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Thursday, August 18, 2022

IMF warns that crypto assets as national currency is a ‘step too far’

NEW DELHI: 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 decentralised digital currency, Bitcoin, as a legal tender from 7 September..

In a historic move on 9 June, El Salvador became the first country in the world to pass a legislation to adopt Bitcoin as legal tender.

“Privately issued crypto-assets like bitcoin come with substantial risks. Making them equivalent to a national currency is an inadvisable shortcut,” IMF warned in a tweet on Sunday.

In a blog titled ‘Crypto assets as National Currency? A Step Too Far’, which was shared with the tweet, the IMF said, “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.”

According to the IMF, 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.”

The IMF also believed that 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.

“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,” IMF said in the blog post.

Banks and other financial institutions could also be exposed to the massive fluctuations in crypto-asset prices.

However, as per the fund, 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. “But doing so is not straightforward,” IMF opined.

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