## Executive Summary

## Source details

**Canonical URL:** [Executive Summary](https://www.imf.org/-/media/files/publications/ftn063/2023/english/ftnea2023012.pdf)

## Other formats

- [Markdown version](/-/media/files/publications/ftn063/2023/english/ftnea2023012.pdf.md)
- [Structured JSON version](/-/media/files/publications/ftn063/2023/english/ftnea2023012.pdf.json)

---

### Overview
- Technological innovations in finance have created new private digital assets, both unbacked (e.g., Bitcoin) and backed by other assets (e.g., stablecoins).
- Adoption of crypto assets has been significant and can increase rapidly, with previous booms showing rapid accelerations in use.
- Digital money can lower cross-border payment costs and promote competition but can accentuate international transmission of shocks and constrain monetary policy.
- Key risks identified:
  - Digital dollarization/“cryptoization”.
  - Bank disintermediation.
  - Weakened monetary policy effectiveness.
  - Circumvention of capital controls—especially in economies with volatile currencies, high inflation, and weak macroeconomic policy frameworks.

### Model and Key Findings
- Model structure and calibration:
  - Two-country New Keynesian model: a small domestic economy with a banking sector and financial frictions, and a large foreign economy (calibrated to the US for illustrative purposes).
  - Large foreign economy roughly 70 times the small domestic economy.
  - Stablecoin issued and backed by foreign cash and bonds; useful domestically as means of payment and non-domestic-currency store of value.
  - Households choose payment instruments endogenously among domestic cash, deposits, foreign cash, and stablecoins.
  - CFMs modeled as a tax on the return of foreign bonds; CFMs do not apply to the stablecoin.
  - Calibration: approximately 2 percent of payment assets are held in the stablecoin in the initial steady state (consistent with the global average).
- Principal mechanisms:
  - Foreign-currency denominated stablecoin increases currency substitution and provides a circumvention channel for CFMs.
  - Banking-sector stress arises from deposit outflows and reduced bank net worth, widening credit spreads and lowering lending.
  - Monetary policy transmission weakens as households reallocate savings away from instruments directly influenced by the domestic central bank.

### Impact Scenarios and Quantitative Results
- Shocks analyzed (as used in simulations):
  - 1 percent reduction in domestic total factor productivity (TFP).
  - Contractionary foreign monetary policy shock (modeled as a foreign interest rate hike; magnitude presented in model simulations).
- Effects without CFMs:
  - Presence of the foreign-currency denominated stablecoin amplifies currency substitution and capital outflows in response to negative shocks.
  - For a 1 percent domestic TFP reduction:
    - Inflation rises temporarily and holdings of non-domestic assets, including the stablecoin, increase.
    - Larger slump in output, consumption, and investment compared with the no-stablecoin case.
    - Larger fall in domestic deposits.
    - Banks experience larger deposit outflows, larger reduction in net worth, wider credit spreads, and reduced lending.
  - For a contractionary foreign monetary policy shock:
    - Substantially larger spillovers with the stablecoin: more pronounced declines in output, consumption, and investment; larger decreases in cash and deposits; greater banking sector stress; increased holdings of stablecoins and foreign bonds; and substantial exchange rate depreciation.
  - Monetary policy reaction:
    - Central bank must react more aggressively to inflation (optimal Taylor-type rule parameters change, with stronger response to inflation) because households reallocate savings away from instruments the central bank can influence.
- Effects with CFMs (tax on foreign bond returns, not applying to stablecoin):
  - CFMs reduce attractiveness of foreign bonds but incentivize households to hold the stablecoin as a circumvention channel.
  - CFMs dampen capital outflows via the bond channel but accelerate stablecoin adoption as households reallocate into the stablecoin.
  - In the presence of CFMs and the stablecoin, macroeconomic outcomes are generally worse when shocks occur:
    - Larger exchange rate depreciation.
    - Larger central bank rate hikes.
    - Worse investment, output, and consumption paths.
    - Greater banking sector stress (lower net worth, wider credit spreads).
  - Conclusion: crypto-asset-based circumvention can undermine the insulating effects of CFMs and increase spillovers from foreign shocks.

