The International Monetary Fund (IMF), an organization which includes 190 countries, working to foster global monetary cooperation, in a blogpost titled, ‘Cryptoassets as National Currency? A Step Too Far’, believes that the adoption of cryptocurrencies as national currencies has more risks and cost that outweighs potential benefits.
Cryptocurrencies had an exceptional year in 2017. Both the technology and the value of virtual currencies have experienced historic breakthroughs. At the same time, the rise of these digital currencies is causing serious concerns in the world of cybersecurity.
The IMF blogpost starts by acknowledging the potential benefits of digital currencies saying that new digital forms of money had the potential to provide cheaper and faster payments, enhance financial inclusion, improve resilience and competition among payment providers, and facilitate cross-border transfers.
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However, according to the post, the IMF believes that the adoption of digital currencies is not straightforward as it requires a lot of difficult policy choices such as clarifying the role of the public and private sectors in providing and regulating digital forms of money.
The blogpost went further to say that some countries will be tempted to view these cryptoassets as legal tender which they termed a ‘shortcut’ because of the benefit they provide.
“Some countries may be tempted by a shortcut: adopting crypto assets as national currencies. Many are indeed secure, easy to access, and cheap to transact. We believe, however, that in most cases risks and costs outweigh potential benefits.”
The post spoke about the volatile nature of cryptocurrency assets by using Bitcoin’s price crash in May as an example to further buttress their point. On this, they stated, “Their value can be extremely volatile. Bitcoin, for instance, reached a peak of $65,000 in April and crashed to less than half that value two months later.”
The post also expressly differentiates cryptocurrency assets from Central Bank Digital Currencies (CBDC) in an in depth where it argues that Cryptoassets are thus fundamentally different from other kinds of digital money whereby Central banks, for instance, are considering issuing digital currencies – digital money issued in the form of a liability of the central bank.
The IMF believes that because of the volatile nature of cryptoassets, they are unlikely to catch on in countries with stable inflation and exchange rates, and credible institutions, as their households and businesses would have very little incentive to price or save in a parallel cryptoasset even if it were given legal tender or currency status. It stated that even in relatively less stable economies, the use of a globally recognized reserve currency such as the dollar or euro would likely be more alluring than adopting a crypto asset.
Cryptocurrencies first appeared due to the need to make anonymous transactions. While the idea of a decentralized digital currency first came about in 1998, it wasn’tuntil 2009 when the first cryptocurrency was created: Bitcoin.
Cryptocurrencies guarantee a complete, balanced and secure way to make transactions. That’s why they are used as a currency for the exchange of goods and services. They can also be exchanged for money, including other cryptocurrencies. Some digital currencies are only used to buy certain types of goods or other cryptocurrencies, while the best-known cryptocurrencies, such as Bitcoin, Ethereum and Litecoin, can be used like regular money.
Potential Effects of Adoption of Crypto Assets
According to the IMF, the adoption of cryptocurrency assets will likely affect macroeconomic stability. IMF says that If goods and services were priced in both a real currency and a crypto asset, households and businesses would spend significant time and resources choosing which money to hold as opposed to engaging in productive activities. “Similarly, government revenues would be exposed to exchange rate risk if taxes were quoted in advance in a crypto asset while expenditures remained mostly in the local currency, or vice versa.” IMF said
On the other hand, it raised a point on the monetary policies effectiveness saying that if the Central banks failed to set interest rates on a foreign currency. where Usually, when a country adopts a foreign currency as its own, it “imports” the credibility of the foreign monetary policy and hope to bring its economy–and interest rates–in line with the foreign business cycle. Neither of these is possible in the case of widespread crypto asset adoption.
The next point raised was the effect on financial integrity. On this the report stated, in absence of robust anti-money laundering and combating the financing of terrorism measures, crypto assets can be used to launder ill-gotten money, fund terrorism, and evade taxes. This could pose risks to a country’s financial system, fiscal balance, and relationships with foreign countries and correspondent banks.
In conclusion the IMF standpoint concludes that “attempting to make crypto assets a national currency is an inadvisable shortcut,”
it also acknowledges that the advantages of their underlying technologies, including the potential for cheaper and more inclusive financial services, should not be overlooked. The IMF believes that world governments need to do better in terms of providing these services and leveraging new digital forms of money while preserving stability, efficiency, equality, and environmental sustainability.
