Inadvisable shortcut, a step too far, and dire consequences — the IMF warns countries against using Bitcoin as a national currency

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Inadvisable shortcut, a step too far, and dire consequences — the IMF warns countries against using Bitcoin as a national currency
International Monetary FundPixabay
  • El Salvador became the first country to adopt Bitcoin as a legal tender in June, but it still isn't enough to convince the International Monetary Fund (IMF).
  • IMF calls Bitcoin adoption as legal tender a "shortcut" since it isn’t backed by a solid monetary policy and provides zero control to authorities.
  • It vehemently believes that a balance must be maintained that keeps in mind macro-financial stability, financial integrity, consumer protection, and the environment.
El Salvador became the first country to announce the adoption of Bitcoin as a legal tender in June, but the International Monetary Fund ( IMF) still is not convinced. According to the banking behemoth, using crypto assets as national currencies is ‘a step too far’.

Some countries may be tempted by a shortcut — adopting crypto assets as national currencies… We believe, however, that in most cases risks and costs outweigh potential benefits.

Blog post by IMF’s Tobias Adrian and Thoda Weeks-Brown

Since the beginning, the institution has been vocal against the move and is afraid the Bitcoin domino effect could spread to more small countries. While crypto enthusiasts view the move as a step into the future, critics are concerned about the long-term ramifications to the global economy.

According to the IMF’s blog post, Bitcoin can be a helpful policy in countries with unstable inflation and exchange rates by providing banking services to underprivileged people.
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But, even in such cases, the overall cost to the economy in the long run could be considerable. The post reiterates that while digital currencies can provide easy access to banking, payments and facilitate cross-border transfers — they still require massive investment from a policy point of view and a clear line needs to be drawn between the public and private sectors.

Bitcoin is too volatile to be a national currency, according to the IMF


The IMF termed El Salvador's take on Bitcoin as a ‘shortcut’. According to the fund, Bitcoin's biggest drawback is its volatility — meaning it erratically changes its value based on the free market.

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1 Bitcoin (BTC) was valued at more than $60,000 in mid-April but corrected to below $35,000 by mid-July. These random or unpredictable changes may be a boon for traders looking to make a quick buck, but make it challenging to be relied on as a currency.

A crypto-asset 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.

Blog post by IMF’s Tobias Adrian and Thoda Weeks-Brown

El Salvador's primary reason for the shift was to avoid forex charges and service fees that apply to its remittance dependent economy. While Bitcoin helps bridge the gap temporarily, it's privately issued at the end of the day, and the government or authorities have no control over it.

According to the IMF, the country will lose its ability to gauge and set interest rates on a foreign currency. “The monetary policy would lose bite,” it said. Transactions with the outer world shall also become extremely difficult as citizens will be tasked with constant conversions amid an unstable peg.
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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.

Blog post by IMF’s Tobias Adrian and Thoda Weeks-Brown

Interestingly, it also focuses on crypto's dependence on the internet and technology, which isn't easily accessible in many countries. It not only raises concerns about financial inclusion but also the legitimacy of transactions. The decentralised setup offers utmost anonymity, which has its own good and wrong sides.

Going crypto is an ‘inadvisable shortcut’


The Financial Action Task Force, an intergovernmental organisation tasked to prevent money laundering through policy, has released standards to limit overexposure to crypto-assets and transactions, but their enforcement is inconsistent.
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While many small Central American countries are exploring the adoption of Bitcoin, autocratic countries like China are moving towards a complete ban. Others, like India and the European Union, are considering the creation of a central bank digital currency ( CBDC), which can incorporate faster payments without losing inherent value.

The IMF vehemently believes that a balance must be maintained that keeps in mind macro-financial stability, financial integrity, consumer protection, and the environment.

It highlighted that while digital is the future, governments need to preserve stability, efficiency, equality, and sustainability of their financial system. "Attempting to make crypto assets a national currency is an inadvisable shortcut," it concluded.
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For a more in-depth discussion, come on over to Business Insider Cryptosphere — a forum where users can deep dive into all things crypto, engage in interesting discussions and stay ahead of the curve.

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Bitcoin price slump cost Tesla $23 million — but the company still managed net income of $1 billion
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