### Policy Responses and Recommendations
- First-order defense: maintain high-quality macroeconomic policy frameworks to minimize preconditions for foreign currency substitution:
  - Strengthen monetary policy credibility.
  - Safeguard independence of central bank or monetary authority and quality of institutions.
  - Maintain a sound fiscal position.
  - Adopt effective legal and regulatory processes to disincentivize foreign currency use.
- Domestic CBDC:
  - Introducing a domestic CBDC can reduce steady-state stablecoin holdings slightly but does not fully mitigate the role of the stablecoin in transmitting foreign shocks.
  - A domestic CBDC, being denominated in domestic currency, does not provide a hedge against domestic inflation or depreciation and thus is limited as a defensive tool against cryptoization.
- Ban on stablecoin holdings:
  - A comprehensive domestic ban that precludes any holding of the stablecoin would almost entirely alleviate currency substitution, capital outflows, bank disintermediation, and larger output losses—returning the economy nearly to the “no stablecoin” outcome (some small differences remain because the stablecoin still circulates in the foreign economy).
  - Practical feasibility concerns: difficult to implement and enforce given decentralized technology, potential peer-to-peer transfers, informal sector evasion, and enforcement leakages; blanket bans could have unintended consequences and risk foregone innovation.
- Regulatory and coordinated approaches:
  - National, cross-country, and multilateral coordination on regulation and supervision of foreign stablecoins could mitigate negative effects—particularly effective when the stablecoin issuer is headquartered in a cooperating large foreign economy.
  - Where the issuer is based offshore in non-cooperating jurisdictions, effective regulation is more difficult and broader multilateral coordination is required.
  - Prefer comprehensive regulatory frameworks over bans: regulation should address crypto asset features that generate externalities, enable KYC/AML and consumer protection, and bring activity within regulatory perimeter (for example, allowing access only via regulated exchanges).
- Combined policy packages:
  - A domestic CBDC could be combined with other measures (regulation, inclusion objectives) rather than relied upon solely to defend against foreign stablecoins.
  - Less-than-comprehensive bans (e.g., restricting access to regulated venues) may be preferable to full bans in some contexts.
  - Where CFMs exist, reducing macroeconomic imbalances and improving policies that enable capital account liberalization would reduce demand for foreign digital money as circumvention.
- Monitoring and supervision:
  - Improve monitoring of crypto assets and regulation/supervision of crypto-related entities and providers.
  - Cross-country coordination and cooperation among governments and international organizations are essential to preserve macroeconomic policy autonomy and financial stability while harnessing benefits of stablecoins.

*Source: Executive Summary, ftnea2023012 (Fintech Note summarizing Le and others, 2023).*

### Executive Summary ......................................................................................................

### Executive Summary

### I. Introduction
- Section title: "Introduction"
- Appears on page: 1

### II. Crypto Assets and Macrofinancial Risks
- Section title: "Crypto Assets and Macrofinancial Risks"
- Appears on page: 5
- Figures referenced:
  - Figure 1. Crypto Asset Adoption
  - Figure 2. Determinants of Crypto Asset Adoption

### III. Model Description
- Section title: "Model Description"
- Appears on page: 9
- Figures referenced:
  - Figure 3. Model Overview: Domestic Economy
  - Figure 4. Model Overview: Foreign Economy

### IV. Impact of the Foreign Stablecoin
- Section title: "Impact of the Foreign Stablecoin"
- Appears on page: 12
- Figures referenced:
  - Figure 5. Response of selected variables in the domestic economy to a negative 1 percent TFP shock
  - Figure 6. Response of selected variables in the domestic economy to a contractionary foreign monetary policy shock

