Digital Currencies: The Rise of Stablecoins
IMF Blog, September 19, 2019
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- Authors: Tobias Adrian, Tommaso Mancini-Griffoli
- Published: September 19, 2019
Central thesis
- A battle is raging for users' wallets as new digital payment entrants—particularly stablecoins—seek to occupy the role of cash and debit cards.
- Adoption of new forms of money depends on attractiveness as a store of value and a means of payment.
- Stablecoins differ from cash and bank deposits: many are claims on issuers or underlying assets, often offer redemption guarantees at face value (e.g., a coin bought for 10 euros can be exchanged back for a 10-euro note), lack government-backing, rely on private trust backed by safe and liquid assets, and typically use decentralized settlement technology based on the blockchain model.
Drivers of stablecoin adoption and strengths
- Recent market signals:
- "USD Coin recently launched in 85 countries"
- Facebook announced Libra
- Key competitive advantages:
- Low costs, global reach, and speed as means of payment.
- Seamless payments for blockchain-based assets and embedding into digital applications due to open architecture.
- Network effects from firms with large user bases that can make transacting as easy as using social media.
- Payments are described as a social experience; stablecoins promise better integration into digital lives and user-centric design.
Risks and policy observations (six observations)
- 1) Banks and intermediation
- Risk: Banks may lose deposits to stablecoin providers and thus some intermediary role.
- Counterpoints: Banks can compete with innovations and higher interest rates; stablecoin providers may recycle funds into the banking system or engage in lending themselves.
- Conclusion: "Banks are unlikely to disappear."
- 2) Market concentration and data concerns
- Risk: New monopolies could arise as tech giants use networks to shut out competitors and monetize transaction data.
- Policy needs: New standards for data protection, portability, control, and ownership; interoperability to facilitate entry.
- 3) Currency substitution and monetary policy
- Risk: In countries with high inflation and weak institutions, local currencies might be shunned in favor of foreign-currency stablecoins—a new form of "dollarization" that could undermine monetary policy, financial development, and economic growth.
- Policy choice: Countries may need to decide whether to restrict foreign-currency stablecoins as they strengthen monetary and fiscal frameworks.
- 4) Financial integrity and illicit activity
- Risk: Stablecoins could promote illicit activities (money laundering, terrorist financing).
- Requirement: Providers must demonstrate prevention measures and enforcement of international standards.
- Supervisory challenge: Monitoring must adapt to a more fragmented and geographically diverse value chain; new technologies offer monitoring opportunities.
- 5) Loss of seigniorage
- Risk: Central banks could lose "seigniorage" where issuers siphon profits if stablecoins do not carry interest while the backing hard currency earns a return.
- Possible mitigation: Promote competition so that coin issuers eventually pay interest.
- 6) Consumer protection and financial stability
- Risk: Customer funds must be safe and protected from bank runs.
- Policy tools: Legal clarity on the financial-instrument classification of stablecoins; one suggested approach is regulating stablecoins like money market funds that guarantee fixed nominal returns, with requirements for sufficient liquidity and capital.
Policy imperatives and recommendations
- Policymakers must create an environment that maximizes benefits and minimizes risks by:
- Innovating and collaborating across countries and across policy functions.
- Establishing legal clarity on the nature of stablecoins.
- Setting standards for data protection, portability, control, ownership, and interoperability.
- Ensuring enforcement of international anti–money laundering and countering the financing of terrorism standards across a fragmented value chain.
- Considering regulatory regimes that require liquidity and capital similar to money market fund frameworks.
- Promoting competition to mitigate seigniorage loss and encourage payment of interest by issuers.
Outlook
- Stablecoins present significant potential benefits (efficiency, competition, inclusion, innovation) alongside substantial risks to financial stability, integrity, monetary policy effectiveness, and competition standards.
- The policies adopted today will shape the future payments landscape; far-sighted regulatory regimes are advised.
- A follow-up exploration is noted in the authors' next blog.
IMF Blog: Digital Currencies: The Rise of Stablecoins (September 19, 2019)