Cristiano Oliveira — Head of Research at Rivool Finance

The centralized model of monetary issuance, in which states have a monopoly on the creation of money, is a pillar of modern financial systems. However, this model faces severe criticism, especially in economies where inconsistent fiscal and monetary policies compromise the currency’s purchasing power and increase dependence on inflationary revenues through inflationary taxation.

In addition, traditional financial intermediation often imposes high costs, such as high account maintenance fees and interest on loans, as well as barriers to access, such as complex bureaucratic requirements and exclusion of populations in remote areas. These factors limit the efficiency of the monetary system by restricting financial inclusion and raising user costs.

Faced with these problems, using private currencies, such as digital assets, has been widely debated as an alternative to the centralized model. Among these assets, Bitcoin was a pioneer in offering a decentralized currency based on blockchain technology. However, its high volatility and inability to handle large volumes of transactions have made it unsuitable as a direct replacement for fiat currencies. For these reasons, it was used predominantly as a store of value.

Technological evolution, however, has brought a promising solution: stablecoins. These digital currencies are designed to solve some of the limitations of traditional cryptocurrencies and offer an alternative that combines innovation and functionality for the global financial system. Stablecoins are a class of digital currencies designed to provide something unbacked cryptocurrencies cannot: the stability of their value. This stability is achieved by linking its value to stable assets, such as fiat currencies (e.g., U.S. dollar), commodities (such as gold), or even a basket of financial assets.

Among the main advantages of stablecoins are:

1. Stability:
   Because stablecoins are assets of relatively fixed value, they offer significantly lower volatility than traditional cryptocurrencies. This makes them more suitable for use in everyday transactions and as a means of payment.

2. Scalability:
   Stablecoins are designed to support a much higher volume of transactions than cryptocurrency networks like Bitcoin, allowing for greater efficiency in use in global markets and digital platforms.

3. Cost Reduction:

By eliminating some of the traditional financial intermediation, stablecoins reduce transaction and brokerage costs. This makes them attractive for a wide range of applications, from cross-border payments to trading on cryptocurrency exchanges.

Two widely used examples of stablecoins are Tether (USDT) and USD Coin (USDC). Tether has a market capitalization of approximately $135 billion, while USD Coin reaches around $45 billion. While these figures are significant, they are still far below the trillions of dollars in circulation as fiat currencies. However, the rapid advancement of stablecoins could significantly impact monetary policy, necessitating further discussion of its implications.

Traditional monetary policy operates through the creation of bank money, which is connected to the granting of credit by commercial banks. In this model, banks generate new deposits by granting loans, which expands the monetary base and allows the Central Bank to influence the economy by adjusting interest rates and regulating credit supply through compulsory deposits.

In turn, by competing with traditional bank deposits, stablecoins can reduce the role of commercial banks as financial intermediaries, a process known as bank disintermediation. When economic agents transfer their funds from bank deposits to stablecoins, banks can lose a significant part of their deposit base, becoming more dependent on capital market financing. This reliance alters how banks react to changes in interest rates set by the Central Bank, potentially diminishing the effectiveness of monetary policies.

In addition, the impact of stablecoins on monetary policy depends on the type of remuneration and the composition of the reserves backing them. Stablecoins backed exclusively by domestic currencies would tend to have yields similar to those of bank deposits, reducing the impact on the transmission of monetary impulses. In contrast, those backed by a basket of foreign currencies or diversified assets would be less influenced by local policies, significantly weakening the Central Bank’s ability to control the money supply and influence interest rates. The latter situation is comparable to using a strong foreign currency for domestic payment, known as the “dollarization” of the economy. In extreme cases, when only foreign currency circulates, the Central Bank completely loses control over monetary policy.

In countries like Brazil, where governments often show little commitment to preserving the currency’s purchasing power, stablecoins can play an important role in protecting the population’s economic well-being. The country’s recent history is marked by high inflation and monetary instability, often resulting from the difficulty of governments in achieving sustainable fiscal balances.

Stablecoins offer a robust alternative in this context, acting as a store of value and a medium of exchange that reduces citizens’ exposure to the uncertainties associated with state currency. Because they are pegged to stable assets such as the U.S. dollar, these digital currencies can protect individuals against the effects of fiscal and monetary policies that prioritize revenue generation via inflationary tax. This phenomenon has already been observed in countries such as Venezuela, where the population has turned to cryptocurrencies to preserve their purchasing power amid hyperinflation.

Therefore, adopting stablecoins could significantly affect fiscal and monetary management in countries like Brazil. By migrating their demand from state currency to more reliable private assets, citizens reduce their inflationary tax payments and the effectiveness of monetary policies conducted by the Central Bank. This phenomenon becomes especially relevant in contexts of high inflation or high inflationary expectations when confidence in the local currency is severely compromised.

Ultimately, stablecoins can offer Brazilians a reliable alternative to preserve value, conduct transactions, and foster an environment of greater accountability in economic policies. This potential, however, depends on proper regulations that ensure the transparency and stability of the use of these digital currencies in the financial system.

The growth of stablecoins has led to significant regulatory efforts at the global level, such as the case of Markets in Crypto-Assets (MiCA) in the European Union, which seeks to establish clear guidelines for the issuance and use of these digital currencies. In parallel, central banks worldwide have reacted to the advancement of stablecoins with the development of Central Bank Digital Currencies (CBDCs), which are digital versions of fiat currencies issued by central banks. In Brazil, Drex, the Central Bank’s CBDC initiative, exemplifies this trend, intending to modernize the payment system and expand financial inclusion.

While CBDCs can bring advantages, they also present problems similar to stablecoins, especially concerning bank disintermediation. However, stablecoins and CBDCs can be seen as solutions to strengthen citizens’ economic protection, acting as reliable stores of value and mediums of exchange in unstable economies.

However, its large-scale adoption has both benefits and costs. On the one hand, it offers a more reliable alternative to state money, reducing governments’ ability to finance public deficits through the inflation tax. On the other hand, its widespread use can significantly limit the effectiveness of traditional monetary policies, restricting central banks’ ability to control the money supply and, consequently, to respond effectively to economic fluctuations.

For these reasons, there is a need for a broad debate on the impacts of these innovations on the local and global economic balance. Clear and comprehensive regulations must ensure transparency, security, and integration of these new technologies into the financial system, avoiding risks to stability while taking advantage of the benefits they bring to modernized economies.