### V. Conclusions and Policy Responses
- Section title: "Conclusions and Policy Responses"
- Appears on page: 17
- Figure referenced:
  - Figure 7. Response of selected variables in the domestic economy with CFMs to a contractionary foreign monetary policy shock

### References and Supplementary Material
- "References" section appears on page: 19
- "TABLES AND FIGURES" listing includes the figures noted above and indicates their captions and ordering

*Source: ftnea2023012 - Executive Summary (ftnea2023012 - Executive Summary) — IMF PDF*

### Executive Summary

### Executive Summary

### Overview
- Technological innovations in finance have created new private digital assets, both unbacked (e.g., Bitcoin) and backed by other assets (e.g., stablecoins).
- Adoption of crypto assets has been significant and can increase rapidly, with previous booms showing rapid accelerations in use.
- Digital money can lower cross-border payment costs and promote competition but can accentuate international transmission of shocks and constrain monetary policy.
- Risks highlighted: digital dollarization/“cryptoization”, bank disintermediation, weakened monetary policy effectiveness, and circumvention of capital controls—especially in economies with volatile currencies, high inflation, and weak macroeconomic policy frameworks.

### Model and Key Findings
- The note summarizes Le and others (2023), which develops a two-country New Keynesian model: a small domestic economy with a banking sector and financial frictions, and a large foreign economy (calibrated to the US for illustrative purposes) hosting a stablecoin issuer.
- Model features:
  - Large foreign economy roughly 70 times the small domestic economy.
  - Stablecoin issued and backed by foreign cash and bonds; useful domestically as means of payment and non-domestic-currency store of value.
  - Households choose payment instruments endogenously among domestic cash, deposits, foreign cash, and stablecoins.
  - CFMs modeled as a tax on the return of foreign bonds; CFMs do not apply to the stablecoin.
- Calibration: approximately 2 percent of payment assets are held in the stablecoin in the initial steady state (consistent with the global average).

### Impact Scenarios and Quantitative Results
- Baseline shocks examined include a negative domestic TFP shock and a contractionary foreign monetary policy shock. Specific shock magnitudes used in simulations:
  - 1 percent reduction in domestic total factor productivity (TFP).
  - Contractionary foreign monetary policy shock (modeled as a foreign interest rate hike; magnitude presented in model simulations).
- Effects without CFMs:
  - The presence of a foreign-currency denominated stablecoin amplifies currency substitution and capital outflows in response to negative shocks.
  - A 1 percent domestic TFP reduction:
    - Raises inflation temporarily and increases holdings of non-domestic assets, including the stablecoin.
    - Leads to a larger slump in output, consumption, and investment, and a larger fall in domestic deposits.
    - Banks face larger deposit outflows, a larger reduction in net worth, wider credit spreads, and reduced lending.
  - A contractionary foreign monetary policy shock:
    - Produces substantially larger spillovers in the presence of the stablecoin—more pronounced declines in output, consumption, and investment; larger decreases in cash and deposits; greater banking sector stress; increased holdings of stablecoins and foreign bonds; and substantial exchange rate depreciation.
  - Monetary policy transmission weakens: the central bank must react more aggressively to inflation (optimal Taylor-type rule parameters change, with stronger response to inflation), because households reallocate savings away from instruments the central bank can influence.
- Effects with CFMs (tax on foreign bond returns, not applying to stablecoin):
  - CFMs reduce attractiveness of foreign bonds but incentivize households to hold the stablecoin as a circumvention channel.
  - CFMs dampen capital outflows via the bond channel but accelerate stablecoin adoption as households reallocate into the stablecoin.
  - In the presence of CFMs and the stablecoin, macroeconomic outcomes are generally worse when shocks occur: larger exchange rate depreciation, larger central bank rate hikes, worse investment, output, and consumption paths, and greater banking sector stress (lower net worth, wider credit spreads).
  - Conclusion: crypto-asset-based circumvention can undermine the insulating effects of CFMs and increase spillovers from foreign shocks.

