IMF: Using Bitcoin as a national currency may lead to macroeconomic instability


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The IMF believes that using Bitcoin and other encrypted assets as national currencies involves certain risks, but the advantages of their underlying technologies, including the potential for financial services, should not be ignored.

Original title: “IMF: Use crypto assets as national currency? Step forward! 》
Written by: Tobias Adrian, Rhoda Weeks-Brown, Economist of the International Monetary Fund

In early June of this year, the Congress of the South American country of El Salvador (EI Salvador) passed the “Bitcoin Act” with an “absolute majority” vote, becoming the first country in the world to use Bitcoin as legal tender. However, the International Monetary Fund (IMF) still has no interest in cryptocurrencies. Tobias Adrian and Rhoda Weeks-Brown, well-known economists of the IMF, stated in a recent article that using crypto assets such as Bitcoin as a national currency may lead to macroeconomic instability. The following is the translation of the article published by the IMF on July 26:

Use crypto assets as national currency? Step too far

New forms of digital currency have the potential to provide cheaper and faster payments, enhance financial inclusion, increase flexibility and competitiveness between payment providers, and facilitate cross-border transfers.

But it is not simple to implement. This requires a lot of investment, as well as difficult policy choices, such as clarifying the role of the public and private sectors in providing and regulating digital currencies.

Some countries may be tempted by a shortcut: adopt encrypted assets as their national currency. Many crypto assets are indeed safe, easy to obtain and low transaction costs. However, we believe that in most cases, the risks and costs outweigh the potential benefits.

Encrypted assets are privately issued Tokens (tokens) based on encryption technology and are priced in their own accounting unit. Their value may be extremely unstable. Take Bitcoin as an example. It reached a peak of $65,000 in April and fell to less than half of this price two months later.

However, Bitcoin continues to exist. For some people, it represents an opportunity to conduct transactions anonymously, regardless of purpose; for others, it represents a way to diversify investment portfolios and hold a speculative asset , May bring wealth, but may also bring heavy losses.

Therefore, encrypted assets are fundamentally different from other types of digital currencies. For example, central banks of various countries are considering issuing digital currencies, that is, digital currencies issued in the form of central bank debt. Private companies are also exploring new areas, using currencies that can be sent via mobile phones (which are popular in East Africa and China), and stablecoins (the value of which depends on the security and liquidity of their supporting assets).

Crypto assets as legal tender?

Crypto assets such as Bitcoin are still on the fringe of finance and payment to a large extent, but some countries are actively considering granting crypto assets the status of legal tender, or even use it as the second (or possibly the only) national currency.

If an encrypted asset is granted the status of legal tender, it will have to be accepted by creditors to pay for monetary obligations including taxes, similar to paper money and coins (currency) issued by the central bank.

Some countries may even go a step further and pass legislation to encourage the use of encrypted assets as their national currency, that is, as an official currency unit (to assume currency obligations), and as a compulsory payment method for daily purchases.

But in countries with stable inflation and exchange rates, and reliable institutions, crypto assets are unlikely to become popular. Households and businesses have little incentive to price or save crypto assets such as Bitcoin, even if it is granted the status of legal tender or currency. Their value is too unstable and has nothing to do with the real economy.

Even in relatively unstable economies, the use of globally recognized reserve currencies such as the US dollar or the euro may be more attractive than the use of encrypted assets.

Encrypted assets may become a tool for unbanked people to make payments, rather than as a tool for storing value. They will exchange it into real currency as soon as they receive it.

But real money may not always be readily available, nor is it easy to transfer. In addition, in some countries, the law prohibits or restricts the use of other forms of currency for payment. This may promote the widespread use of encrypted assets.

Proceed with caution

The most direct cost of widespread adoption of crypto assets such as Bitcoin is the impact on macroeconomic stability. If goods and services are priced in real currency and encrypted assets at the same time, households and businesses will spend a lot of time and resources to choose which currency to hold instead of engaging in production activities. Similarly, if taxes are pre-quoted in the form of encrypted assets, and government expenditures are largely denominated in local currencies, then government revenues will face exchange rate risk, and vice versa.

In addition, monetary policy will lose its effectiveness. The central bank cannot set interest rates on foreign currencies. Usually, when a country adopts a foreign currency as its currency, it “imports” the credibility of the foreign currency policy and hopes to align its economy – and interest rates – with the foreign business cycle. But in the case of widespread adoption of encrypted assets, neither of these two scenarios will be possible.

As a result, domestic prices may become very unstable. Even if all prices are priced in some kind of encrypted asset (such as Bitcoin), the prices of imported goods and services will still fluctuate significantly with changes in market valuations.

Financial soundness may also be affected. Without strong anti-money laundering and combating terrorist financing measures, encrypted assets may be used for money laundering, terrorism financing, and tax evasion. This may pose risks to a country’s financial system, fiscal balance, and relations with foreign countries and correspondent banks.

The Financial Action Task Force has developed standards for how to regulate virtual assets and related service providers to limit the risks of fiscal soundness. However, the implementation of this standard in various countries is still inconsistent, and considering the possibility of cross-border activities, this may cause problems.

This will also create further legal issues. The status of legal tender requires the widespread use of a certain means of payment. However, in many countries, Internet access and technology required to transfer encrypted assets are still scarce, raising questions about fairness and financial inclusion. In addition, the value of the official currency unit must be stable enough to allow it to assume medium and long-term monetary obligations. To change the legal tender status and monetary unit of a country usually requires complex and extensive amendments to the currency law to avoid creating a disconnected legal system.

In addition, banks and other financial institutions may be affected by large fluctuations in the price of encrypted assets. It is unclear whether prudential supervision of banks’ foreign exchange or risk asset exposure can be maintained if crypto assets (such as Bitcoin) gain legal tender status.

In addition, the widespread use of encrypted assets will undermine the protection of consumers. Households and businesses may lose wealth due to large fluctuations in their value, fraud or cyber attacks. Although the underlying technology of encrypted assets has proven to be very robust, technical failures may occur. As far as Bitcoin is concerned, since there is no legal issuer, the right of recourse is difficult to achieve.

Finally, mining encrypted assets (such as Bitcoin) requires a lot of electricity to drive a computer network that verifies transactions. The ecological impact of using these encrypted assets as the national currency may be serious.

Find a balance

Using Bitcoin and other encrypted assets as national currency poses major risks to macro financial stability, financial integrity, consumer protection, and the environment. The advantages of their underlying technologies, including the potential for cheaper and more inclusive financial services, should not be ignored; and governments need to strengthen the provision of these services and use new forms of digital currency while maintaining stability, efficiency, and equality. And environmental sustainability. Trying to make encrypted assets the national currency is an undesirable shortcut.

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