According to a paper published by the Bank for International Settlements (BIS) on Friday, stablecoins might present bigger challenges despite their adoption in some emerging markets.
A number of emerging markets and developing economies (EMDEs) have been looking at CBDCs and stablecoins as a possible solution to issues with their financial systems. However, they have not been tested on a large scale and could lead to further issues in these markets instead of addressing the ones other fintech innovations are tackling according to BIS.
The report, titled What Does Digital Money Mean for Emerging Market and Developing Countries, states:
Stablecoin arrangements aspire to improve financial inclusion and cross-border remittances – but they are neither necessary nor sufficient to meet these policy goals…stablecoin initiatives are no panacea. While they may achieve adoption in certain EMDEs, they may also pose particular development, macroeconomic and cross-border challenges for these countries and have not been tested at scale.
EMDEs in Latin America and elsewhere are increasingly buying stablecoins because of their potential as a store of value. These digital assets, which are said to be pegged 1:1 to the USD, are attractive in countries where the local currencies tend to be less stable and vulnerable to inflation. In many South American countries, it is hard to open an account in USD unless you’re rich.
Doubts of stablecoins’ competitive advantages over other payment services
The authors of the report raise doubt as to whether stablecoins can provide competitive advantages over other rapidly evolving and developing digital payment services such as mobile banking, e-money, and digital ID. They associate stablecoins with risks of data privacy breaches, loss of consumer protection, payment inefficiency, and inadequate governance.
The report further states:
There is a risk that in periods of systematic stress, (that) households and other agents may shift from bank deposits or other instruments into the CBDC, spurring a ‘digital run’ of unprecedented speed and scale. We argue that the distinction between token-based and account-based money matters less than the distinction between central bank and non-central bank money.
Attention to financial inclusion challenges
The authors point out that stablecoins in particular have attracted a lot attention to the challenges of cross-border payments and remittances and financial inclusion in general. This development has emphasized efforts to improve “monetary and financial stability frameworks and payment infrastructures, particularly across borders” and develop a less restrictive regulatory environment.
