The International Monetary Fund (IMF) has raised concerns that stablecoins might undermine the effectiveness of monetary policy in some countries. The organization highlighted the potential of stablecoins to "penetrate an economy" quickly. Most stablecoins currently are pegged to the U.S. dollar. In a comprehensive report, the IMF discussed how stablecoins could expand access to financial services, posing a challenge to central banks. The report detailed "currency substitution" as a risk, indicating that stablecoins might gradually weaken the financial independence of nations.
Traditionally, to access U.S. dollars, one would need physical cash or a specific bank account. However, stablecoins can rapidly enter an economy through digital means like the internet and smartphones. The IMF warned that stablecoins denominated in foreign currencies, especially in cross-border transactions, could lead to currency substitution and threaten monetary sovereignty, particularly with the use of unhosted wallets. A substantial shift of economic activity away from a country's currency could limit a central bank's control over liquidity and interest rates. If stablecoins tied to foreign currencies become ingrained in payment systems, locally developed options like central bank digital currencies (CBDCs) might struggle to compete. Unlike stablecoins, CBDCs are digital forms of sovereign currency issued and regulated by central banks.
The IMF observed that stablecoin holdings are increasing in regions such as Africa, the Middle East, Latin America, and the Caribbean, affecting foreign exchange deposits that central banks use to steer monetary policy. However, it acknowledged that currency substitution often stems from a need for stability in countries with high inflation. Currently, stablecoins in U.S. dollars make up 97% of the $311 billion market, according to CoinGecko, while those in euros and Japanese yen are significantly less.
To protect monetary sovereignty, the IMF suggests countries establish frameworks to prevent digital assets from being recognized as official currencies or legal tender, thereby preventing their mandatory acceptance for payments. In a related development, the European Central Bank (ECB) in November warned of the risks associated with dollar-denominated stablecoins, including their potential to deplete key banking resources. The ECB noted that significant growth in stablecoins could lead to a reduction in retail deposits, an essential funding source for banks, resulting in more volatile funding.
Despite these concerns, U.S. Treasury Secretary Scott Bessent emphasized the benefits of increased demand for government debt, following the passage of stablecoin legislation in the United States earlier this year. He remarked that this demand could reduce government borrowing costs and help manage the national debt. Additionally, it could introduce millions globally to the dollar-based digital asset economy.