The IMF has warned stablecoins need to be properly regulated. In a report this week, the IMF said that while stablecoins can bring benefits such as low transaction costs and speed, they face risks, particularly if they are not correctly regulated. As a form of privately issued digital money, stablecoins are subject to runs and pose potential risks to monetary and financial stability if not well regulated, the report ‘Making Stablecoins Stable’ read.
The IMF has warned about stablecoin risks. The report says that a number of stablecoin issuers hold risky assets backing their tokens. It mentions Tether, the largest stablecoin issuer, having some reserves of Bitcoin backing its product, which it describes as a ‘vulnerability.’ Tether, which mints the most-traded cryptocurrency, USDT, has run into trouble in the past with regulators for not being transparent about its reserves.
The IMF went on to say that if users suspect a stablecoin issuer’s assets have fallen in value below what’s needed to cover all redemptions, they rush to redeem before others do — leading to a bank run. It used examples of the collapse of Terraform Labs, which collapsed under market pressure when its UST stablecoin failed to keep its peg to the dollar. The asset was not backed by reserves.
Among all ‘liquid and safe assets’, only central bank reserves truly have the quality of being universally accepted, no questions asked. But the paper also warns that safer backing creates its own problem: safe assets like government bonds or cash yield lower returns than risky assets, so stablecoin issuers’ profits may be squeezed and they may reduce supply as a result.
The IMF says the best outcome would be if issuers have alternative income sources — either central banks paying interest on reserves, giving issuers a return on the safe assets they’re required to hold, or regulators permitting issuers to earn revenue from the payment data they collect. If stablecoin issuers can make money without taking risks, the IMF argues, then they no longer need to.
Stablecoins have become a hot topic since they were brought to the forefront of US policy making thanks to crypto-friendly President Trump. Now, major companies and banks around the world are working to issue their own versions of the digital tokens. The IMF has warned that stablecoins offer low costs and fast transfers, but robust regulation is essential to prevent runs and protect financial stability.
The IMF highlights examples such as Tether, whose reserves include crypto assets described as a vulnerability, and it references past regulatory scrutiny over reserve disclosures. A run can occur when users redeem en masse, a scenario that echoed the Terraform Labs collapse when UST failed to maintain its peg. The paper argues that even the safest assets, like central bank reserves, may yield lower returns, squeezing issuer profits and potentially dampening supply. To balance safety and supply, the IMF suggests alternative income streams for issuers, such as central banks paying interest on reserves or revenue from payment data being allowed. If issuers can earn revenue without taking on risk, the report argues, the role of regulation could be scaled back. Overall, strong regulatory frameworks are presented as essential to preserving financial stability while enabling stablecoin innovation.
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