IMF warns accepting crypto as legal tender is a ‘step too far’

IMF warns accepting crypto as legal tender is a ‘step too far’
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  • The International Monetary Fund (IMF) has warned that countries should think long and hard before adopting cryptos as legal tender.
  • These words of caution come ahead of El Salvador officially bringing in Bitcoin at legal tender on September 7.
  • The IMF is concerned about volatility of cryptos’ values and lack of control from central authorities.
The International Monetary Fund (IMF) has warned that accepting cryptocurrencies as official currencies is a “step too far”.

Some countries may be tempted by a shortcut: adopting crypto assets as national currencies. Many are indeed secure, easy to access, and cheap to transact. We believe, however, that in most cases risks and costs outweigh potential benefits.

Tobias Adrian, Financial Counsellor and Director of the IMF’s Monetary and Capital Markets Department and Rhoda Weeks-Brown, General Counsel and Director of the IMF’s Legal Department

In a blog post, the IMF warned that crypto assets like Bitcoin come with “substantial risks”. It expressed that using them as national currencies, which is exactly what countries like El Salvador are planning to do, is an “inadvisable shortcut”.

It also reiterated warnings that have come from many central banks around the world, on the fact that the value of cryptocurrencies can be “extremely volatile” and expressed concern over the fact that they are”denominated in their own unit of account”.

Impact on policy

“Bitcoin, for instance, reached a peak of $65,000 in April and crashed to less than half that value two months later,” the blog post said. Between the lines, the IMF has the same concerns that almost every financial regulator has been hawking — that they cannot control the price of cryptocurrencies like Bitcoin, Ethereum and more when they want to.

Coincidentally, the lack of central control is a feature of cryptocurrencies that have long driven the community. And, it’s biggest point of contention between regulators and crypto backers — the fact that these currencies were designed to take control of monetary systems away from governments.

“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 hopes to bring its economy–and interest rates–in line with the foreign business cycle. Neither of these is possible in the case of widespread crypto asset adoption,” said the IMF blog post.

Crypto as legal tender

The IMF’s concerns aren’t simply about control. The global financial entity noted that the volatility of crypto’s values means that households and businesses would have “very little incentive” to put their wealth into Bitcoin and other crypto assets in countries that have stable inflation and exchange rates. The IMF pointed out that the value of Bitcoin or Ethereum isn’t linked 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 crypto asset. 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,” the authors wrote.

IMF isn’t against the technology powering Bitcoin and other cryptocurrencies

The international organisation may not be sold on cryptocurrencies, but it does recognize the benefits of the technology underneath it all — blockchain. According to the IMF, the benefits of cryptocurrencies lie in the fact that they make transactions cheaper and more efficient. A lesson that it believes banks and governments can use to enhance financial inclusion. However, making crypto assets a national currency, it maintains, is still an ‘inadvisable’ shortcut.

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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