A senior official from the People’s Bank of China (PBOC) has highlighted the potential impact of stablecoins such as Facebook’s proposed Libra cryptocurrency upon the international monetary system.
“The potential user base for stablecoins is immense” said PBOC deputy governor Chen Yulu (陈雨露) during a speech delivered at the 2019 China Financial Association Annual Conference (2019中国金融学会学术年会暨中国金融论坛年会) on 21 December.
“There is the potential for (stablecoin) to possess systemic importance for individual legal jurisdictions, and replace existing money at a national or even a global scope.
“The threat of stablecoins for weaker currencies is even greater. In economies where rates of inflation are high but institutional control is weak, local currencies could be abandoned and overseas stable currencies chosen instead.
“This could lead to a new ‘dollarisation’ trend, harming the monetary policy, financial development and long-term economic growth of related economies.”
According to Chen the weaker the value of a national currency, the greater the difficulties for its payments system and the less developed its financial markets will be.
“Such a country’s citizens will have greater motivation to turn from its statutory currency to stablecoins, creating a shock for its monetary sovereignty.
“Once monetary sovereignty is undermined, the most direct impacts for a country will be a reduction in the effectiveness of its monetary and fiscal policy.”
Chen said that a reduction in the credit creation ability of banks that would result from stablecoin popularisation could reduce the efficacy of monetary policy.
The replacement of statutory currency with stablecoin could also result in a large-scale outflow of bank deposits and a weakening of the money multiplier, while the reduction in steady demand for statutory currency would exacerbate the difficulty of formulating monetary policy.
Chen also highlighted the potential for the international usage of stablecoins anchored to the US dollar to further heighten the dominant role played by the greenback in the international monetary system.
This would hamper the internationalisation of the renminbi, as well as the diversification of the global monetary system.
The PBOC deputy-governor pointed out that most stable coins are likely to be backed by the US dollar, while Facebook’s Libra could be over 50% supported by the greenback.