## Digital Currencies: The Rise of Stablecoins

_IMF Blog, September 19, 2019_

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**Canonical URL:** [Digital Currencies: The Rise of Stablecoins](https://www.imf.org/en/blogs/articles/2019/09/19/blog-digital-currencies-the-rise-of-stablecoins)

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## Bibliographic details
- Authors: Tobias Adrian, Tommaso Mancini-Griffoli
- Published: September 19, 2019

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### 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)*

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## References

- [Fintech Notes](https://www.imf.org/en/Publications/fintech-notes/Issues/2019/07/12/The-Rise-of-Digital-Money-47097)

_Source: https://www.imf.org/en/blogs/articles/2019/09/19/blog-digital-currencies-the-rise-of-stablecoins_