Macro-Financial Implications of Foreign Crypto Assets for Small Developing Economies (IMF Fintech)

Summary

• Total crypto asset market capitalization peaked at around $3 trillion in November 2021 before falling below $1 trillion.p.10
• The model calibration assumes the foreign economy is roughly 70 times larger than the small developing economy.p.14
• In the initial steady state of the model, approximately 2 percent of payment assets are held in the stablecoin.p.17
• A simulated negative domestic total factor productivity shock of 1 percent depresses output and temporarily increases inflation.p.17

Key insights

1. Foreign stablecoin adoption amplifies currency substitution and capital outflows in small developing economies during negative shocks.p.5
2. Widespread crypto asset adoption weakens domestic monetary policy transmission, forcing central banks to adjust interest rates more aggressively.p.5
3. Capital flow management measures that fail to constrain crypto flows incentivize households to hold foreign stablecoins for circumvention.p.5
4. Introducing a domestic CBDC can reduce foreign stablecoin adoption in the steady state but does not fully insulate the economy from foreign shocks.p.5
5. A comprehensive domestic ban on stablecoins would limit shock transmission but remains difficult to implement and enforce in practice.p.8
6. Multilateral and cross-country regulatory coordination is required to preserve macroeconomic autonomy against foreign stablecoin risks.p.8