### Policy Responses and Recommendations
- First-order defense: maintain high-quality macroeconomic policy frameworks to minimize preconditions for foreign currency substitution. Specific measures:
  - Strengthen monetary policy credibility.
  - Safeguard independence of central bank or monetary authority and quality of institutions.
  - Maintain a sound fiscal position.
  - Adopt effective legal and regulatory processes to disincentivize foreign currency use.
- Domestic CBDC:
  - Introducing a domestic CBDC can reduce steady-state stablecoin holdings slightly but does not fully mitigate the role of the stablecoin in transmitting foreign shocks.
  - A domestic CBDC, being denominated in domestic currency, does not provide a hedge against domestic inflation or depreciation and thus is limited as a defensive tool against cryptoization.
- Ban on stablecoin holdings:
  - A hypothetical comprehensive domestic ban that precludes any holding of the stablecoin would almost entirely alleviate currency substitution, capital outflows, bank disintermediation, and larger output losses—returning the economy nearly to the “no stablecoin” outcome (some small differences remain because the stablecoin still circulates in the foreign economy).
  - Practical feasibility: such a ban would be difficult to implement and enforce given decentralized technology, potential peer-to-peer transfers, informal sector evasion, and enforcement leakages; blanket bans could have unintended consequences and risk foregone innovation.
- Regulatory and coordinated approaches:
  - Specific national, cross-country, and multilateral coordination on regulation and supervision of foreign stablecoins could mitigate negative effects—particularly effective when the stablecoin issuer is headquartered in a cooperating large foreign economy.
  - Where the issuer is based offshore in non-cooperating jurisdictions, effective regulation is more difficult and broader multilateral coordination is required.
  - Prefer comprehensive regulatory frameworks over bans (IMF 2023): regulation should address crypto asset features that generate externalities, enable KYC/AML and consumer protection, and bring activity within regulatory perimeter (for example, allowing access only via regulated exchanges).
- Combined policy packages:
  - A domestic CBDC could be combined with other measures (regulation, inclusion objectives) rather than relied upon solely to defend against foreign stablecoins.
  - Less-than-comprehensive bans (e.g., restricting access to regulated venues) may be preferable to full bans in some contexts.
  - Where CFMs exist, reducing macroeconomic imbalances and improving policies that enable capital account liberalization would reduce demand for foreign digital money as circumvention.
- Monitoring and supervision:
  - Improve monitoring of crypto assets and regulation/supervision of crypto-related entities and providers.
  - Cross-country coordination and cooperation among governments and international organizations are essential to preserve macroeconomic policy autonomy and financial stability while harnessing benefits of stablecoins.

*Source: Executive Summary, ftnea2023012 (Fintech Note summarizing Le and others, 2023).*

### References

### References

### IMF and policy papers
- International Monetary Fund (IMF). 2020. “Digital Money Across Borders: Macro-Financial Implications.” IMF Policy Paper 2020/50, International Monetary Fund, Washington, DC.
- International Monetary Fund IMF. 2021. “The Crypto Ecosystem and Financial Stability Challenges” (Chapter 2). In Global Financial Stability Report: COVID-19, Crypto, and Climate: Navigating Challenging Transitions. Washington, DC, October.
- International Monetary Fund (IMF). 2023. “Elements of Effective Policies for Crypto Assets.” IMF Policy Paper 2023/004, International Monetary Fund, Washington, DC.
- G20. 2023. “The Macrofinancial Implications of Crypto Assets.” Group of Twenty Note prepared by Staff of the International Monetary Fund. Washington, DC.
- Das, Mitali, Tommaso Mancini Griffoli, Fumitaka Nakamura, Julia Otten, Gabriel Soderberg, Juan Sole, and Brandon Tan. 2023. “Implications of Central Bank Digital Currencies for Monetary Policy Transmission.” IMF Fintech Note 2023/010, International Monetary Fund, Washington, DC.
- He, Dong, Annamaria Kokenyne Ivanics, Xavier Lavayssiere, Inutu Lukonga, Nadine Schwarz, Nobuyasu Sugimoto, and Jeanne Verrier. 2022. “Capital Flow Management Measures in the Digital Age: Challenges of Crypto Assets.” IMF Fintech Note 2022/005, International Monetary Fund, Washington, DC.
- Le, Anh H., Alexander Copestake, Brandon Tan, Evan Papageorgiou, S. Jay Peiris and Umang Rawat. 2023. “Macro-Financial Impacts of Foreign Digital Money.” IMF Working Paper 23/249, International Monetary Fund, Washington, DC.

