- The organisation said the adoption of crypto as legal tender could bring volatility and macroeconomic instability.
- It called the move “a step too far” and “an inadvisable shortcut.”
The International Monetary Fund (IMF) has issued a warning against countries using cryptocurrencies as a legal tender. This follows El Salvador’s recent move to pass a bill making the leading cryptocurrency, Bitcoin, a legal tender. A move that has received widespread backlash and prompted protest from Salvadorians.
In a warning dated July 26, the organisation called the adoption of crypto as national currency “a step too far”. The IMF, while acknowledging the potential merits of digital currencies like security, ease of access, and affordability countered that in many cases, the risks and costs outweigh potential benefits.
Volatility, monetary policy integrity and potential macroeconomic instability
The organisation cited the common argument that crypto is too volatile to qualify for use as a national currency. It pointed to Bitcoin’s crash from an all-time high of $65,000 per BTC to about $30,000 in about two months. Adoption of crypto as legal tender could expose a country’s financial institutions to such fluctuations, warns the blog post. Macroeconomic could also be affected, warns the organisation.
In a case where goods and services were priced in both the local currency and a cryptocurrency, businesses and households would have to invest a lot of valuable time and resources in settling on a currency. Governments would also potentially suffer exchange rate risk if, for example, taxes and other forms of government revenue were quoted in one currency while expenditure was quoted in another.
The blog also pointed out the potential threat to central banks and monetary policy.
Monetary policy would lose bite. Central banks cannot set interest rates on a foreign currency. 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 cryptoasset adoption.
There is also the issue of financial integrity. Unregulated, crypto can be used in money laundering, tax evasion and to fund activities like terrorism. All these could be threats to a country’s “financial system, fiscal balance, and relationships with foreign countries and correspondent banks”. This is why the IMF believes that stable economies are unlikely to make this decision.
Cryptoassets are unlikely to catch on in countries with stable inflation and exchange rates, and credible institutions. Households and businesses would have very little incentive to price or save in a parallel cryptoasset such as Bitcoin, even if it were given legal tender or currency status. Their value is just too volatile and unrelated to the real economy.
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 cryptoasset. A cryptoasset might catch on as a vehicle for unbanked people to make payments, but not to store value. It would be immediately exchanged into real currency upon receipt.
“An inadvisable shortcut”
The merits of digital currencies and the underlying technology cannot be ignored. The IMF however, advises that governments simply step up and provide these benefits in existing financial services while leveraging new digital assets. All this while making sure to preserve ‘stability, efficiency, equality, and environmental sustainability. Attempting to gain all these benefits by simply introducing a cryptocurrency as legal tender is, according to the organisation, “an inadvisable shortcut”.
The IMF previously warned El Salvador about the possible adverse effects of its adoption of Bitcoin as legal tender.