New Delhi, Feb 11 (NationPress) Pakistan's initiative to adopt a dollar-linked stablecoin in collaboration with the American cryptocurrency firm World Liberty Financial might further fuel the country's dollarization and jeopardize its macroeconomic stability, according to a recent report.

The Daily Mirror report suggests that a dollar-pegged stablecoin promotes a preference for the dollar as both a store of value and a medium of exchange, leading households to adopt it as a state-recognized alternative and drift away from the Pakistani rupee (PKR).

Currency substitution via stablecoins may heighten exchange-rate pressures and create a feedback loop that exacerbates the rupee's depreciation.

"For a nation with a delicate currency, frequent balance-of-payments challenges, and restricted monetary policy options, the launch of an officially sanctioned dollar-linked stablecoin risks intensifying instability instead of alleviating it," the report stated.

Additionally, it was pointed out that stablecoins operate outside traditional banks, diverting household and business liquidity into digital wallets that are not part of the regulated financial system. In a scenario like Pakistan, where the effectiveness of monetary policy is closely tied to banks' balance sheets, this could lessen the impact of interest rate adjustments and complicate liquidity management.

The report also emphasized that confidence in the PKR has already been undermined by persistent inflation spikes, significant devaluations, and stabilization cycles driven by the International Monetary Fund (IMF).

The IMF has consistently cautioned that widespread adoption of stablecoins could siphon deposits from local banks and disrupt monetary frameworks in vulnerable economies.

Moreover, the Bank for International Settlements has argued that such financial instruments fail to meet fundamental criteria of sound money and pose threats to monetary sovereignty.

Although the State Bank of Pakistan has historically adopted a cautious position regarding cryptocurrencies, the recent arrangement with a crypto business linked to former US President Donald Trump's family has conferred quasi-official legitimacy to a foreign-controlled stablecoin ecosystem, as noted in the report.

The report further cautioned that cryptocurrencies are private liabilities, with their stability hinging on the quality of reserves, legal enforceability, and the issuer's capability to fulfill redemptions during stressful conditions.

"In advanced economies, such risks are mitigated by robust oversight and deep financial markets. Pakistan lacks both control over the issuer and the means to support a crisis involving a foreign-controlled stablecoin," the report concluded.

aar/na