People in emerging economies have been flocking to cryptocurrency as a hedge against traditional markets. However, many countries have rejected private cryptos in favor of stablecoins or central bank digital currencies [CBDCs].
Nonetheless, a recent report stated that stablecoins and CBDCs could cause significant problems in emerging markets and may not address the issues that fintech innovations are attempting to address. On Friday, the Bank for International Settlements [BIS] published a paper titled What Does Digital Money Mean for Emerging Market and Developing Countries?
“Stablecoin arrangements aim to improve financial inclusion and cross-border remittances, but they are neither necessary nor sufficient to achieve these policy objectives.”
Stablecoins have become popular as a store of value and an alternative to “volatile” crypto in emerging markets and developing economies (EMDEs) around the world, including Latin America. However, when national fiat was shaky and prone to inflation, stablecoins were seen as a viable alternative.
However, the paper raised the important question of whether these stablecoins could provide long-term competitive advantages over rapidly developing and evolving digital payment services. When compared to cryptocurrencies, stablecoins serve a limited purpose.
Stablecoins have found it difficult to keep up with the innovations taking place in the crypto industry. Furthermore, the report stated that stablecoins could introduce new risks in the areas of governance, payment process efficiency, consumer protection, and data privacy.
CBDC, on the other hand, is quickly becoming the preferred substance among regulators. China is doing it, Nigeria is doing it, and India is considering it. According to the paper, CBDC posed policy challenges for EMDE authorities.
“…there is a risk that, during periods of systemic stress, households and other agents may suddenly shift from bank deposits or other instruments into the CBDC, sparking a ‘digital run’ of unprecedented speed and scale,” it stated.
CBDCs and stablecoins, like cryptocurrencies, have advantages and disadvantages. The emerging nations may be concentrating on the transition from traditional finance to modern finance via CBDCs and stablecoins. But what they don’t realize is that cryptocurrency has already paved a new path for finance. As more people get involved, education will play a significant role in driving innovation and growth—for both crypto and economies.