IMF: The Rise of Stablecoins [Analysis]

On September 19th, 2019, the IMF (International Monetary Fund) published a blog entry titled, ‘Digital Currencies: The Rise of Stablecoins’.

We’re going to go ahead and take a look at this piece and see what the IMF has to say about ‘stablecoins’.

What are Stablecoins?

As their name implies, ‘stablecoins’ refer to cryptocurrencies with a pegged/fixed value. Often this value is pegged or fixed to that of another fiat currency.

Stablecoins were allegedly created to mitigate the volatility of traditional cryptocurrencies (i.e., Bitcoin, Ethereum, etc.).

However, as of late, they have been widely considered to be a conduit for money laundering and other illicit activities (see: Tether).

Reviewing the IMF’s Write-Up

In the write-up, the IMF: ‘

  • Explains what stablecoins are
  • The use case and niche that they fill within the blockchain space
  • Why they’ve managed to gain popularity
  • The pros and cons of using them

The ‘Strengths’ of Stablecoins

According to the IMF article, the ‘strength’ of stablecoins lies in their, “attractiveness as a means of payment.”

The IMF argues that stablecoins possess the following attributes:

  1. Low costs
  2. Global reach
  3. Speed
  4. Allowance of seamless payments of blockchain-based assets
  5. The ability to be embedded into digital applications, “thanks to their open architecture, as opposed to the proprietary legacy systems of banks”

The IMF concludes this section by stating that the, ‘strongest attraction’ toward stablecoin use stems from the various networks associated with said stablecoins that have promised that they will make transacting them as simple as navigating social media.

The ‘Risks’ of Stablecoins

The ‘risks’ of stablecoins as outlined by the IMF are a bit different than what one may have intuitively expected from them.

According to the IMF, stablecoins present the following risks:

  1. “Banks may lose their place as intermediaries if they lose deposits to stablecoin providers”
  2. “New monopolies could arise”
  3. “Weaker currencies could face threats”
  4. “Stablecoins could promote illicit activities”
  5. “Stablecoins could provoke the loss of ‘seigniorage’, where central banks capture profits from the difference betweena currency’s face value and its manufacturing cost.”
  6. “Policymakers must reinforce consumer protection and financial stability”

Assessment of the IMF’s Brief Write-Up on Stablecoins

Overall, the IMF’s write-up on stablecoins was a tremendous disappointment for a host of reasons.

Overall, the piece failed to address the current state of the stablecoin market in the crypto sphere, which is particularly relevant here. Additionally, the piece also failed to expound on the true strengths and, more importantly, weaknesses/risks associated with the proliferation of stablecoins in the cryptocurrency space.

IMF Overstates the Strength of Stablecoins

To recap, the IMF asserted that the ‘strengths’ of stablecoins are:

  1. Low costs
  2. Global reach
  3. Speed
  4. Allowance of seamless payments of blockchain-based assets
  5. The ability to be embedded into digital applications, “thanks to their open architecture, as opposed to the proprietary legacy systems of banks”

Below, we’ll assess each of these purported strengths of stablecoins.

#1 — ‘Low Costs’

In terms of the claim that ‘low costs’ are a strength of stablecoins, there is no concrete proof to suggest that transferring stablecoins presents any less of a cost for its users than what individuals would face if they used the alternative (i.e., ‘legacy’ banking system).

#2 — Global Reach

This part is very true. However, this strength could have been a bit more specific. If we’re comparing stablecoins to the ‘legacy’ banking system (i.e., SWIFT), then there is nothing in the article to support the idea that stablecoins are any stronger in this attribute than SWIFT is (as a payment option).

#3 — Speed

This strength is overstated entirely. One of the biggest issues plaguing the crypto sphere today is the issue of ‘scalability’. This is mostly because blockchains’ failure to scale adequately has been a major weak point that pundits and critics have constantly mentioned when addressing the shortcomings of the technology.

Since stablecoins are built atop of this technology, they are plagued by the same issues of scalability (namely, limited throughput).

Assessing stablecoins objectively, one could easily argue that the speed of stablecoin transfers would actually serve as a weakness rather than a strength.

#4 — Allowance of seamless payments of blockchain-based assets

This feature isn’t really explained.

Specifically, the piece states, “The strength of stablecoins is their attractiveness as a means of payment. Low costs, global reach, and speed are all huge potential benefits. Moreover, stablecoins could allow seamless payments of blockchain-based assets, and can be embedded into digital applications thanks to their open architecture, as opposed to the proprietary legacy system of banks.”

In the statement above, we can’t really discern what the IMF means when it states that stablecoins, “Allow seamless payment of blockchain-based assets”, because the term ‘seamless’ isn’t defined and this feature is not juxtaposed with any specific parallel in the legacy banking system that we can examine to draw a fair comparison.

Thus, this almost seems like empty praise to a certain extent.

