A number of emerging markets and developing economies (EMDE) have been looking at stablecoins and central bank digital currencies (CBDC) to address weaknesses in their financial systems.
But according to a paper released Friday by the Bank for International Settlements (BIS), these digital currencies may create daunting issues in these markets and not address problems that other fintech innovations are tackling.
“Stablecoin arrangements aspire to improve financial inclusion and cross-border remittances – but they are neither necessary nor sufficient to meet these policy goals,” the authors of the report, entitled “What Does Digital Money Mean for Emerging Market and Developing Countries,” write.
EMDEs in Latin America and other regions have turned increasingly to stablecoins as a store of value. Stablecoins have appeal in countries where the local currencies tend to be less stable and possibly subject to capital controls because of inflation.
The Basel, Switzerland-based BIS is a 91-year organization that supports central banks’ efforts to create banking and financial stability through research and by fostering cooperation among central banks on a range of issues.
The report’s authors question whether stablecoins could “offer lasting competitive advantages over rapidly developing, evolving digital payment services,” including digital ID, e-money and mobile banking. They add that stablecoins could generate new risks related to such issues as governance, efficiency in payment processes, consumer protection and data privacy.
The authors raise concerns about CBDCs, writing that “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,” and questioning “whether they are necessary or desirable for all jurisdictions.”
But the authors also write that stablecoins in particular have “drawn great – and much needed – attention to the challenges of financial inclusion and cross-border payments and remittances.” This development has underscored efforts to foster a less restrictive regulatory environment, improve “monetary and financial stability frameworks and payment infrastructures, particularly across borders.”