Adopting crypto assets as currency is a risky bet: IMF

Source: This post is based on the article “Adopting crypto assets as currency is a risky bet: IMF” published in Livemint on 31st August 2021.

What is the news?

The International Monetary Fund (IMF) has warned that adoption of crypto assets such as Bitcoin as national currency can impact a country’s macroeconomic stability.

The warning came ahead of the Central American nation, El Salvador, officially adopting the world’s most popular decentralized digital currency, Bitcoin, as a legal tender from 7th September.

Must Read: El-Salvador makes bitcoin a legal currency
What did IMF say?

Many cryptocurrencies are indeed secure, easy to access, and cheap to transact. However, that in most cases risks and costs outweigh potential benefits.

Risks

  • Substantial risks with bitcoin: Privately issued crypto-assets like bitcoin come with substantial risks. Making them equivalent to a national currency is an inadvisable shortcut.
  • Too much volatility: 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.
  • Wastage of time: If goods and services were priced in both a real currency and a crypto-asset, people would spend significant time and resources choosing which money to hold as opposed to engaging in productive activities.
  • Exchange-rate risks to govt: Similarly, government revenues would be exposed to exchange rate risk if taxes were quoted in advance in a crypto asset while expenditures remained mostly in the local currency, or vice versa.
  • Banks and other financial institutions could also be exposed to the massive fluctuations in crypto-asset prices.

Potential Benefits

However, new digital forms of money have some benefits too, like

  • the potential to provide cheaper and faster payments
  • enhance financial inclusion
  • improve resilience and competition among payment providers
  • facilitate cross-border transfers

But doing so is not straightforward.

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