Dollar-denominated stablecoins risk accelerating currency substitution in countries with weak monetary systems, potentially undermining central banks' control over capital flows, the International Monetary Fund warned.
The IMF released a comprehensive report titled "Understanding Stablecoins" examining how the rapid expansion of these digital assets could destabilize economies where local currencies face low trust or high inflation.
Stablecoins allow users to access dollar-denominated assets through smartphones without traditional banking infrastructure.
What Happened
The global stablecoin market now exceeds $300 billion, with dollar-pegged tokens comprising 97% of the sector, according to cryptocurrency data provider CoinGecko. Euro-denominated stablecoins total just $675 million, while yen-linked tokens amount to approximately $15 million.
Trading volumes surged to $23 trillion in 2024, marking a 90% increase since 2023, the IMF report stated. Tether's USDT and Circle's USDC dominate the market, with reserves backed primarily by short-term U.S. Treasurys.
Asia leads all regions in total stablecoin activity, though usage relative to gross domestic product remains most pronounced in Africa, the Middle East and Latin America. These regions historically face elevated currency substitution risks.
The IMF noted that stablecoin holdings in these areas are rising compared to foreign exchange deposits that help central banks implement monetary policy. Unlike physical dollars or foreign-currency accounts, stablecoins can penetrate economies rapidly via internet and smartphones.
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The report warned that stablecoins may contribute to currency substitution, increase capital flow volatility by circumventing capital controls, and fragment payment systems unless interoperability is ensured. Runs on stablecoins remain a central concern, as loss of confidence could force issuers into fire sales of reserve assets.
Why It Matters
Central banks would have less control over domestic liquidity and interest rates if significant economic activity transitions away from national currencies, the IMF said. If foreign currency-denominated stablecoins become entrenched through payment services, local alternatives like central bank digital currencies could struggle to compete.
Regulation remains inconsistent across major jurisdictions. The IMF's comparative review of Japan, the European Union, the U.S. and the U.K. found differences in who can issue stablecoins, how reserves are held in custody, and how foreign issuers are treated. Such gaps may create opportunities for regulatory arbitrage.
The U.S. passed the GENIUS stablecoin bill into law over the summer, with federal agencies now implementing rules. Rep. Bryan Steil asked regulators this week for progress updates on implementing the legislation.
The IMF acknowledged potential benefits, noting stablecoins could increase competition, lower payment costs and integrate more people into digital financial ecosystems if supported by strong regulatory and legal frameworks. The organization said stablecoins are "here to stay," but their impact will depend heavily on coordinated international action.
The pseudonymous, cross-border nature of stablecoins could weaken capital controls, facilitate illicit finance and erode the quality of macroeconomic data, the IMF added. The global distribution of holders, often unknown due to unhosted wallets, complicates crisis monitoring and policymaking.
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