The International Monetary Fund has kicked against the adoption of cryptocurrencies, like bitcoin and ethereum, as legal tenders.
In a blogpost titled ‘Crypto assets as national currency? A step too far’, the IMF said it did not see crypto currencies catching on as national currencies, and highlighted numerous risks and costs involved if it happened.
The post was authored by the financial counselor and director of the IMF’s Monetary and Capital Markets Department, Tobias Adrian, and general counsel and director of the IMF’s Legal Department, Rhoda Weeks-Brown.
The IMF said, “Bitcoin and its peers have mostly remained on the fringes of finance and payments, yet some countries are actively considering granting crypto assets legal tender status, and even making these a second (or potentially only) national currency.
“If a crypto asset were granted legal tender status, it would have to be accepted by creditors in payment of monetary obligations, including taxes, similar to notes and coins (currency) issued by the central bank.
“Countries can even go further by passing laws to encourage the use of crypto assets as a national currency, that is, as an official monetary unit (in which monetary obligations can be expressed), and a mandatory means of payment for everyday purchases.
“Crypto assets 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 crypto asset 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 recognised reserve currency such as the dollar or euro would likely be more alluring than adopting a crypto asset.”
The IMF added that digital currencies had the potential to provide cheaper and faster payments, enhance financial inclusion, improve resilience and competition among payment providers, and facilitate cross-border transfer but nations need to proceed with caution.
The IMF said that macroeconomic instability, reductions in government revenues, and weak monetary policy would be the likely possibilities if nations rush to adopt cryptocurrencies.
The IMF, “As national currency, crypto assets – including bitcoin – come with substantial risks to macro-financial stability, financial integrity, consumer protection, and the environment.”
It said even though the advantages of their underlying technologies, including the potential for cheaper and more inclusive financial services, should not be overlooked attempting to make crypto assets a national currency was an inadvisable shortcut.