The International Monetary Fund’s (IMF) first deputy managing director Gita Gopinath on Thursday flagged concerns about the rise of crypto uptake in developing economies saying that though nascent, it poses a risk in terms of currency substitution. In an interview with the Financial Times, Gopinath said “we are seeing some pretty rapid growth of uptake of crypto in some emerging markets.”
Emerging markets faced risks from crypto uptake, especially stablecoins, in terms of “disintermediation of their financial institutions,” she said. “In terms of currency substitution, those risks are rising,” Gopinath added.
Gopinath’s comments came against the backdrop of US President Donald Trump’s push for a strategic crypto reserve and backing to the issuance of stablecoins to make America the “crypto capital of the world”.
In the Indian subcontinent, Pakistan has recently struck a deal with US-based World Liberty Financial Inc (WLFI) a firm backed by the Trump family, for that country to emerge as a crypto hub while promoting the use of blockchain technology and the use of stablecoins for payments and remittances. Amid a spate of activity in the crypto space, experts echo Gopinath’s warning that cryptocurrencies may pose a risk to the currencies and financial institutions of developing and emerging economies.
What are stablecoins
Stablecoins are cryptocurrencies whose value is pegged to an asset such as a currency or commodity such as gold. Cryptocurrencies such as Bitcoin have rallied since Donald Trump took over as US President owing to the reversal of his earlier skeptical stance on digital coins. He appointed David Sacks as the White House crypto czar while also naming crypto backer Paul S Atkins as the Securities and Exchange Commission (SEC) chair.
Flagship cryptocurrency Bitcoin’s price stood at $104,512.82 apiece, down 0.07 per cent, at 7:30 pm on Thursday. Last month, Bitcoin breached the $110,00 mark for the first time after the passage of the GENIUS Act Bill in the US Senate owing to bipartisan support.
If passed the GENIUS Act is also expected to allow crypto companies to produce more stablecoins. Issuers must be in compliance with anti-money laundering provisions and anti-terrorism regulations, according to the Bill’s fine print. Further, stablecoins issuers must back the digital currency with fiat currency or highly liquid assets in a 1:1 ratio. They must also maintain separate reserves to backstop the stablecoins, according to the GENIUS Act Bill.
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Democratic Senator Mark R Wright, who backed the bill, stated that while there were concerns about the Trump family’s involvement in cryptocurrencies to “evade oversight, hide shady financial dealings, and personally profit at the expense of everyday Americans… blockchain technology is here to stay.” He said it was in America’s interest to take the lead on shaping crypto policies.
Democratic Senator Elizabeth Warren warned that the GENIUS Act Bill did not meet the minimum standards such as guaranteeing consumer protection and preventing the illicit use of stablecoins. Passage of the GENIUS Act may pose a risk since the illicit use of stablecoins already make up 60 per cent of unlawful crypto transactions. If passed, the GENIUS Act is expected to boost the stablecoin market’s growth by 10X to $2 trillion, Warren said citing industry estimates.
Developing countries and their dalliance with cryptocurrencies
Pakistan recently announced a collaboration between the Pakistan Crypto Council and the WLFI, which envisages the use of blockchain technology to promote financial inclusion. It also aims to monetise national assets such as rare earths besides using stablecoins in trade and remittance. Pakistan eyes the status of a regional crypto hub as a result of this agreement.
Experts warn of the inherent instability of the crypto asset system. To elaborate on Gopinath’s warning, a paper titled ‘Crypto assets as a threat to financial market stability’ states that currencies of emerging and developing economies may lose their importance as store of value owing to higher inflation rates, leading to a rising degree of substitution of the domestic currency by a foreign currency.
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According to an UNCTAD study, this may result in the ‘cryptoisation’ of emerging and developing economy currencies relative to their GDP and backed by factors such as a younger population as well as macroeconomic stability.
In Central America, El Salvador, which approved Bitcoin as official tender in 2021, the cryptocurrency has seldom found use as a means for buying goods and services.
Stablecoins may also pose a risk similar to that seen during a bank run — when depositors and investors rush to cash their assets after a bank is unable to honour its financial commitments owing to a shortage of assets. According to the paper cited above, the linkage of stablecoins to a currency creates arbitrage opportunities leading to speculation. Former US Treasury Secretary Janet Yellen during a US Congressional hearing said fears of inadequate asset backing for stablecoins may also lead to a sell off triggering a situation similar to a bank run.
US crypto reserve
In March this year, Trump announced the creation of a strategic crypto reserve — a basket comprising Bitcoin, Ethereum, XRP, Solana and Cardano.
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While flagging “corrupt attacks (on cryptocurrencies) by the Biden administration” Trump in a Truth Social post said the US Crypto Reserve, part of his executive order on digital assets will “elevate this critical industry”.
“I will make sure the US is the Crypto Capital of the World,” Trump said.
Under Trump, the US has dropped probes and legal lawsuits related to alleged securities violations against cryptocurrency firms and exchanges. The US government holds an estimated 200,000 Bitcoin pending an audit, according to a fact sheet shared by the White House.
To be sure, the US crypto reserve will only store digital tokens obtained through forfeiture proceedings — it will not purchase additional reserves at the cost of the American taxpayer’s money, according to the White House fact sheet.