The International Monetary Fund (IMF) has issued a warning against adopting crypto assets as legal tender. The IMF noted numerous costs and risks involved and does not believe that cryptocurrencies like Bitcoin can catch on as a national currency. On Monday, a blog post was published that discussed this topic. The title of the post was ‘Cryptoassets as National Currency? A Step Too Far. This was penned down by the financial director and counselor of the Monetary and Capital Markets Department of the IMF, Tobias Adrian, and a general counsel and director of the Legal Department of IMF, Rhoda Weeks-Brown.
There is no mention of the Central American country, El Salvador, which adopted Bitcoin recently as legal tender, along with the US dollar. The authors stated that there are substantial risks associated with these crypto-assets and they are a threat to financial integrity, macro-financial stability, the environment, and consumer protection. The IMF directors acknowledged the benefits of the underlying technologies of these digital currencies, but they insisted that it’s the governments that need to provide these services. They asserted that using cryptocurrencies as a national currency was a shortcut, an ill-advised one at that. Nevertheless, the directors don’t believe these crypto assets will be able to gain traction in countries with stable economies.
They will not have enough incentive to save in crypto assets, whereas less-stable economies would prefer adopting reserve currencies like the euro or the dollar, which are globally recognized. However, a cryptocurrency may catch on as a vehicle for payments used by unbanked people, but not for storing value. The two IMF directors said that these people would immediately exchange it into real currency as soon as they receive it. But, they did add that real currency is not always easily available, or transferable. Plus, some countries also have restrictions regarding payments in other forms of money, which would promote the use of these crypto-assets.
The authors went ahead and warned about the cost consequences of widespread crypto adoption. They said that rather than engaging in any productive activities, most businesses and households would spending significant time and resources in trying to choose which crypto to hold. They also added that the revenue of the government would also be exposed to exchange rate risk and monetary policy will also suffer because a foreign currency cannot be used by the Central Bank for setting interest rates. They warned that it would impair financial integrity and domestic prices would become unstable.
Furthermore, it was asserted that cryptocurrencies can also be used for funding terrorism, evading taxes, and laundering money. This would obviously put the country’s financial system at risk, along with fiscal balance and relationships with correspondent banks and foreign countries. Plus, there are also legal problems associated with the adoption of cryptocurrencies as legal tender. For a currency to be legal tender, it has to be widely available, but many countries don’t have the technology and internet access needed for using cryptocurrencies, which causes issues of financial inclusion and fairness.