The rapid growth of digital currencies has brought both opportunities and challenges to the countries of Latin America and the Caribbean (LAC). While crypto-assets promise benefits such as financial inclusion and faster payments, they also carry risks, especially with regard to domestic currency substitution. In this article, we will discuss the risks associated with stablecoins, especially the threat they pose to domestic currencies, and discuss how Central Bank Digital Currencies (CBDCs) can mitigate them.
Understanding the risks of stablecoins
Stablecoins, a type of crypto asset designed to maintain a stable value relative to a particular asset, have become quite popular in LAC countries according to a recent report from the International Monetary Fund (IMF). However, the agency warned that their widespread adoption could potentially lead to domestic currency substitution, with citizens abandoning their national currencies in favor of stablecoins.
This poses a significant risk to the monetary stability and sovereignty of the countries concerned. Related concerns include diminished control over the money supply, possible disruption of monetary policy and the erosion of confidence in the domestic currency.
The case of Meta’s pilot project
The experience of Meta’s pilot project in the United States and Guatemala is used by the IMF to illustrate the challenges of effective stablecoin adoption. While the said project was intended to facilitate cross-border payments without fees, it also carried the risk of substituting Guatemala’s domestic currency.
Regulatory pushback ultimately led to the project closing in 2022, highlighting the need for caution when considering stablecoin adoption in a macro environment.
The promise of CBDCs
CBDCs have emerged as a possible solution to address the risks associated with stablecoins. These central bank-issued digital currencies, if properly designed, can provide greater usability, resiliency and efficiency in payment systems, while also promoting financial inclusion.
By integrating unbanked individuals and curbing currency substitution to stablecoins or cryptoassets, CBDCs can help maintain monetary sovereignty.
Improving payment systems and financial inclusion
Most central banks in LAC are actively exploring the introduction of CBDCs based on the findings of the IMF. These central bank-issued digital currencies can improve payment systems, making them more accessible and efficient for both individuals and businesses.
In addition, CBDCs can bridge the financial inclusion gap by providing access to banking services for the unbanked population, ultimately reducing their reliance on unstable crypto-assets.
Mitigate risks and ensure adoption
To ensure successful adoption and mitigate risk, LAC countries are advised to invest in public awareness and robust infrastructure for CBDC implementation. Promoting transparency is crucial, as tracking and recording crypto asset transactions in national statistics can provide valuable insights into the demand for digital payment solutions.
Likewise, it is important for policymakers to address the underlying drivers driving demand for crypto assets, such as citizens’ unmet digital payment needs.
As Latin America and the Caribbean navigate the changing landscape of digital currencies, the risks associated with stablecoins and domestic currency substitution should be carefully considered. CBDCs offer a promising way to improve payment systems, promote financial inclusion and protect against the potential pitfalls of unregulated crypto-assets.
By striking a balance between innovation and regulation, LAC countries can reap the benefits of digital currencies while protecting their monetary stability and sovereignty.
Giancarlo is an economist and researcher by profession. Prior to his addition to Blockzeit’s dynamic team, he handled several crypto projects for both the government and private sector as a consultancy project manager.