The IMF noted that despite having a market cap of about 10 percent of Bitcoin, stablecoins are growing in popularity because of their interconnections with mainstream financial markets that stem from their structure and potential use cases. The IMF has also mentioned that their use and value surged over the past couple years.
The IMF further noted in a blog post that stablecoins have considerable potential to make international payments considerably faster and cost-effective for individuals and companies.
The IMF also stated that this promise comes with risks of currency substitution and countries “losing control over capital flows.”
The blog post from the IMF further stated that turning stablecoins into a force for good in the global financial system will “require concerted actions by policymakers, at both the domestic and international levels.”
A new IMF report now highlights the potential opportunities, possible risks, and implications.
As explained in a blog post, stablecoins are designed “to avoid the wild price swings of native crypto assets like Bitcoin.”
Although both are based on distributed ledgers, the primary difference is that stablecoins are “centralized (meaning they are run by a specific company) and are mostly backed by conventional and liquid financial assets, like cash or government securities.”
Most stablecoins are denominated “in US dollars and are typically backed by US Treasury bonds.”
As stated in the IMF update, the market cap of the two largest stablecoins has tripled since 2023, “reaching a combined $260 billion.”
Meanwhile, the report pointed out that the overall trading volume “has increased 90 percent, amounting to $23 trillion in 2024.”
Asia still decisively leads with the relatively highest volume of stablecoin activity, “exceeding North America.”
Relative to gross domestic product, though, other regions like the Middle East and Latin America now tend to stand out.
Most of the flow is from North America “to other regions.”
Currently, the IMF said that most stablecoin turnover “relates to trading native crypto assets, as they are used for settlement in traditional currencies.”
But stablecoins’ cross border flows are growing steadily, particularly this year.
Stablecoins could enable “faster and cheaper payments, particularly across borders and for remittances, where traditional systems are often slow and costly.”
The IMF further explained that international payments mostly travel through “networks of commercial banks that have accounts with each other, known as correspondent banking.”
The use of multiple data formats, “long process chains, and payment systems with different operating hours results in high costs, delays and less transparency.”
Some remittances can cost up to “20 percent of the amount being sent.”
Being a single source of information, blockchains can “simplify the processes linked with cross-border payments and reduce costs.”
Expanding financial access is another promising or high-potential area.
Stablecoins could drive innovation by increasing “competition with established payment service providers, making retail digital payments more accessible to underserved customers.”
They could facilitate digital payments in areas where “it is costly or not profitable for banks to serve customers.”
Many developing countries are already “leapfrogging traditional banking with the expansion of mobile phones and different forms of digital and tokenized money.”
Competition with established providers could “lead to lower costs and more product diversity, leveraging synergies between digital payments and other digital services.”
Despite their potential, stablecoins do tend to carry certain risks.
Their value can fluctuate if the underlying assets “lose value or if users lose confidence in the ability to cash out.”
This could lead to sharp declines and even runs, “triggering fire sales of the reserve assets and disrupting financial markets.”
According to the IMF update, another possible risk is currency substitution, which is when individuals and companies in a country “forego their own national currency, due to instability or high inflation, in favor of a foreign one, most commonly US dollars or euros.”
This scenario has actually played out in dramatic fashion in countries like El Salvador where the US dollar became the acceptable medium-of-exchange due to the collapse of the local economy and the depreciation in value of their local currency. Interestingly, El Salvador has now emerged as one of the leading nation-states that has been aggressively accumulating Bitcoin, a move that has been heavily criticized by institutions like the IMF.
