???? #STABLECOINS + #CBDC: IMF STABILITY REPORT OCT 2024. PROS AND CONS

#IMF has released this report speaking about CBDC's and its impact in the financial stability.

This paper offers evaluates the potential risks and benefits of central banks issuing their own digital currencies, primarily focusing on how this could impact the overall financial system.

The key findings show that issuing a retail CBDC could have a significant effect on both the central bank's and commercial banks' balance sheets, with various implications:

1?? Impact on the Banking System:

When people use CBDC instead of traditional bank deposits, banks could lose a key source of cheap funding (customer deposits), forcing them to seek more expensive or unstable sources of money. ? loans and ? the ability of banks to provide credit.

In stable times, the effects could be moderate, but in times of financial crisis, the ease with which people can move their money into CBDC could lead to digital bank runs, worsening the crisis. ??

2?? Balance Sheet Effects:

If deposits goes ?, commercial banks will need to find other sources of funds, which could raise their costs and affect lending.

The central bank may need to lend more to banks or buy assets to keep the system balanced, which could expose the central bank to risks, especially in times of stress. ??

So, how can they solve this 2 problems?

First of all taking a look to the CBDC Design. In order to reduce risks, the #IMF suggests that ?????????? ???????????? ???? ???????????????? ???? ???? ???????? ???????????? ?????? ???????????????? ?????? ?????? ???? ?? ?????????? ???? ??????????.

Adding to that, they must take care of the policies. Central banks could increase banks' resilience by requiring them to hold more capital, or the central bank could provide more liquidity in times of need.

Some of the benefits about CBDCs creation are pointed in the report:

?? Improving Payment Systems: CBDCs can make payment systems faster and more reliable, especially in countries with a lot of cash use. It could also reduce the cost of producing and handling physical cash. ?? ?????????? ???????? ???? ?????? ?? ???????? ??????????????...

?? Financial Inclusion;

?? Monetary Sovereignty: A CBDC could help central banks maintain control over their currency, ???????????????????? ???? ?????????????? ?????????????? ???????????????????? ???????? ?????????????????????? ???????????? ??????????????... Aha! ??

So, to summarize, the major risks for financial stability stem from the replacement of bank deposits with CBDCs. This would weaken banks by forcing them to seek alternative (and more expensive) funding. The central bank may need to expand its balance sheet by offering more loans to banks or buying assets to maintain stability. Apart from that Central banks have more flexibility in adjusting policies such as setting interest rates, capping CBDC holdings, or adjusting reserve requirements to manage the impact on banks.

But what about a blockchain stablecoin scenario instead?

Stablecoins are issued by private entities and not directly controlled by the central bank. This decentralization reduces the central bank’s direct influence over the monetary system... ???????? ???? ???????????? ???????? ???? ?????????? ???? ?????? ??????????.

Let's think a bit more about this scenario. If stablecoins become widely used, they could also reduce the demand for traditional bank deposits, similarly affecting banks’ ability to lend. However, since stablecoins are typically backed by assets, they could create liquidity pressures if the backing assets become illiquid or devalued in a crisis, triggering runs.

In terms of finacial stability, stablecoins might be more vulnerable to liquidity crises since they rely on private entities to maintain their peg to a traditional currency. A loss of confidence in a stablecoin’s backing could lead to runs, destabilizing financial markets.

Of course, Central banks cannot easily provide liquidity support to stablecoin issuers, unlike banks, making it harder to contain crises. So we can sy that stablecoins could increase the risk of shadow banking activities, where financial services are provided outside traditional regulatory frameworks, adding more complexity to maintaining financial stability.

Monetary Sovereignty: A CBDC could help central banks maintain control over their currency, ???????????????????? ???? ?????????????? ?????????????? ???????????????????? ???????? ?????????????????????? ???????????? ??????????????... Aha! ??

And what about monetary sovereignty?

If stablecoins adoption keeps growing, particularly those pegged to foreign currencies, this could undermine a country’s monetary sovereignty. People may prefer stablecoins denominated in stronger currencies, which could limit the central bank’s ability to conduct monetary policy effectively. ???????? ???????????????? ???? ?????? "?????????????? ??????????"...

I'm pretty sure that CBDCs offer central banks the ability to modernize the financial system while keeping control over monetary policy and financial stability. ???????? ?????????? ???? ?????? ?????????????? ???????????? ???????????? ?????????????? ?????????????? ???????????? ?????? ???????????? ????????????????????????????, which can be managed through policy adjustments and careful design of the CBDC.

On the other hand, stablecoins offer a decentralized alternative but pose more significant risks to financial stability, especially in crisis scenarios (longer crisis periods at minimun).

?? They are less controllable by central banks, and their use can lead to financial disintermediation, liquidity risks, and loss of monetary sovereignty if they gain widespread popularity.

Conclusion

So both scenarios present challenges and problems: CBDCs provide more tools for central banks to manage these risks, whereas stablecoins, though efficient in certain use cases, might expose the financial system to greater vulnerabilities without adequate regulation. Stablecoins give the end user power on their money.

Responsability has a cost. Can people be capable of taking responsibility or do they prefer to have it all handed to them and be more comfortable?