Risks of stable coins in Latin America and the Caribbean: How Central Bank Digital currencies can mitigate the threat to domestic currencies

Risks of stable coins in Latin America and the Caribbean: How Central Bank Digital currencies can mitigate the threat to domestic currencies

The fast growth of digital currencies has confronted Latin America and the Caribbean (LAK) with opportunities and challenges. While cryptocurrencies such as stablecoins promise benefits such as financial inclusion and faster payments, they also pose risks for domestic currencies. In this article we consider the risks associated with stable coins, in particular the threat to domestic currencies and discuss how Central Bank digital currencies (CBDCS) can alleviate these risks.

According to a report by the International Monetary Fund (IMF), stable coins in Latin America and the Caribbean are very popular. This type of cryptocurrency retains a stable value in relation to a certain asset. However, the IMF warns that the widespread distribution of stable coins could lead to the substitution of the state currency, with citizens give up their national currencies in favor of stable coins. This represents a significant risk of currency stability and sovereignty of the affected countries. This affiliated concerns are a lower control over the money supply, possible disorders of monetary policy and the erosion of trust in the national currency.

An example of the risks of stable coins offers the failed pilot project of Meta in the United States and Guatemala that the IMF analyzed. Although the project should enable cross -border payments without fees, there was a risk that the domestic currency will be replaced in Guatemala. Due to the resistance of the authorities, the project was finally discontinued in 2022. This shows that caution is required when introducing stable coins at the macro level.

A possible solution for the risks of stable coins offer central bank digital currencies (CBDCs). These digital currencies issued by central banks can increase the usability, resilience and efficiency of payment systems if they are well designed and at the same time promote financial inclusion. By integrating people without bank details and the containment of the substitution of currencies through stable coins or cryptocurrencies, central banks can contribute to the preservation of currency sovereignty.

Most central banks in Latin America and the Caribbean actively check the introduction of CBDCs. These digital currencies issued by the central bank can improve payment systems and make them more accessible and efficient for private individuals and companies. In addition, CBDCs can promote financial inclusion by gaining access to banking services to the population and thus reducing their dependence on unstable cryptocurrencies.

In order to ensure a successful introduction of CBDCs and minimizing risks, the countries of Latin America and the Caribbean are recommended to invest in the awareness of the public and in a solid infrastructure for the introduction of CBDCs. Transparency is of crucial importance, since the persecution and recording of transactions with digital currencies can provide valuable knowledge about the demand for digital payment solutions. It is just as important that the political decision -makers deal with the underlying factors that drive the demand for cryptocurrencies, such as: B. the unfulfilled needs of the citizens according to digital means of payment.

While Latin America and the Caribbean drive the development of digital currencies, the risks of stablecoins and the substitution of domestic currencies must be carefully considered. CBDCs offer a promising path to improve payment systems, promote financial inclusion and to protect themselves from the potential pitfalls of unregulated cryptocurrencies. By searching for a balance between innovation and regulation, the countries of Latin America and the Caribbean can use the advantages of digital currencies and at the same time protect their currency stability and sovereignty.