The International Monetary Fund (IMF) warns against using cryptocurrencies such as Bitcoin as legal tender. Noting the many risks and costs involved, the IMF does not believe that encrypted assets will become a national currency.
The International Monetary Fund warns of the risks of adopting cryptocurrencies as national currencies
The International Monetary Fund (IMF) published a blog post on Monday discussing the topic of cryptocurrency as legal tender. This article is entitled “Crypto Assets as National Currency? A Step Too Far” by Tobias Adrian, Financial Advisor and Director of the IMF Monetary and Capital Markets Department and General Counsel and Director of the IMF Legal Department Written by Rhoda Weeks-Brown.
The post did not mention the Central American country of El Salvador, which recently adopted Bitcoin and the U.S. dollar as legal tender. The author wrote:
As a national currency, encrypted assets including Bitcoin have brought huge risks to macro financial stability, financial integrity, consumer protection, and the environment.
While acknowledging the advantages of the underlying encryption technology, the IMF directors insisted that the government “needs to step up to provide these services…Trying to make encrypted assets a national currency is an undesirable shortcut.”
Nevertheless, the directors do not believe that crypto assets will become popular because people in economically stable countries have “almost no incentive to price or save crypto assets”, while less stable economies are more willing to adopt “globally recognized reserve currencies, such as U.S. dollars or euros.”
However, they believe that crypto assets may “become a tool for payment by people without a bank account, rather than a tool for storing value”, and emphasized that “it will be converted into real currency as soon as it is received.” Two Directors of the International Monetary Fund Point out:
Again, real money may not always be available at all times, nor is it easy to transfer. In addition, in some countries/regions, the law prohibits or restricts payments in other forms of currency. These may shift the balance to the widespread use of crypto assets.
The author continues to warn about the “cost of widespread adoption of crypto assets such as Bitcoin”. Not only “households and businesses will spend a lot of time and resources to choose which funds to hold instead of engaging in production activities”, but government revenue will also “face exchange rate risk”, adding:
In addition, monetary policy will be useless. The central bank cannot set interest rates for foreign currencies.
They warned that domestic prices could become very volatile and financial integrity could also be affected.
In addition, they said: “Encrypted assets can be used for money laundering, financing of terrorism, and tax evasion. This may bring risks to a country’s financial system, fiscal balance, and relations with foreign and correspondent banks.”
There are also legal issues with using cryptocurrency as legal tender. “Legal bidding status requires a payment method to be widely used. However, in many countries, Internet access and technology required to transfer encrypted assets are still scarce, which raises questions about fairness and financial inclusion,” they pointed out. In addition, “a country’s legal tender status and currency unit changes usually require complex and extensive changes to the currency law to avoid a disconnected legal system.”
The directors of the International Monetary Fund pointed out that banks and other financial institutions may also face large fluctuations in the price of encrypted assets, adding that mining cryptocurrencies such as Bitcoin requires “a lot of electricity to power computer networks.” They emphasized that “the ecological impact of adopting these crypto assets as national currencies can be terrible,” they added:
In addition, widespread use of encrypted assets can undermine consumer protection. Households and businesses may lose wealth due to large fluctuations in value, fraud or cyber attacks.
What do you think of the comments of the directors of the International Monetary Fund? Let us know in the comments section below.
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