#5 — The ability to be embedded into digital applications, “thanks to their open architecture, as opposed to the proprietary legacy systems of banks”

This fifth point makes no sense. There are countless digital applications that have been deployed by the ‘legacy systems of banks’.

Below is a brief sampling of digital applications:

  • CashApp
  • Venmo
  • Zelle (Capital One)
  • All the countless online banking applications/websites/etc.

The list goes on…

So to suggest that the ‘ability to be embedded into digital applications’ is a property that is unique to stablecoins is so off-target that its worth wondering if the author of this piece at the IMF was actually awake when they wrote it.

IMF Grossly Understates the Risks of Stablecoins

To recap, the IMF asserted that the ‘risks’ associated with stablecoins are:

  1. “Banks may lose their place as intermediaries if they lose deposits to stablecoin providers”
  2. “New monopolies could arise”
  3. “Weaker currencies could face threats”
  4. “Stablecoins could promote illicit activities”
  5. “Stablecoins could provoke the loss of ‘seigniorage’, where central banks capture profits from the difference betweena currency’s face value and its manufacturing cost.”
  6. “Policymakers must reinforce consumer protection and financial stability”

Rather than dissecting each of the risks one-by-one as we did with the IMF’s outlined strengths, we’re going to take a broader look at the arguments that were made in this section (because a few of them were redundant)

#1 — The Idea That Stablecoins Pose an Inherent Threat to ‘Legacy’ Finance/Banks

This idea (and the premise backing it) is entirely unfounded for several reasons.

To start — the volume of USD fiat transfers greatly outstrips the volume of all stablecoins (combined).

According to ‘CryptoDollarCap’, the 24-hour volume for all stablecoins in the crypto markets was $18.5 billion.

Source: https://cryptodollarcap.com/

Meanwhile, the average volume of USD federal wire transfers (just the wire transfers) is approximately $2.7 trillion dollars USD/daily [source: https://www.frbservices.org/resources/financial-services/wires/volume-value-stats/monthly-stats.html], which dwarfs that of stablecoins currently.

Additionally, the most popular stablecoin (by volume), USDT [Tether], is ultimately a derivative of USD. So, its hard to comprehend how the increased dominance of USDT (and other stablecoins like it) would somehow impact a legacy banking system that has already built a nearly indestructible, well-oiled machine that is backed by one of the most powerful nations on planet earth that also controls the governance/fiscal and monetary policy/distribution/taxation/politics of said currency.

The Risks of Money Laundering is Significantly Understated

Going back to ‘Cryptodollarcap’, one can see by the statistics that USDT dominates the stablecoin market in terms of dominance percentage (96%+ at the time of writing):

https://cryptodollarcap.com/

As we can see above, over the last 24 hours, USDT has accounted for $17.8 billion USD / $18.5 billion USD total stablecoin volume.

Numerous Issues With USDT:

  1. USDT (Tether) has been in existence for 3–4 years, yet there have been absolutely no audits of the digital currency.
  2. USDT (Tether) is involved with a significant amount of money laundering and wash trading
  3. There is no evidence to suggest that USDT (Tether) is legitimately minting new tokens in accordance with actual USD deposits that it receives. Currently, the company is embroiled in a lawsuit with the New York Attorney General in Federal Court in Manhattan.
  4. A representative (lawyer — Stuart Hoegner) for Tether, stated publicly, a few months ago, that USDT’s reserves were only backed 74% by actual fiat cash (i.e., their attorney representing Tether admitted that the digital currency is not operating on a full reserve and there’s no reason to believe that it ever was)
  5. On a fundamental level, USDT (Tether) does not operate in a decentralized, distributed or trustless manner — which effectively strips all of the purported benefits of blockchain technology. Essentially, USDT is just a synthetic, digital USD-derivative manifested by a company with an extremely opaque background/ownership structure/governance model.
  6. USDT has substantial ties to a payment processor that was recently indicted on numerous federal counts just four months ago from the time of writing (May 2019).

There are numerous additional points that can be added above, but the primary point here is that the compliance issue is a MAJOR one and this issue poses a significant and marked risk to the existence of USDT, which means that nearly 97% of the stablecoin market as we know it today (September 2019) is at risk of being destroyed.

In light of the information above, it seems almost naive, if not somewhat negligent for the IMF to list the number one risk associated with stablecoins is that, “Banks may lose their place as intermediaries if they lose deposits to stablecoin providers.

When juxtaposing the statement above with all of the risks that were outlined in the prior section (i.e., money laundering/federal indictments/no demonstrated proof of solvency or legitimacy/legal operation), with the alleged risk that, ‘Banks may lose their place as intermediaries if they lose deposits to stablecoin providers’ the latter statement seems almost trivial in comparison.

Conclusion

It seems that the IMF is sorely off base in their assessment of stablecoins, overall.