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When it comes to crypto assets as currency, risks outweigh benefits: IMF warns

The IMF warned that adopting crypto assets as legal tender carries risks for the country’s macroeconomy, among others.

“When it comes to adopting crypto assets as national currencies, risks and costs outweigh potential benefits,” the International Monetary Fund (IMF) wrote in a post recently. Terming crypto assets as an “inadvisable shortcut”, the post added that the risks come in the form of “macro-financial stability, financial integrity, consumer protection, and the environment”. 

The financial institution, however, advised that countries should not ignore the advantages of blockchain technology, and instead “leverage new digital forms of money while preserving stability, efficiency, equality, and environmental sustainability”.

Cryptocurrencies and the blockchain technology powering them have witnessed an accelerated rate of adoption in the last few years. The excitement around cryptocurrencies stems from the fact that they hold the potential to streamline payments, promote financial inclusion, and improve cross-border transfers as per IMF. On the other hand, it must be noted that the ecosystem is in its infancy and is speculated to be volatile. There is also uncertainty on how to regulate these forms of digital currencies. 

Read: A complete low-down on cryptocurrency regulation in India

Key takeaways from IMF’s blog

Crypto assets as legal tender

  1. Many countries were considering granting “cryptoassets legal tender status, and make them a second national currency”.
  2. Countries may pass laws to encourage the use of cryptoassets as national currency and a mandatory means of payment for everyday purchases.
  3. The move has to be backed by creditors in payment of monetary obligations, including taxes, which is akin to notes and coins issued by a central bank.
  4. Legal tender status might not convince households and businesses to save in a parallel crypto asset such as Bitcoin because of its volatility and its lack of connection to the real economy.
  5. People in relatively less stable economies still find the dollar or euro more alluring than crypto because they are globally recognised reserve currencies. 
  6. Crypto assets might catch on “as a vehicle for unbanked people to make payments, but not to store value”. 
  7. Crypto as real tender is unlikely to catch on in countries with stable inflation and exchange rates, and credible institutions. 

Macroeconomic stability

IMF said that households and businesses will waste time and resources choosing which money to hold as opposed to engaging in productive activities if countries were to introduce crypto as national currencies. It added that government revenues would be exposed to exchange rate risk if taxes were quoted in advance in a crypto asset while expenditures remained in the local currency or vice versa.

Monetary Policy

The IMF said that widespread crypto asset adoption will prevent central banks from setting their interest rates. The body explained that central banks cannot set interest rates on a foreign currency. 

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“When a country adopts a foreign currency as its own, it “imports” the credibility of the foreign monetary policy and hopes to bring its economy–and interest rates–in line with the foreign business cycle,” the post read. 

It warned that domestic consumer prices could become highly unstable and put consumers at risk. Many personal and business entities could lose wealth through large swings in value, fraud, or cyber attacks. 

Financial Integrity

The monetary group said crypto enables activities of laundering illegal money, funding terrorism, and evading taxes. This could “pose risks to a country’s financial system, fiscal balance, and relationships with foreign countries and correspondent banks in the absence of anti-money laundering and combating the financing of terrorism measures”. 

The IMF added that there is no consistency in enforcement of standards prescribed by the Financial Action Task Force for how virtual assets and related service providers should be regulated to limit financial integrity risks. 

Lack of access and stability

The IMF said that internet access and technology required for the transfer of crypto assets remains underdeveloped in many countries thereby restricting access to crypto-related firms. Technical glitches can throw the system in limbo because there is no recourse that can be sought due to a lack of legal issuers. Most cryptocurrencies have a decentralised system with no single nodal administrator.

“The official monetary unit must be sufficiently stable in value to facilitate its use for medium- to long-term monetary obligations. And changes to a country’s legal tender status and monetary unit typically require complex and widespread changes to monetary law to avoid creating a disjointed legal system.” IMF said

Environmental degradation

The IMF also said that mining cryptocurrencies such as Bitcoin guzzle enormous amounts of electricity to power computer networks that verify transactions. “The ecological implications of adopting these cryptoassets as a national currency could be dire,” the forum said. 

Countries exploring crypto as legal tender

El Salvador became the first country in June this year to pass a law that directed businesses to accept Bitcoin as legal tender. 

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Some of the countries which are planning to introduce legislation as per a City A.M. report are: 

  • Paraguay introduced a law back in July which will make Bitcoin its legal tender. The law is yet to be passed. 
  • Panama introduced a draft bill to regulate crypto and make Bitcoin legal tender, according to Coin Desk
  • Mexico was said to be holding discussions on how to introduce the process of crypto adoption in the country. 
  • Venezuela, Argentina, Malta, Brazil, and Nicaragua have not introduced any bills but are said to be in talks to draft one to be introduced in due course of time.  

India has been on the fence about cryptocurrencies since the RBI first banned banking services to crypto-related businesses in 2018. The ban was later overturned by the Supreme Court of India in March 2020.

Finance Minister Nirmala Sitharaman recently informed the media that the proposed legislation on cryptocurrencies has been tabled before the Cabinet and is awaiting its approval. The RBI had also announced in July that it is working towards a “phased implementation strategy” for the introduction of central bank-backed digital currency (CBDC) called Digital Rupee.

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