The IMF says stablecoins are becoming more closely tied to the US dollar system rather than replacing traditional banks

Stablecoins are widely perceived as a way for crypto to bypass conventional financial institutions due to their unique services, such as offering borderless, 24/7 access to funds without relying on banks, providing instant, borderless financial freedom.

Nonetheless, the International Monetary Fund (IMF) issued a recent report presenting a contrasting view. In this report, the international financial watchdog noted that, “The stablecoin market is increasingly reliant on short-term US government debt, transforming the ‘stablecoin era’ into a private system for distributing dollars instead of replacing them.” 

The total stablecoin market has ballooned to more than $300 billion, nearly doubling in recent years as traders, payment services, and remittance platforms increasingly adopt digital tokens. This surge in size and usage has caught the attention of regulators and central banks worldwide.

Stablecoins’ dominance in the market sparks concerns 

Regarding the IMF’s findings, individuals sparked concerns in the industry. At this point, their discovery revealed that this system has experienced a rapid rise in concentration. To support this claim, the global financial institution highlighted that stablecoins connected to the dollar account for about 97% of all the issuance. Moreover, more than 90% of the market capitalization is concentrated in Circle’s USDC and Tether’s USDT. 

This situation becomes crucial because major stablecoins, by holding significant Treasury bills and repos, now interact directly with financial systems that regulators closely monitor. This consists of competition for deposits, international transaction capabilities, and broader financial stability.

Apart from this warning, reports noted that the IMF also issued another warning about stablecoins towards the end of last year. The international financial watchdog alleged that stablecoins threaten to accelerate the adoption of foreign currencies in countries with weak monetary systems. This could, in turn, erode central banks’ ability to regulate capital flows, they said.

Moreover, the global financial institution issued a report titled “Understanding Stablecoins,” further cautioning that the rapid surge in dollar-pegged stablecoins and their cross-border use could prompt families and businesses to abandon local currencies for dollar-backed stablecoins. They contended that this outcome is particularly expected in regions with high inflation or diminished confidence in the local currency.

To breakdown this statement for better understanding, the IMF issued a statement noting that, “Stablecoins may contribute to currency substitution, increase capital flow volatility by circumventing capital controls, and fragment payment systems unless interoperability is ensured,” adding that, “These risks could be more pronounced in countries experiencing high inflation, in countries with weaker institutions, or in countries with diminished confidence in the domestic monetary framework.”

Meanwhile, despite these challenges, the International Monetary Fund sees potential to expand financial access. The Washington-based financial institution adopted this outlook after observing that mobile digital services have already surpassed traditional banking in many developing economies.

According to their argument, if stablecoins are regulated, they could enhance competition, reduce payment costs, and broaden financial inclusion.

Analysts raise concerns regarding the stability of the banking sector

Last month, reports noted that the global stablecoin market had exceeded $284 billion in circulation. This finding reignited debates over whether stablecoins will disrupt or replace traditional banking, or whether they signify a new layer of finance evolving alongside existing systems.

This topic dominated the headlines when Niall Ferguson and Manny Rincon-Cruz, historians and researchers at the Hoover Institution at Stanford University, argued that concerns about the banking sector’s stability are overstated, even as banks intensify their opposition to stablecoin benefits.

At this particular moment, Ferguson and Rincon-Cruz characterized stablecoins as distinct from highly volatile cryptocurrencies such as BTC.

They claimed that while speculative tokens function essentially as financial derivatives, Fiat-backed stablecoins are increasingly used as payment tools, with their adoption accelerating rapidly since the enactment of the GENIUS Act.

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