Why in News?
IMF’s First Deputy Managing Director Gita Gopinath expressed concern over the rapid growth of cryptocurrency adoption in developing economies.
She warned that the rise of crypto—particularly stablecoins—poses risks such as currency substitution and the disintermediation of financial institutions in emerging markets.
What’s in Today’s Article?
- Stablecoins
- Surging Crypto Momentum Under Trump Administration
- Alarm Over Crypto Growth in Emerging Economies
- Warnings on Financial Instability
Stablecoins
- Stablecoins are cryptocurrencies pegged to stable assets like fiat currencies (e.g., USD) or commodities (e.g., gold).
- Their value remains relatively stable compared to volatile cryptocurrencies like Bitcoin.
Surging Crypto Momentum Under Trump Administration
- Bitcoin's value has soared since President Donald Trump reversed his earlier skepticism on crypto.
- As of June 6, Bitcoin traded at $104,512.82, slightly down by 0.07%. It recently crossed $110,000 after bipartisan Senate support for the GENIUS Act Bill.
- GENIUS Act Bill and Its Impact
- The proposed GENIUS Act seeks to expand the production of stablecoins, requiring issuers to:
- Comply with anti-money laundering and anti-terrorism regulations
- Back stablecoins 1:1 with fiat or liquid assets
- Maintain separate reserves to support issued stablecoins
- If passed, it could boost the stablecoin market tenfold to $2 trillion, according to industry estimates.
- Developing Countries Embrace Cryptocurrencies
- Pakistan has partnered with World Liberty Financial Inc (WLFI) through the Pakistan Crypto Council to use blockchain for financial inclusion, trade, remittances, and monetisation of national assets like rare earths.
- The country aims to become a regional crypto hub through this initiative.
- El Salvador’s Limited Bitcoin Adoption
- Despite making Bitcoin legal tender in 2021, El Salvador has seen minimal use of the cryptocurrency for everyday transactions, underscoring its limited utility in real-world commerce.
Alarm Over Crypto Growth in Emerging Economies
- IMF First Deputy Managing Director Gita Gopinath has expressed concerns about the rapid uptake of cryptocurrencies in developing countries.
- She warned that, though still nascent, crypto adoption—particularly stablecoins—poses rising risks of currency substitution and financial institution disintermediation in emerging markets.
- Warning on Currency Substitution and Financial Risks
- Gopinath emphasized that stablecoins could bypass traditional financial institutions and threaten monetary sovereignty by replacing national currencies.
- Global Political Push: Trump’s Strategic Crypto Vision
- Gopinath’s remarks come amid US President Donald Trump’s call for a strategic crypto reserve and support for issuing stablecoins to position the U.S. as the “crypto capital of the world.”
- Pakistan’s Deal with Trump-Backed WLFI
- In South Asia, Pakistan has partnered with World Liberty Financial Inc (WLFI), a Trump-affiliated firm, aiming to become a regional crypto hub.
- The deal promotes blockchain adoption and stablecoin-based payments and remittances.
Warnings on Financial Instability
- Experts caution that cryptocurrencies pose systemic risks to developing economies.
- A paper titled ‘Crypto Assets as a Threat to Financial Market Stability’ warns that due to high inflation, domestic currencies in emerging markets may lose value as stores of wealth, leading to their substitution by foreign or crypto assets.
- The Risk of Cryptoisation
- A UNCTAD study highlights the growing ‘cryptoisation’ of developing economy currencies—driven by macroeconomic instability and younger populations—where cryptocurrencies gain an outsized role relative to GDP.
- Cryptoisation refers to the process where cryptocurrencies, especially stablecoins, are substituted for a country's domestic currency and assets.
- Stablecoins and the Risk of Bank Run-Like Crises
- Stablecoins are particularly risky. Their peg to fiat currencies can create arbitrage and speculative behavior.
- If investors lose confidence in the asset backing, a rapid sell-off—similar to a bank run—can occur.