### IMF working papers and forthcoming IMF studies
- Adrian, Tobias, Federico Grinberg, Tommaso Mancini-Griffoli, Robert M. Townsend, and Nicolas Zhang. 2022. “A Multi-Currency Exchange and Contracting Platform.” IMF Working Paper 22/217, International Monetary Fund, Washington, DC.
- Baer, Katherine, Ruud de Mooij, Shafik Hebous, and Michael Keen. 2023. “Taxing Cryptocurrencies.” IMF Working Paper 23/144, International Monetary Fund, Washington, DC.
- Furceri, Davide, Pablo Gonzalez-Dominguez, and Nour Tawk. Forthcoming. “Robust Determinants of Crypto Asset Adoption.” IMF Working Paper (forthcoming), International Monetary Fund, Washington, DC.
- Graf von Luckner, Clemens, Robin Koepke, and Silvia Sgherri. Forthcoming. “Cryptocurrencies: A Market Place for Capital Flight.” IMF Working Paper (forthcoming), International Monetary Fund, Washington, DC.
- Popescu, Adina. 2022. “Cross-Border Central Bank Digital Currencies, Bank Runs and Capital Flows Volatility.” IMF Working Paper 22/83, International Monetary Fund, Washington, DC.

### Academic journal articles and BIS working paper
- Benigno, Pierpaolo, Linda M Schilling, and Harald Uhlig. 2022. “Cryptocurrencies, Currency Competition, and the Impossible Trinity.” Journal of International Economics 136: 103601.
- Brunnermeier, Markus, Harold James, and Jean-Pierre Landau. 2021. “The Digitalisation of Money.” BIS Working Papers 941, Bank for International Settlements, Basel, Switzerland.
- Davis, J. Scott, and Ignacio Presno. 2017. “Capital Controls and Monetary Policy Autonomy in a Small Open Economy.” Journal of Monetary Economics 85 (January): 114–30.
- Graf von Luckner, Clemens, Carmen M. Reinhart, and Kenneth Rogoff. 2023. “Decrypting New Age International Capital Flows.” Journal of Monetary Economics 138: 104–22.
- Makarov, Igor, and Antoinette Schoar. 2019. “Trading and Arbitrage in Cryptocurrency Markets.” Journal of Financial Economics 135 (2): 293–319.
- Minesso, Massimo Ferrari, Arnaud Mehl, and Livio Stracca. 2022. “Central Bank Digital Currency in an Open Economy.” Journal of Monetary Economics 127 (April): 54–68.
- Ozbilgin, H. Murat. 2012. “Currency Substitution, Inflation, and Welfare.” Journal of Development Economics 99 (2): 358–69.
- Rey, Hélène. 2013. “Dilemma Not Trilemma: The Global Cycle and Monetary Policy Independence.” Proceedings of Economic Policy Symposium, Jackson Hole, Federal Reserve Bank of Kansas City, 1–2.

### Books and other studies
- Eichengreen, Barry. 2012. Exorbitant Privilege: The Rise and Fall of the Dollar and the Future of the International Monetary System. Reprint edition. New York: Oxford University Press.

*Macrofinancial Implications of Foreign Crypto Assets for Small Developing Economies NOTE/2023/012*

---


_Source: https://www.imf.org/-/media/files/publications/ftn063/2023/english/ftnea2023012.pdf_