The latest IMF article: the rise of stablecoins, weak currencies will face a huge threat

Compilation | White NightIMF

Compilation | White Night

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When a new form of currency appears in the market, its popularization and application mainly depends on whether it can become a powerful value storage and means of payment.

One of the main reasons for the rapid rise of stablecoins is that people believe that stablecoins are a reliable means of payment. In addition, stablecoins have many other potential advantages, such as: low cost, global coverage, and higher processing efficiency. In addition, stablecoins can also seamlessly use blockchain-based assets for payment and be embedded into digital applications through its open architecture, without the need to go through the traditional transaction system of the bank.

One of the main reasons for the rapid rise of stablecoins is that people believe that stablecoins are a reliable means of payment. In addition, stablecoins have many other potential advantages, such as: low cost, global coverage, and higher processing efficiency. In addition, stablecoins can also seamlessly use blockchain-based assets for payment and be embedded into digital applications through its open architecture, without the need to go through the traditional transaction system of the bank.

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02 Stable currency risk

Stablecoins also have many risks. Policymakers therefore need to create an environment that maximizes benefits and minimizes risks. In addition, policymakers in different countries need to innovate and collaborate with each other to jointly deal with the risks of stablecoins.

First, when banks "lose" stablecoin issuer deposits, they lose their "middleman" status in the stablecoin market. However, banks will definitely take some action, such as raising their competitiveness through higher interest rates. In addition, stablecoin issuers can also withdraw funds into the traditional banking system, or engage in loan business by increasing deposits themselves. In short, the role of banks in the stablecoin market is unlikely to disappear.

Second, new monopolies may emerge. In the field of stablecoins, tech giants may monopolize the market. Thanks to their vast networks, large companies prevent competitors from accessing information such as transaction data. If this problem is to be solved, new standards will need to be set in terms of data protection, portability, control and ownership, and interoperability.

Third, weak currencies will face a huge threat. If a strong stable currency appears in a country with a poor economy or high inflation rate, the local currency is likely to be abandoned by people, and a new form of "dollarization" may form locally, which will then undermine the country's monetary policy , financial development and economic growth. More seriously, assuming governments are forced to adjust monetary and fiscal policies, they need to decide whether to ban stablecoins anchored to foreign currencies.

Fourth, stablecoins will lead to more illegal activities. Stablecoin issuers must implement international standards, and regulators need to demonstrate how to prevent stablecoin networks from being used for money laundering and terrorist financing. On the other hand, regulators also need to adapt to an increasingly fragmented and geographically diverse stablecoin value chain.

Fifth, "seigniorage" revenue will be affected. The central bank earns a profit from the difference between the face value of the currency and the cost of manufacturing it, which is known as "seigniorage". However, stablecoin issuers will grab profits and get rewards by supporting stablecoin hard currency. One way to solve this problem is to promote competition, which incentivizes stablecoin issuers to pay interest.

Sixth, policymakers need to strengthen consumer protection and maintain financial stability. Policy makers need to keep customers' funds safe while ensuring that funds are not affected by bank runs. To achieve this goal, the law needs to clarify the types of financial instruments represented by stablecoins, and it also requires stablecoin issuers to maintain sufficient liquidity and capital at all times.

Stablecoins have both challenges and potential. Therefore, policymakers need to develop a regulatory regime that is up to the challenge and far-sighted.