How Stablecoins Challenge Financial Sovereignty
Will stablecoins create a two-tier cash transfer system?
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Short take—fast, focused, and straight to the point.
The growing $225 billion stablecoin market impacts the financial sovereignty of European and other nations and may push them to dollarize.
Stablecoins usher in a new era of on-chain “private money,” and while those coins conforming with standard bank AML/KYC regulations may seem innocuous, not all will, and there is a real risk that stablecoins will create a two-tier cash transfer system.
One tier for banks, and the other for stablecoins, whose low cost, ease of transfers, and potentially lower standards of KYC/AML make them attractive.
This is not theoretical; it is well known, for example, that the Tether stablecoin on the Tron network is the choice of SE Asian pig butchering scam money launderers.
Monetary sovereignty is a jurisdiction's ability to control its currency and implement monetary policy, while payment sovereignty is a jurisdiction’s ability to control payment infrastructure.
While crypto-bros will argue this point, it is a government’s fundamental right to control what currency may be used in the country and how foreign currency transactions are exchanged and taxed.
Stablecoins risk creating a significant problem of monetary and payment sovereignty for all nations, not just emerging markets.
Nations may lose control of their payment systems, while dollar or even euro stablecoins displace local currencies, making fragile economies even more fragile.
While stablecoins have benefits, destabilizing fragile monetary systems or tax evasion shouldn’t be the price of attaining them.
Stablecoin impact on monetary sovereignty:
🔹Potential Enhancements:
➢ Modernising the domestic currency, ensuring its relevance in digital ecosystems.
➢ Enhancing the currency's international role and competitive positioning against foreign alternatives.
➢ Potentially increasing demand for sovereign debt through reserve asset composition.
🔹Potential Challenges:
➢ Risk of currency substitution (e.g., "digital dollarisation")
➢ Potential disruption to monetary policy effectiveness and traditional credit creation channels (commercial bank disintermediation).
➢ Threats to financial stability stemming from run risks, de-pegging events, or contagion.
🏝️ Short takes are holiday editions! Shorter, yet packing a punch, even if there are more typos!
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