It’s a Bad Idea To Give Legal Tender Status to Cryptoassets Such As Bitcoin, Says IMF

On Monday (July 26), the International Monetary Fund (IMF) explained in a blog post why it is a bad idea for countries to pass laws to make cryptoassets (such as Bitcoin) national currencies instead of creating their own central bank digital currencies (CBDCs).

The IMF, which was established on 27 December 1945, is “an organization of 189 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world.”

Its main purpose is “to ensure the stability of the international monetary system—the system of exchange rates and international payments that enables countries (and their citizens) to transact with each other.”

Undoubtedly, the IMF felt that it had to issue the warnings in the aforementioned blog post as the result of the actions of the government of El Salvador — where on June 9 the proposed bill to make Bitcoin legal tender got passed by the Legislative Assembly — and the goal seems to be to discourage other countries with poor financial structure and/or unstable economies, such as Paraguay, from following El Salvador’s footsteps.

According to the IMF, although “new digital forms of money have the potential to provide cheaper and faster payments, enhance financial inclusion, improve resilience and competition among payment providers, and facilitate cross-border transfers,” this needs “significant investment as well as difficult policy choices, such as clarifying the role of the public and private sectors in providing and regulating digital forms of money.”

It went on to say that although some countries might find it tempting to avoid this hard work by simply passing laws that grant legal tender status to privately issued coins/tokens, most of the time, “risks and costs outweigh potential benefits.”

The IMF points out that cryptoassets are “unlikely to catch on in countries with stable inflation and exchange rates, and credible institutions” and as for “relatively less stable economies,” using popular world reserve currencies, such as the dollar or euro, would “likely be more alluring than adopting a cryptoasset.”

According to the IMF, here are some of the problems with giving legal tender status to non-CBDC cryptoassets:

• Although cryptoassets could be used for making payments, their price instability makes them poor stores of value, which means that those people who are faced to accept them as payment methods would need to immediately convert them to a “real currency”.
• Macroeconomic stability would suffer: “If goods and services were priced in both a real currency and a cryptoasset, households and businesses would spend significant time and resources choosing which money to hold as opposed to engaging in productive activities. Similarly, government revenues would be exposed to exchange rate risk if taxes were quoted in advance in a cryptoasset while expenditures remained mostly in the local currency, or vice versa.”
• Monetary policy would be negatively impacted. Since “central banks cannot set interest rates on a foreign currency,” you could end up with very unstable “domestic prices.”
• Financial integrity could be another victim (since they could be used for illicit purposes), which “could pose risks to a country’s financial system, fiscal balance, and relationships with foreign countries and correspondent banks.”
• Financial institutions could be “exposed to the massive fluctuations in cryptoasset prices.”
• Individuals and businesses could “lose wealth through large swings in value, fraud, or cyber-attacks.”
• Mining of cryptoassets, such as Bitcoin, that use Proof-of-Work (PoW) consensus consumes a lot of energy, the “ecological implications” of which “could be dire.”

Last August, the IMF explained via a tutorial video what the problems are with existing centralized payment solutions, what cryptocurrencies are, what their pro and cons are, and how they could be the future of money. In the video it released (as part of a tweet), the IMF said that when you use cryptocurrencies for making payments, the advantages are lower costs and faster transactions.

DISCLAIMER

The views and opinions expressed by the author, or any people mentioned in this article, are for informational purposes only, and they do not constitute financial, investment, or other advice. Investing in or trading cryptoassets comes with a risk of financial loss.

IMAGE CREDIT

Image by “WorldSpectrum” via Pixabay

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