoins pose an existential threat to currencies of smaller economies; citizens may prefer widely accepted corporate-issued stablecoins over volatile local currencies.

### Policy and regulatory challenges
- National regulation alone is insufficient due to the borderless nature of the internet and stablecoin usage.
- A cooperative international regulatory approach is desirable to tamp down risks, preserve space for innovation, and curb excessive concentration of economic power.
- Practical obstacles:
  - International cooperation is currently weak; major powers (US and euro area) are pursuing divergent crypto regulation paths.
  - Smaller economies, with weaker financial systems and limited regulatory capacity, are unlikely to have adequate representation in international rule-setting and may receive rules that neglect their concerns.
- Suggested focus for smaller economies: improve domestic payment infrastructures and work with other countries to remove frictions in international payments rather than issuing national stablecoins.

### Net assessment and recommendations
- Stablecoins highlight inefficiencies in existing financial systems and demonstrate technological solutions to some payment frictions.
- However, they may produce greater concentration of power and reinforce dollar dominance, risking a new financial order marked by increased instability rather than broader inclusion and competition.
- Policy recommendations (implied in the text):
  - Implement effective regulation that reduces risks while allowing financial innovation.
  - Foster international cooperation on stablecoin regulation to address cross-border implications.
  - Prioritize fixing domestic payment-system inefficiencies over creating national stablecoins.

*Eswar Prasad, “The Stablecoin Paradox,” F&D, DECEMBER 2025*

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_Source: https://www.imf.org/-/media/files/publications/fandd/article/2025/12/prasad.pdf_