IMF: stablecoins are inherently UNSTABLE

IMF latest paper Making Stablecoins Stable just dropped. Key takeaways:

1️⃣ Stablecoins are structurally prone to runs

- Even fully reserved-looking structures can de-peg under stress. Remember the USDC at $0.87 episode in 2023?

- The dynamic is classic: early redemptions → forced asset sales → price deterioration → more redemptions

👉 If run risk exists, stablecoins fail the “no-questions-asked” (NQA) property required for money

2️⃣ There is an unavoidable trade-off: safety vs. supply

- Safe reserves (cash, T-bills):

↓ run risk

↓ issuer profitability → issuance ↓

Central bank reserves remains the ONLY true "risk-free" asset but that would require stablecoin issuers to become full fledged banks with more strigent regulatory constraints.

- Riskier reserves:

↑ profitability → issuance ↑

↑ run risk

👉 You cannot get both scale and stability from reserve backing alone

3️⃣ Stablecoins vs MMFs: same fragility, different wrapper

Stablecoins are economically similar to constant NAV money market funds that historically appear stable but break under stress → trigger runs.

👉 Stablecoins vs MMFs: same structure → same fragility. Better liquidity vs better yield.

➡️ Key implications

1️⃣ The entire stablecoin business model hinges on the question: how does the issuer make money without taking risk?

Global stablecoin issuance framework is converging around high-quality reserves, but this limited profitability for issuers.

2️⃣ Stablecoin issuers must find additional revenue channels such as ecosystem services or payment capabilities to expand their business.

Circle has been leaning in that direction with its cross-chain infrastructure, wallet and payment products.

3️⃣ Stablecoins end game isn't too compete on risk and yield dimensions vs tokenized bank deposits. 

- Tokenized bank deposits are better balance sheet cash instruments.

- Stablecoins are a distribution layer product and need to compete on payment use cases.

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