The International Monetary Fund (IMF) has released an educational and informative blog post titled ‘Digital Currencies: The Rise of Stablecoins” targeted at policymakers and stakeholders in the financial sector.
The post, published on September 19th, 2019, gives an overview of stablecoins and how these new forms of money are gaining widespread adoption.
The post notes:
“The strength of stablecoins is their attractiveness as a means of payment. Low cost, global reach, and speed are all huge potential benefits. Moreover, stablecoins could allow seamless payments of blockchain-based assets, and can be embedded into digital applications thanks to their open architecture, as opposed to the proprietary legacy systems of banks.”
The post goes to show that the strongest attraction however comes from promise by networks to make transacting as easy as using social media. In other words, payments fundamentally become social experiences linking people.
“Adoption of new forms of money will depend on their attractiveness as a store of value and means of payment.”
Risks of Stablecoins
Despite the high appraisal of stablecoins, the post goes on to list six risks of stablecoins that policymakers need to be aware of.
Check them out below:
- Banks lose their place as intermediaries – This will happen if they lose deposits to stablecoin providers. Banks though are unlikely to disappear as stablecoins could be recycled into the banking system
- The rise of new monopolies – Tech giants could shut down competitors and monetize information. New standards on data protection, control and ownership are needed
- Weaker currencies could face threats – Local weak currencies might be shunned in favor foreign currency stablecoins. Improved monetary and fiscal policies are needed
- Stablecoins could promote illicit activities – Networks might be used for money laundering and terrorist financing. Adaptation to the value chain of stablecoins is needed for improved monitoring
- Stablecoins could provoke the loss of seigniorage – Issuers could siphon off profits if their stablecoins do not carry interest. Competition will ensure coin issuers pay interest
- Policymakers must reinforce consumer protection and financial stability – Customer funds must be protected from bank runs. Legal clarity on stablecoins will be needed and regulate them like money market funds requiring sufficient liquidity and capital
The post concludes by urging policy makers to envision far-sighted regulation that meet the above challenges.
Sign Up for the upcoming Centonomy Cryptocurrency event featuring the Blockchain Association of Kenya, Lawyers Hub Kenya, and Luno Africa Crypto Exchange, on September 27th, 2019 in Nairobi, Kenya.
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