From Stablecoins to Central Bank Digital Currencies

IMF Blog, September 26, 2019

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Authors: Tobias Adrian, Tommaso Mancini-Griffoli
Publication date: September 26, 2019
Core thesis: Privately issued stablecoins are encroaching on traditional forms of money (cash and bank deposits); policymaker rules and actions will shape payment methods, financial sector structure, and risks.
Context: This blog is the second in a two-part IMFBlog series on digital currencies and follows the IMF’s first Fintech Note discussion of synthetic central bank digital currency (sCBDC).

Stablecoins are cryptographic tokens designed to be easily exchanged and to benefit from minimal price volatility relative to cash.
Key risks identified:
- Uncertainty over whether stablecoins are actually fully-backed and hence redeemable on demand.
- Dependence on the safety and liquidity of underlying assets backing coins.
- Legal protection of assets against other creditors if the stablecoin provider becomes bankrupt.
- Vulnerability to runs (mass redemptions) by coin-holders.
Regulatory options proposed:
- Require stablecoin providers to hold safe and liquid assets and sufficient equity to protect coin-holders from losses.
- Regulate stablecoin providers even if they are not traditional banks, acknowledging the complexity of doing so.

Policy alternative: require stablecoin providers to fully back coins with central bank reserves.
Observed precedent: the People’s Bank of China requires AliPay and WeChat Pay to back balances with central bank reserves.
Conditions mentioned for central banks to give fintech access to reserves: anti-money laundering safeguards, connectivity between coin platforms, security, and data protection.
Effects and trade-offs of central-bank-backed stablecoins:
- Would transform stablecoin providers into narrow banks (institutions that do not lend but only hold central bank reserves).
- Could intensify competition with commercial banks for customer deposits, raising questions about the social price tag.
- Advantages: enhanced stability (backing in perfectly safe and liquid assets), clearer regulatory fit, seamless exchange among different stablecoins via central bank settlement, enhanced competition among providers.
- Additional potential benefits: support for domestic payment solutions against foreign-currency stablecoin monopolies and improved monetary policy transmission if currency substitution pressures are reduced and interest is paid on reserves held by stablecoin providers.

Definition and mechanism:
- If stablecoin providers held client assets at the central bank, clients would indirectly hold and transact in central bank liabilities—this is the essence of a “central bank digital currency.”
- In the proposed model, coins would remain liabilities of private issuers; client assets would need protection against issuer bankruptcy.
Synthetic central bank digital currency (sCBDC):
- Described as a public-private partnership where central banks provide trust and efficiency while private firms handle innovation, customer interaction, and remaining payment-chain steps under supervision.
- sCBDC is contrasted with a full-fledged CBDC that would require central banks to undertake app development, brand management, technology selection, and direct customer interactions—activities that can be costly and risky for central banks.
Decision factors for central banks:
- Each central bank would weigh payment system stability, financial inclusion, and cost efficiency in deciding whether to adopt an sCBDC.
- sCBDC presented as a potentially attractive option for central banks that wish to offer a digital alternative to cash.

The world of fiat money is in flux and innovation will transform banking and money.
Policymakers will not remain passive; their choices will arbitrate how payments evolve and how financial-sector risks are allocated.
sCBDC offers a middle path combining central-bank trust with private-sector innovation, but legal protections for client assets and careful regulation will be essential.
The blog reiterates that regulatory clarity, financial stability, and protection against runs are central concerns in shaping the future of stablecoins and central bank digital currencies.

IMFBlog is a forum for views of IMF staff and officials on pressing economic and policy issues.
The IMF is based in Washington D.C. and is an organization of 191 countries, working to foster global monetary cooperation and financial stability.
The views expressed are those of the author(s) and do not necessarily represent the views of the IMF and its Executive Board.

Source: From Stablecoins to Central Bank Digital Currencies (IMFBlog), September 26, 2019.