The International Monetary Fund (IMF) is warning that stablecoins present a risk to emerging markets around the world.
Specifically, the IMF is warning that U.S. dollar-pegged stablecoins could spark currency substitution and capital outflows in emerging markets, undermining local currencies and destabilizing economies.
The IMF report, entitled "Understanding Stablecoins,” explores stablecoin use cases, demand drivers, global regulations, and financial risks for emerging markets.
“Some evidence points to crypto, including stablecoins, being used as a marketplace for capital flight,” reads the report.
The IMF argues in the report that the penetration of stablecoins in emerging markets with high inflation and volatile currencies could trigger "currency substitution," in which locals ditch volatile local currencies for more stable U.S. dollar-backed stablecoins, eroding central bank control.
The International Monetary Fund also notes that stablecoins, whose values are pegged to external sources such as the U.S. dollar or price of gold, facilitate transactions outside traditional banking.
The most popular stablecoins, USDT and USD Coin (USDC), are pegged to the U.S. dollar and have a combined market capitalization of $264 billion U.S.
These dollar equivalents can be freely traded on public blockchains, meaning anyone, anywhere in the world can access U.S. dollars without having to open a bank account.
The IMF says that if panic grips emerging markets, locals can move capital across borders quickly via stablecoins, weakening capital flow management measures.
The International Monetary Fund is a special agency of the United Nations (U.N.) and is headquartered in Washington, D.C.
