A new IMF Paper has analyzed the rapid growth of stablecoins, and its associated risks, and implications.

About Stablecoins:

• These are crypto assets designed to maintain a stable value relative to a specific peg (e.g. Fiat currency), distinguishing them from volatile unbacked crypto assets like Bitcoin.
• Issuers: Generally issued and operated in a centralized manner by entities such as crypto firms or financial institutions.
• Applications: 
  • While originally designed as a bridge for crypto trading, use cases are expanding into cross-border payments and remittances.
  • Stablecoins are part of a broader trend toward asset tokenization i.e. representing assets on a programmable ledger.
  • They have the potential to bring efficiencies to payments.

Risks associated with stablecoins:

• Run Risk: If users lose confidence, mass redemptions can trigger fire sales of reserve assets (such as US Treasury bills), potentially impairing broader market functioning.
• Currency Substitution: Widespread adoption of foreign-denominated stablecoins in countries with high inflation/weak institutions could undermine monetary sovereignty and weaken effectiveness of domestic monetary policy.
• Banking Disintermediation: They might reduce banks' stable funding sources, potentially impacting lending capabilities.
• Financial Integrity: The pseudonymity of blockchain transactions creates risks for money laundering and terrorism financing.