By providing a source of cash to settle transactions, hold assets and supply credit on blockchain networks, Stablecoins are the crucial underpinning of the digital asset markets. In the last three years, they have come under intense regulatory scrutiny, and are now facing the prospect of onerous regulations akin to those laid on traditional banks – and for good reasons. Several algorithmic Stablecoins have collapsed, costing investors dear. Asset-backed Stablecoins have proved steadier but are plagued by collateral liquidity issues and threaten not only the funding sources of commercial banks but central bank control of monetary policy and financial systems. Yet Stablecoins have also proved a seminal source of innovation. It was Stablecoins which spawned the idea of central bank digital currencies (CBDCs) and daring new solutions to both the high cost of cross-border payments and round-the-clock trading of digital assets. Stablecoins are now set to play a leading role in the gradual convergence of the traditional financial markets and their digital asset successors. Anybody active in modern financial markets – and traditional banks in particular – need to understand where Stablecoins came from, and where they are going, because Stablecoins are poised to revolutionise not just how money is stored and transferred but how it is created. This paper provides that understanding.
Stablecoins may play a role in the future of finance, but absent robust regulatory frameworks, they will introduce significant risks. If developed and implemented under appropriate regulation, Stablecoins have the potential to reduce costs of cross-border remittances; complement and improve existing payments’ infrastructure; provide competition in the payment space; and generate efficiencies when used for more wholesale or back-end functions involving large, regulated entities. However, without an appropriate regulatory framework in place, Stablecoin issuers and arrangements could generate risks to consumers, markets, and—where systemic—financial stability.
International Monetary Fund, November 2022
 International Monetary Fund, FinTech Notes, Regulating the Crypto Ecosystem: The Case of Stablecoins and Arrangements by Parma Bains, Arif Ismail, Fabiana Melo, and Nobuyasu Sugimoto, Note/2022/008, September 2022, pages 38-9.
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